Why Trump is winning the trade war with China
I’m the king of debt. I’m great with debt. Nobody knows debt better than me.
Donald Trump
In the epic game of chicken being played by the US and China over trade, the Americans appear to have the advantage.
In terms of their relative economic positions, timing is playing into US President Donald Trump’s hands.
The US economy is still humming, energised by tax cuts and high levels of business and consumer confidence.
Yes, Wall Street took a pounding last month.
As I wrote last week, investors got the October jitters. It was the worst month for US stocks in seven years, wiping off all the gains of the year to date.
It was a reminder of just how fragile the US economic boom is.
But markets have started bouncing back and the sell-off didn’t spill over into the wider economy, where low unemployment is finally starting to fuel wage growth.
Meanwhile China’s economy is looking shaky.
There were strong indications this week that the leadership in Beijing will deploy more stimulatory measures to prop up the economy, which is slowing faster than it had hoped, Bloomberg news has reported.
“The nation’s economic situation is changing, downward pressure is increasing, and the government needs to take timely steps to counter this,” a statement from the Chinese regime said.
China is trying to manage a tightening of credit conditions to curb domestic debt while maintaining a GDP growth target of 6.5 per cent per year.
While the extent to which this has been undermined by US trade tariffs isn’t clear, they certainly haven’t helped.
The falls on Chinese stock markets this year make Wall Street look stable by comparison.
Both major Chinese markets are in bear territory. The Shanghai Composite has shed more than one quarter of its value since January and The Shenzen Composite is off by more than one third.
But there is growing optimism that when Trump and Chinese President Xi Jinping meet later this month at the G20 they may strike a deal and call a truce on the trade war.
Whatever you think of Donald Trump’s aggressive rhetoric and divisive cultural stance (and frankly it disgusts me), if a truce is reached at the G20 then we will likely see resurgence on global markets.
One of the most immediate clouds hanging over both economies — and global growth — will lift.
If you hit your head against a wall for long enough then life feels pretty good when you stop.
Whether Trump’s tariffs have effected any meaningful change is highly debatable.
China’s trade surplus with the US has continued to grow since tariffs were introduced. It hit record highs in August and September.
But if Trump gets enough concessions and commitments to claim victory he may pull back from further escalation, which will cheer markets.
When the trade tensions started escalating last year I argued that China’s centrally controlled economy meant it had more capacity to win a long-term war of attrition. I still think that’s true.
It’s hard to see modern US consumers tolerating economic hardship in the national interest in the way that the Chinese have in their relatively recent history.
But the Chinese Government is pragmatic, focused on a much longer game than Trump — or almost any Western politicians for that matter.
Given the short-term economic cycle appears to be against them it makes sense to do a deal now.
Trump’s strength is powered by a fearless attitude to debt — an attitude that Chinese leaders don’t share.
His debt strategy has always underpinned by a rock-solid belief that he is in a position of power.
“I’m the king of debt. I’m great with debt. Nobody knows debt better than me,” he told CBS news in 2016.
“I’ve made a fortune by using debt, and if things don’t work out I renegotiate the debt.”
In other words he’s always been able to declare bankruptcy — or threaten to — and walk away from debt in a way that most people would consider reckless.
It works as long as you are able to maintain the illusion of power.
Trump is now applying that strategy to the US economy — blowing out the Federal deficit and arguing that the Federal Reserve should just leave lending rates close to zero even as the economy booms.
Given the lessons the US should have learned about debt from the 2008 financial crisis, there’s plenty in this approach for Americans and the rest of the world to worry about.
Meanwhile, on Wednesday, the Trump administration faces its biggest domestic political test yet.
Polls for US mid-term elections suggest the Democrats should get control of the House of Representatives — but not the Senate.
That will slow the President’s ability to enact domestic policy — a relief for millions of liberal Americans in shock about what the country has been through in the past two years.
But if that happens there’s a risk then that it will sharpen Trump’s focus on foreign policy, where he has more executive power.
A victory — however Pyrrhic — in round one of the trade stoush with China is hardly likely to deter him from pushing harder for his adversarial, nationalistic approach to trade.
That’s a cause great concern for us here in New Zealand.