By Saeed Sobhani

Trump's defeat in the trade war with the red dragon

September 16, 2019 - 12:52

The US-China trade war has reached a critical stage. Although the US president believes one of the main reasons for John Bolton's dismissal from power was his disagreement with Trump over Beijing, the claim is completely false. Continuing a trade war with China is one of the issues that President Donald Trump has. America will continue to insist on it. Here's a look at the latest news and analysis on the Washington-Beijing trade war:

The U.S. and China have appeared to dial down their trade fight by announcing some concessions on tariffs — but experts warned that it’s not yet time to pop the champagne. Markets in Asia rose on U.S. President Donald Trump’s tweet that he will delay increasing tariffs on $250 billion of Chinese goods from Oct. 1 to Oct. 15 as “a gesture of good will.” His announcement followed an earlier move by Beijing on Wednesday to exempt 16 types of American products from additional tariffs.

But, while such de-escalation in tensions between the two countries is welcomed, it’s still difficult to see both sides reaching any “real resolution” anytime soon, said James McCormack, Fitch’s global head of sovereign ratings.“Things change very quickly, it’s hard to know what motivation there is — to be honest — on the U.S. side. So, I wouldn’t want to read too much into a small concession suggesting that we’re on the road to this being resolved,” he told CNBC’s “Squawk Box” on Thursday.“I think there’s a couple more chapters yet to be written in the trade war,” McCormack added.

China, too, may not necessarily be softening its stance on trade with its move to exempt some U.S. goods from additional tariffs, according to Iris Pang, greater China economist at Dutch bank ING. She said in a Wednesday note that Beijing had, in fact, been considering such a move since May. So, the tariff exemption was aimed more at supporting the Chinese economy, and less of “a gesture of sincerity towards the U.S.” ahead of next month’s trade talks, she explained.

“There are still many uncertainties in the coming trade talks. An exemption list of just 16 items will not change China’s stance. We believe that China will stand very firm in the negotiations, which will be similar to the last round of talks,” Pang said.

Unpredictable trade war

From an investment standpoint, the U.S.-China trade war remained unpredictable, according to Daniel Gerard, head of investment and risk advisory for Asia Pacific at State Street Global Exchange. That means it’s still too early for investors to put more money into risk assets such as stocks, he told CNBC’s “Squawk Box” on Thursday. That’s especially the case as the trade war has come at a time when developments such as the Brexit crisis also added to uncertainties worldwide, he added. The trade conflict, which started last year, has escalated multiple times this year with both sides repeatedly increasing tariffs on each other’s goods. The latest tariff increases took place earlier this month before the two countries agreed to meet in October for another round of negotiations.

Still, analysts from Citi Research wrote in a note that the latest “goodwill gestures” by the U.S. and China have “induced hope for a respite in US-China tensions even as structural differences” have persisted.

China wants a two-track approach to the trade talks

China wants to draw a line between negotiations about trade and talks about other foreign affairs, the Wall Street Journal reported on Thursday. In order to streamline trade talks between Washington and Beijing, China is looking to weed out other topics of conversation that come up between the world’s two largest economies during negotiations, like national security threats, the WSJ said.

Tensions between the world’s two largest economies have gone on for more than 18 months as China and the U.S. engage in a tariff war that is pressuring both the country’s economies. On Wednesday, President Donald Trump delayed tariffs on $250 billion worth of Chinese goods for 15 days as a good will gesture to China. The two countries are set to meet early next month led by Vice Premier Liu He and Trade Representative Robert Lighthizer. China wants Liu to lead the talks about trade and a separate team to discuss the broader geopolitical concerns, people familiar with the talks told the WSJ. It is unclear whether Trump will go for China’s new plan. Trump has been vocal about his distrust of China regarding national security threats, like 5G wireless provider Huawei Technologies, which is blacklisted by the U.S. administration.

Deputy-level talks next week will surround “issues of common concern such as trade balance, market access, and investor protection,” according to Chinese news outlet Xinhua. The meeting in October will mark the 13th round of trade negotiations between the U.S. and China. The talks could fall apart like they did in May but the editor-in-chief of the Global Times Hu Xijin said last week this round of talks could lead to a “breakthrough.”

Running up to the talks in October, sources said China is planning to boost agricultural buying.

