Item Cannot Be Added To A Read-Only Or Fixed-Size Trump Wins Trade War As Global Markets Plummet

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Trump Wins Trade War As Global Markets Plummet

It’s early July, well before this article goes online, but the landscape is pretty clear from where I’m standing. The United States and China both raised tariffs on $ 34 billion in goods Friday, July 6. This did not deter the S & P 500 from continuing its charge until January 26 all-time high. For starters, unemployment is historically low and the Fed will raise rates twice before the end of the year – all amid a recessionary discretionary spending creep.

So how about this trade war? Let’s summarize. Most people would agree that free trade in goods would be better for all concerned. The goods would be less expensive and those who could not compete on price would do so on quality, leading to a beneficial improvement in goods. All is well and good until protectionism and nationalism rear their ugly heads. Some nations have goods that find it difficult to compete on the basis of price and/or quality. Globally, world leaders in these nations have no qualms in pursuing their nation’s interests at the expense of others. In trying to avoid the ugly American image, we have often put ourselves at a disadvantage. Nowhere is this more evident than in trade, our trading partners often have a clear advantage.

US Census data shows that we have a trade deficit with every trade region except South and Central America and Australia/Oceania. In only $ 33.14 and $ 14.38 billion, respectively, the last four years with a combined trade of $ 310.44 billion, this pales in comparison with the deficit for the rest of the world, – $ 844.66 billion, whose combined trade is $ 3.578 billion dollars. Below is the 2014-2017 average for most of the world in billions:

Canada: -$20.01

European Union: -$149.61

Asia: -$547.49

Africa: -$2.60

China is a case in point. Aware of the huge financial benefits that come with 1.38 billion consumers, they extract major concessions from trading partners, such as the United States. property release. Note that this goes one way; no sharing of intellectual property.

These uncompetitive business practices are unfair, but until now, US companies have accepted them without much push as the cost of doing business. That is until Trump. What the Chinese leaders need to realize is that they are not in a good negotiating position and the longer they hold out the more harm will come to their economy.

But why. The government’s economic leaders are well aware of their history and realize the large Chinese population will not endure poor conditions forever. To keep discontent at bay, they have a policy of inflated economic growth. According to Trade Economy, they have an average of 11.7% GDP growth for the past 10 years but the cracks in the arms are showing. From the peak of 2010-2011, when GDP grew by 19% and 24%, the growth fell gradually and sometimes precipitously. It was 5.56% and 1.14% in 2015 and 2016, respectively. It is not surprising that anxious central government figures have made a big push since then to increase global exports, including those of the US, resulting in a resumption of GDP growth to 9.35% in 2017. Outlook to increase the tariffs, which would make the goods. less competitive, run against these plans. China’s struggling economy and stock markets are testament to that. The smaller Shenzhen composite moved into bear market territory in February and the Shanghai composite closed in bear territory on Tuesday, June 27. The indices went as low as -26.5% and -25.0 on July 5 but have recently recovered to -22.5 and -21.2 %, respectively, as global markets rose in tandem with the US market. That is still in bear market territory, which will greatly reduce the need for foreign investment. Meanwhile, US GDP is growing steadily, the economy seems to be healthy, and the stock market is approaching new heights. Trump can hack the tariff game again knowing he has more economic space. In addition, it can cause more pain in the Chinese economy than it can in ours.

To see why, let’s look at the trading numbers. The trade deficit with China was on average – $ 358.68 billion the last four years in a rising trend. While US exports have fluctuated between $110-129 billion since 2012, Chinese imports have steadily increased from $315 to 375 billion. Last year the deficit was – $ 375.58 billion, of which $ 129.89 billion was US exports to China and $ 505.47 billion was US Chinese imports. Not only is trade imbalanced, so are tariffs. Earlier this year, US tariffs on Chinese agricultural and non-agricultural goods were 2.5% and 2.9%, respectively, while Chinese tariffs on US goods were 9.7% and 5% for the same. It is true, these are down from an average of 14.1% before 2001 when China joined the World Trade Organization but that was part of the price and the tariffs are higher for some industries.

