18/06/2019
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Home > Legal & Financial > Trading Blows

Trading Blows

The USA has declared war on China….actually to be more accurate US President Donald Trump is escalating a willy waggling competition with Premier of the People’s Republic Xi Jinping, and we are all in danger of getting caught in the crossfire, that analogy just took an unpleasant turn, so I might abandon it there.

The love hate relationship between the two most powerful world leaders swung back around to hate again as trade talks broke down last month. Trump has been seeking to redress the huge trade imbalance between the two superpowers, and it might surprise you to learn that he doesn’t appear to have a clue what he is doing.

After the breakdown of the talks, Trump immediately slapped a raft of new tariffs of 25% on an additional 200 Billion dollars worth of Chinese imports, the next day China hit back with a 60bn dollar retaliation with 25% tariff on a range of products from agriculture, to Budweiser, US produced wine, and a little personal insult, American golf clubs, nice touch.

Stock markets reacted predictably with a near 3% drop in the Dow. Meanwhile Trump continues to insist, via the usual early morning Twitter barrage, that this is all good for American citizens and how this is going to go his way in the end. Not so, say the experts. The tariffs are collected at the point of import into the US, and are paid by the US importer, rather than the Chinese exporter. Excuse the basic economics lesson here, but a 25% tariff is obviously going to make your products more expensive, and as the prices of things rise, demand tends to fall away, depending on how much people really want what you are selling. The additional 25% that Uncle Sam wants in his back pocket can either be absorbed by the Chinese manufacturer, who may do so to avoid increasing their prices, or they might calculate that actually they would still sell enough even with the price rise, so pass the entire 25% onto the US importer, or US consumer. It seems this is actually what they are doing. Independent research from a leading US university has suggested that this is costing US consumers, ordinary people, and voters of course, around $3bn per month in rising prices. Trump says that this will incentivise US producers to start selling, or for importers to shop around to other domestic, or overseas producers, but it just isn’t that easy. You can’t build a steel works in a few weeks, or even a few years based around the financial security of a tariff that may easily be abandoned next month if talks get back underway. Similarly with trying to source your imports from outside China, they are so dominant that whatever you want to buy, if you need it cheaply, quickly, and in large volumes, China is often your only supplier. US consumers are a bit stuck, they are forced to pay the tariff themselves with very little room for manoeuvre. Rising prices in the US fuels inflation of course, squeezing household budgets, cutting consumer’s purchasing power and killing demand for products and services across the board. This is how recessions start.

It isn’t all one way traffic of course, China is a very heavily leveraged economy, based on high volume exports. There are many reports, of structural debt issues not far under the surface that could sink the Chinese economy, and the potential for a serious drop in demand from their largest overseas customer might be the straw that breaks the camel’s back, with all the unthinkable global knock on effects that may precipitate.

So at the moment nobody is winning, but in the Trump vs Xi clash of personalities it is difficult to see how Trump comes out of this as victor with his precious ego intact. Don’t forget that in 18 months or so, he is going to run for a second term with much of the intervening time spent electioneering. It seems likely that time will also see the wallets of voters squeezed if this policy prevails. Those who voted for Trump last time out love the bluster and tough talk, but nothing focuses the mind more in having a little more month left at the end of your money. Mister Xi has no such problems with keeping voters happy of course. In war there are no winners just those who lose less than the other side. I have a hunch I know who that is going to be in this war.

 

By Phill McCoffers