Trump says he 'would consider' an interim trade deal with China

Foxbusiness reported that President Trump signaled Thursday that he is open to the possibility of an interim agreement to resolve a lingering trade dispute with China until a permanent deal can be reached.

“A lot of people are talking about – and I see a lot of analysts are saying – an interim deal, meaning we’ll do pieces of it, the easy ones first, but there’s no easy or hard,” Trump told reporters ahead of his appearance at a congressional retreat in Baltimore. “There’s a deal or there’s not a deal. It’s something we would consider, I guess, but we’re doing very well.”

Dow Jones Industrial Average, S&P 500 and NASDAQ futures each ticked slightly higher on Trump’s remarks. The U.S.-China trade dispute has weighed on global markets and stoked fears of a looming recession. However, signs of a thaw in negotiations between U.S. and Chinese diplomats stoked optimism in recent days. The White House confirmed reports last week that the two sides would hold high-level trade talks in Washington early October. The two sides last met in July.

President Trump announced Wednesday that he would delay the implementation of tariffs hikes to 30 percent from 25 percent on $250 billion in Chinese goods in what he referred to as a “gesture of goodwill.” Chinese importers showed signs of ramping up purchases of U.S. soybeans and other farm products.“I did the little bit of a delay in honor of President Xi because it’s their 70th anniversary [of the People’s Republic of China],” Trump added.

The U.S. and Chinese governments have imposed hundreds of billions of dollars in punitive tariffs in recent months amid continued disagreements over trade policy. Trump administration officials have sought assurances on the protection of U.S. intellectual property, an end to industrial subsidies and agreements to purchase American-made agricultural products.

With an Economy This Strong, No Democrat Can Defeat Trump—but the Trade War With China Might

Newsweek reported that Donald Trump planned on seeking a second term based largely on the strength of the economy. Unemployment is down to a 50-year low. The Bureau of Labor Statistics reports the creation of nearly 6 million new jobs since he came into office.

Wages and profits and revenues to the federal Treasury are up. The stock market is generally surging, and economic growth is once again the order of the day. It's an enviable economic record, especially when compared with his two most recent predecessors. Things are going so well, some of the president's bitterest foes predict it's strong enough to carry him across the 2020 finish line first.

The naysayers—those who've never liked Trump—point to a few statistics to suggest the fundamentals of the economy are softer than they appear. The inverted yield curve that appeared this week, now that the yield on 10-year U.S. government bonds is lower than that for two-year notes, has some people saying a recession sometime in the next two years is possible. The U.S. economy is the world's strongest right now but, says the president, would be even stronger had the Federal Reserve not raise interest rates too high too fast.

Others say if things head south, it will be because of the ongoing trade war with China.

"I think we're going to have a very long period of wealth and success," Trump told reporters on Thursday. "Other countries are doing very poorly, as you know. China is doing very, very poorly. The tariffs have really bitten into China. They haven't bitten into us at all." 

In response to the U.S. imposition of tariffs on its exports, Beijing weakened the yuan, effectively blunting their effect. Trump countered by delaying until December the next round of tariffs, mostly on consumer goods, scheduled to take effect on September 1 until mid-December. That's right in the middle of U.S. retailers' most profitable period and could cause trouble at home. These and other moves have caused dramatic fluctuations in the stock market. The U.S. Trade Representative says everything's just "next steps" in the process of getting China to do a deal. Whether that's true is a subject for debate. Capital Alpha Partners' James Lucier counseled investors to view the delay of the tariff imposition as being as advertised and not as "backtracking in policy or a 'blink' by the U.S." and "a case of the White House and President Trump, in particular, getting ahead of his own administrative machinery."

If the economics are sound, the politics are shaky. A second Trump term depends on Midwestern farmers and industrial workers and others whom the tariffs potentially affect adversely in critical states like Florida, Michigan, and Ohio. These are places where the economy always issues No. 1, where the three things voters care about most are jobs, jobs, and more jobs. And, as of now, the tariffs are not working to the president's advantage. As much as the China-bashing rhetoric may excite his base, it's not helping them make ends meet.

Florida's exports to China total about $1.6 billion annually. That includes $533 million in gold because Miami is now the leading hub for refiners and processors who then sell to China for use in manufacturing. Civil aircraft parts, the state's second-biggest export, brings in $126 million now and more in the future as China becomes, over the next 20 years, the world's largest single market for civilian aircraft sales.

