A temporary ceasefire in the lose-lose war

[abomvubuso]

The first stage of the so called trade agreement between the US and China, signed in mid January, is just a temporary ceasefire in the ongoing trade war, not a long-term departure from the tariff policy that started a couple years ago with Trump's change of approach. Still, it's a refreshing halt to what was starting to become a dangerous political direction.

Back in 2018, Trump tweeted that trade wars are a good thing, and easy to win by the US. Turned out he was wrong - as usual. Although there sure are some short-term benefits from China's concessions, the main one is just that the self-inflicted damage for the US economy caused by the tariffs will be partly reversed.

That's called "cost externalizing" by some. Funnily, the more damaging the effect of this trade war was on the US growth rates for the last couple of years, the bigger the potential for a rebounding growth this year.

Trump's initial confidence in trade protectionism was based on the notion that China's trade surplus against the US would force Xi Jinpong to make big political concessions so he could save his exports sector. But the result was rather different: China responded with reciprocal measures instead, and that of course hurt the US producers.

America's trade balance, the main indicator for Trump's success (and the thing he likes to brag about the most), has actually not changed much - perhaps only slightly improved recently against China. Some of the upsides of the tariffs that made US-made products a tad more competitive at least for a while, were almost instantly neutralised by the yuan's deliberate devaluation.



The Fed now reports that the net trade effects of the tariffs were actually a bit more negative for the US production than before the tariffs. The reason is that the profit from the diminished Chinese imports were more than compensated for through diminished US exports, and the larger expenses for imported raw materials, caused by China's response.

Other Fed reports show that almost the entire burden from Trump's tariffs was actually carried by the US consumers (through higher proces), rather than partly by the Chinese producers, who were able to redirect their exports elsewhere. This has led to shrunken real income among the US populace, and diminished consumer expenses, i.e. slowing down of the domestic economy.

The damage for the financial and business trust from the constant trade threats is even bigger, albeit harder to calculate. It's also more long-term. The tightened financial conditions caused by the pumped up US dollar, and the plummeting US stocks in 2018, would've probably been even worse if the Fed hadn't decided to cut the main interest rate by 75 points.

The worst thing is, the growth of capital investment in the US has abruptly shrunken, pushing the economy dangerously close to recession. Part of the regulatory uncertainty caused by the chaotic trade war, will be here to stay for quite a while now, so there might not be a big rise in capital investment for a long time, due to postponed or abandoned projects (investors hate uncertainty). The Fed forecast indicates that these effects of uncertainty alone might have eaten away an entire 1% of the total global GDP growth.

In all, the trade war could be characterised as a huge negative shock for America's overall trade environment, only partly compensated through efforts for fiscal relief.

The annual US GDP growth has slowed down from 3% in early 2018 to approx. 2% in late 2019, and Goldman Sachs estimates that nearly half of that slowdown was caused by the tariffs, while the rest is an effect of the overall market uncertainty.

The good news is that part of these obstacles could now disappear by the end of 2020, boosting US GDP growth by at least 0.5%.

As for the longer-term benefits from the trade deal, China's agreement to purchase extra US exports worth $200bn within 2 years (mostly in the energy, agriculture, industry and services sectors) will cut US trade deficit against China somewhat. But much of that exports will probably be redirected from elsewhere, and won't actually increase US domestic production in those sectors.

In the long term, trade restrictions in China, including the alleged illicit trade practices, seem likely to be curbed. Given the current political momentum from the first stage of the deal, the Chinese reformist faction led by vice-PM Liu He could have the upper hand in Beijing, at least for a while.

The US trade rep Robert Lighthizer has said the power of the Chinese reformist wing will ultimately determine whether the first stage of the trade ceasefire will be successful, but the road is still long and perilous. After all, Xi does not want to appear weak, and the concessions he made to Trump may make him so - and his response could be extreme. Also, the convoluted problems related to the protection of intellectual property, cyber theft, and industrial subsidies all originating from China, are still in the list of "very difficult" problems, and could turn out just as impossible to solve in the second phase.

Unfortunately, now that trade protectionism is being viewed by the US administration as a legitimate tool in international economic diplomacy, the genie is out of the bottle. America and China have remained with an average tariff rate of 20% between themselves, which is a unprecedented stranglehold of post-war global trade. And now, encouraged by his short-term success, Trump is expanding the tactic, and threatening the European automobile industry with similar tariffs. So rest assured that the trade wars are only just beginning.

Unless Trump gets unseated somehow, come election time. Then there'll probably be an attempt to get back to the Clinton-type globalist economy, except this time the US won't be viewed with the trust it used to until Trump came around. In fact, nothing will be the same again. The genie is definitely out of the bottle.