Below are the top 10 US exports to China in 2017 according to the International Trade Center Trade Map http://www.intracen.org/marketanalysis:

Aircraft, spacecraft – $ 16.3 billion

Cars – $13.2 billion

Oil seeds – $ 13 billion

Cars – $ 12.9 billion

Electronic equipment – $ 12.1 billion

Medical equipment, technical – $ 8.8 billion

Mineral fuels including oil – $ 8.6 billion

Plastic – $ 5.7 billion

Woodpulp – $ 3.4 billion

Wood – $ 3.2 billion

Total – $ 97.7 billion

Together they account for 74.8% of all exports this year. Note that except for oilseeds, mainly soybeans, the rest are non-agricultural products. But the rates are not the same and depend on how strategic the product is. For example, Chinese cars cannot compete with American ones so the latter have duties that vary between 21% and 30%. Compare this to a maximum of 2.5% for Chinese car imports in the US

That’s where the rub lies. The Chinese can only increase imports more on these goods, some of which have few suppliers outside the US. As a result, some of the announced tariff increases are empty rhetoric with few teeth. Just as an example, China announced 25% tariffs on aircraft, but not all aircraft – just those with an “empty weight” of 15,000 to 45,000 kilograms. While it may seem like China is targeting Boeing, it turns out the stipulations only target the older 737 that is being phased out of production, while not touching the larger models that include the bulk of Boeing’s business. China desperately needs to develop their aviation industry. It is estimated that 7000 new aircraft will be needed in the next 20 years. With Airbus working at almost full capacity, there is no alternative but to go to Boeing for the rest.

The same goes for soybeans, the bulk of Chinese agricultural imports. China is the largest pork market in the world and they need soybeans for food. It turns out that Brazil and the United States are the two largest global suppliers of soybeans. Brazil has increased production for years and now constitutes 57% of Chinese soybean imports. This came mainly at the expense of the US, but Brazil does not have the ability to make up for the remaining 31% of US soybean exports to China. As a result, the planned 25% increase in tariffs will hurt Chinese pig farmers directly.

Ultimately, the sheer size of the trade imbalance will play in Trump’s favor. With $500 billion in goods at risk for China versus only $130 billion for the US, China’s fate is sealed. That is, since Trump is persistent in raising the bar while keeping disaffected American businessmen. Historians may recall a similar relentless raising of the bar eventually causing Russia to capitulate during Reagan’s tenure. It doesn’t help China that it is already running up against its tariff limits.

We have already seen the final play out. Just four days after both countries raised tariffs reciprocally, Trump announced 10% tariffs on $200 billion in Chinese goods. There was no reciprocal retaliation China could muster after the announcement late on Tuesday, July 10. Instead, China announced it would hit back in other ways – probably by selling US Treasuries, which would flood the medium- and long-term bond market causing bond prices to fall and yields to rise.

Regarding the latter, Trump’s victory will come at a price. Bolstered by his success with China, Trump will continue to pursue his trade normalization agenda with other trading partners. Although trade just balances with the UK, the European Union had a trade advantage of $ 173.58 billion last year on a trade of $ 839 billion. Not only that, but the European Union has made it a habit to go after the great American technology it cannot compete with. Think Qualcomm in 2018, Google in 2017, Facebook in 2017, Apple in 2016, and Microsoft in 2013. Japan is on the same boat. Our deficit with Japan on average – $ 68.59 billion in 2014-2017 and stood last year – $ 68.88 billion on a trade of $ 204 billion. Although government regulations have eased under Prime Minister Abe, Japan has a culture of preventing foreign investment, particularly in the financial sector. In addition, they have high tariffs on dairy products (up to 40%) and meat (38.5% on beef), which represent $ 6.1 billion in US exports to the country. Trump made it clear they were also playing and they fired back.

Given the position by all parties involved, the rates will be higher going forward than they were before. This will increase the price of US goods abroad, making them less competitive. This will, in turn, impact earnings for our major international companies. Our stock market may be flirting with highs now, but I believe that this will be the catalyst in the decline of the market as the Investors, looking forward, bid down these shares. Moreover, the tariffs on imports will inevitably lead to inflation. We are already at the Fed’s 2% comfort level so any visibility of higher inflation will encourage the Fed to hike the fed funds rate beyond their current path. The incentives to do so will be strengthened if China retaliates with a Treasury selling program, as higher 10-year Treasury rates relieve the Fed of yield curve inversion concerns.

A stock market decline will reverse the wealth effect we have seen recently on our economy and combined with export losses, this will undoubtedly lead to job losses and higher unemployment. In addition to all this, the discretionary recession that we have undergone, will make itself clearly evident as the population of the peak spending of the United States continues to decline until 2023. 1968, the peak of 2.09% per year this year, which coincides with the bulk of the boom Our Baby Boomer. Since then it has gradually decreased until it reached 1.09% at the beginning of this year. The peak spenders are the 46-50 year olds and if we take 1968 as the midpoint of their population zenith, they have surpassed it in 2016. This is a major reason why populous nations, like China, have been concerned with slowing down consumption. the past. in years. The result is we will see a global drop in discretionary spending for at least the next five years. This will cause an accelerated global economic decline for the next five years and plummeting global stock markets for the next few years.

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