The Miami Customs District alone did $7 billion worth of business with China in 2017. In South Florida, manufacturers are suffering because of the steel and aluminum tariffs. Michigan has a $3.6 billion export relationship with China, with $1.2 billion comprising car parts. The Wolverine State contains 75 percent of North America's auto R&D, and China is, by volume, the world's largest automaker. The Alliance of Automobile Manufacturers says higher-priced cars resulting from the tariffs could potentially lead to the loss of 700,000 American jobs.

It's not just cars. Over half of all U.S. soybeans are exported, with 60 percent of them going to China and $700 million coming from Michigan. "The noose is getting tighter," Jim Byrum, president of the Michigan Agri-Business Association, told the Detroit Free Press in May. "We have lost market opportunities. We're not shipping soybeans around the world like we normally would. We're not shipping them to China. China was our biggest soybean consumer, and they're not moving."

Ohio's exports to China total $3.9 billion, with more than $691 million worth of soybeans—the state's top agricultural export—shipped to China in 2017. "This will be tough to take. China takes one out of every three rows [of soybeans]," Bret Davis, a Delaware County farmer and governing board member of the American Soybean Association of China, told The Columbus Dispatch about proposed tariffs in 2018. An Ohio Manufacturing Extension Partnership survey of 457 Ohio manufacturers conducted in January found that 14 companies were hurt by tariffs for each it helped. The Trump tariffs have already impacted negatively states that were key to him winning the presidency in 2016 and will be just as important in 2020. If the president wants to continue his record of economic success, he should focus on ending the trade war before Florida, Michigan, and Ohio swing in the other direction.

Trump trade war with China has cost 300,000 U.S. jobs, Moody's estimates

As CNBC reported, Although U.S. unemployment may be at its lowest level in nearly 50 years, the jobless rate would be even lower if not for the U.S.-China trade war, Moody's Analytics said in a recent analysis. The White House's imposition of tariffs on hundreds of billions worth of Chinese imports has resulted in 300,000 fewer jobs being created and reduced U.S. gross domestic product by an estimated 0.3%, Moody's Analytics' chief economist Mark Zandi said in the report. 

That estimate is based on the difference between actual nonfarm employment and projections of what employment would have been as of June 30 if not for the U.S.-China trade war. If the U.S. tariffs stay in place at current and intended levels, some 450,000 fewer jobs will be created by year-end — that figure would rise to 900,000 if the trade dispute carries on through next year, Zandi told CBS Money Watch in an email.

Trump and China Premier Xi "have embarked on a dangerous game of economic chicken," Zandi wrote in the report. "Both claim that their economies are strong enough to withstand the trade turbulence, but they are pursuing policy stimulus to offset the costs of the war."

More than $100 billion in new American tariffs on Chinese goods took effect this week, with another $200 billion set to hit in December. By year's end, nearly every good imported from China will be taxed by the U.S. government — about $550 billion worth of total goods — paid for by American companies. Mr. Trump hiked the tariffs last month after China raised duties on $75 billion in U.S. goods amid an escalating trade war between the world's two biggest economies.

U.S. employers hired 130,000 workers in August amid signs of slowing job creation, leaving the jobless rate at 3.7%. Tariffs on imported Chinese goods are paid for by U.S. companies, not China as President Donald Trump has erroneously claimed. In July alone, tariffs cost American businesses $6.8 billion, according to figures released Wednesday by Tariffs Hurt the Heartland, a coalition of companies and trade associations that oppose the taxes. Rising trade uncertainty can hurt companies' ability to plan and hold back spending, which in turn can slow economic growth. 

"The data speaks for itself — the trade war is having a serious negative impact on the U.S. economy," Deutsche Bank economist Torsten Slok said in a note to investors this week. That impact includes a drop in firms planning capital expenditures in the next three to six months, falling CEO and business confidence, and a decline in job openings. U.S. economic growth, in the midst of a record expansion that has lasted for more than a decade, is starting to slow. The Congressional Budget Office this week forecast GDP of 2.3% for 2019, compared with 2.9% last year. The agency projects growth to slow to 1.8% in 2020, below historic averages.