COMMENTARY: Small, Conciliatory Moves in Trade War Don’t Signal Breakthrough
Don’t get too excited over the “concessions" made this week by both sides in the trade war. China’s Finance Ministry announced a few products that would be exempted from higher import taxes, and hours later President Trump announced a two-week delay in a tariff increase.
Trump billed his delay as a “goodwill gesture” so that the hike wouldn’t come on China’s National Day holiday, which this year celebrates the 70th anniversary of the Communist Party coming to power. Tariffs are now slated to rise from 25 percent to 30 percent on $250 billion in Chinese imports on October 15 instead of October 1.
All of this really doesn’t amount to a hill of beans – or a mountain of soybeans - which the U.S. really wants to sell to China. Even though the Chinese Commerce Ministry announced Friday that some tariff exemptions would include pork and soybeans, it remained unclear to what extent. The exclusions announced previously involve a few seafood items, lubricants and anti-cancer drugs. Those products will be exempt from tariffs for one year starting September 17.
Markets seem to be buying into these gestures, which come in advance of high-level trade talks set to resume next month in Washington. Stocks on both sides of the Pacific rose on renewed hopes for meaningful trade war negotiations.
In truth, we are no closer to a solution to the huge gap separating the two sides. China is not about to accede to U.S. demands that amount to a wholesale change of its command economy that includes subsidies to develop world-class technology companies. Neither are the hardline American negotiators under Trump prepared to back off their insistence on agreements being enshrined in Chinese law, greater protections for intellectual property rights and more openings to foreign companies (though the latter two are legitimate complaints).
Lost in much of the back and forth over trade are some of the companies and industries being hurt. In 2017, the U.S. sold $12 billion worth of soybeans, 60 percent of the entire U.S. export total. But last year China put 25 percent tariffs on American soybeans, then raised it to 30 percent and sales dried up.
In one hopeful sign, Reuters reported Thursday that China has bought 600,000 tons of soybeans from U.S. farmers - its biggest purchase since June in what could be another olive branch. Companies such as Cargill, Louis Dreyfus Co. and U.S. farmer-owned agriculture cooperative CHS Inc. (Nasdaq: CHSCL) would benefit if China starts buying again.
But a real trade breakthrough will not come to fruition anytime soon – at least until the end of the Trump administration. Both countries’ leaders – Trump and Chinese President Xi Jinping – are stubborn, nationalistic and entirely dug into their positions.
The U.S. Hit No Less by Tariffs
Even if the U.S. economy continues to slip – either into slower growth or outright recession - Trump will never admit the trade war is a factor. Instead, he will blame the Federal Reserve Bank for not lowering interest rates more aggressively, a position he has strongly foreshadowed with typical bombast.
It’s time to call out the fact that Trump is the sole perpetrator of this trade war that is starting to damage the global economy. He has been wrong about almost every aspect of it, including his early claims that it’s “easy to win a trade war,” that China’s economy is being seriously hurt and his constantly stated fiction that China is paying for the tariffs.
Trump reacted with glee to China’s tariff exemption on Wednesday, saying in a tweet: “China suspends Tariffs on some U.S. products. Being hit very hard, supply chains breaking up as many companies move, or look to move, to other countries. Much more expensive to China than originally thought.”
That’s nonsense on several levels, one being that the U.S. economy is slowing faster than China’s, which continues to see growth above 6 percent. U.S. GDP slipped to 2 percent in the second quarter and some economists see it at 1 percent during the second half of the year.
Further, a recent U.S.-China Business Council survey revealed that 97 percent of its members – American firms doing business in China – were reporting profits and that 87 percent said they had no intention of leaving China.
China’s economic growth has been slowing for years, for myriad reasons. It is saddled with debt, it is seeing its working-age population decline, and it is in the midst of a historic transition away from an export-driven economy to one led by domestic consumer spending.
Only a small portion of its overall economy is dependent on exports to the U.S. – less than 4 percent, as noted by the respected Peterson Institute for International Economics.
There is little indication that the trade war is hurting China more than the U.S., where the 11-year U.S. economic expansion is under serious threat. On this side of the Pacific, the trade war has hurt manufacturing and business investment, economists say, and tariffs are hitting the average American household with the equivalent of a $600 tax so far this year.
The California Building Industry Association reported last week that tariffs on things like appliances and countertops have driven up the cost of an average new home in the state by $20,000 to $30,000.
If Trump carries through on his December 15 plan to levy taxes on another $300 billion in Chinese imports, it will include highly sought consumer items like shoes, apparel and iPhones. Then the hurt will be felt more widely by U.S. consumers and businesses – who through higher prices and lost business will really be the ones paying for the tariffs.