Filed under: Weekly Economic Commentary

U.S.-China Trade Update

John Lynch Chief Investment Strategist, LPL Financial

Written by Boone Wealth Advisors

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Trade tensions between the U.S. and China have been building over the course of 2018. These tensions have escalated over the last month, but while risks are rising, economic disruptions have remained minimal. We continue to believe the final economic impact of current trade tensions won’t be insignificant, but will be small relative to the short- to intermediate-term positive impact of deficit-financed fiscal stimulus, business-friendly changes in the tax code, and deregulation. We do remain concerned with Trump administration efforts to simultaneously shift terms of trade with all major trading partners: China, the European Union, Canada, Mexico, and, to a lesser extent, Japan, who together accounted for over two-thirds of total U.S. trade. While all of these negotiations are important, trade relations between the U.S. and China—the world’s two largest economies—remain the focus. Despite trade tensions, both countries remain highly motivated to avoid an all-out trade war and, despite ongoing debates about the most efficient means to achieve U.S. trade goals, some shift in trade relations with China was necessary and general movement toward fair trade, if achieved, could benefit both the U.S. and the global economy.

WHERE THINGS STAND

When reviewing the current status of trade negotiations with China, it’s important to keep in mind what has actually been put into place and what still can be negotiated. The tit-for-tat threats and counterthreats we’ve seen over the past few months may be more aptly viewed as the two countries feeling each other out to better understand the other’s pain points as they (hopefully) progress toward a more mutually beneficial relationship as major trading partners. To date we have seen key tariffs put into place on only washing machines, solar panels, steel, and aluminum. The next stage of tariffs—25% tariffs on $34 billion (out of $50 billion) of Chinese imports—goes into effect July 6. While there may be more, we typically see about 60 days from announcement to imposition of the tariffs to give businesses and trade authorities time to react, which also leaves time for further negotiation. The Trump administration’s recent request to draw up a list of an additional $200 billion of Chinese goods for 10% tariffs remains in its early stages and currently can be considered a legitimate threat, but one that’s still far from implementation.

PAIN POINTS

Whether a trade war or just a trade dispute, all sides take some damage. A trade disagreement is “won” when new concessions compensate for the damage, with the side that can take the most pain typically getting more concessions. Of course, if the same ends or something close could have been achieved by less-painful means, the losses were simply wasteful. Also, if both sides have the political will to absorb a lot of pain, the eventual gains must be greater to make up for the losses. Here’s what we see as the major advantages and disadvantages for the U.S. and China in current negotiations.

ADVANTAGE U.S.

– Goods Surplus—With far fewer goods exported to China than imported from China [Figure 1], the U.S. retains a structural advantage in its trade disputes with China. Last year the U.S. exported $130 billion in goods to China, while China exported $505 billion in goods to the U.S. Consequently, China is going to run out of direct reprisals quickly should it look to match U.S. tariffs, a point brought home sharply by the Trump administration’s announcement that it is looking at potential tariffs on an additional $200 billion in goods, an amount that China cannot directly match.

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Written by Boone Wealth Advisors

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