Watching the Dow Jones Industrials retreat from a 250-point gain to end the session up 78-points to 26,062, 72-year-old President Donald Trump warned again that he would impose another 25% tariff on $325 billion in Chinese goods if he and Chinese President Xi Jinping do not work out a deal at the June 28 G20 meeting in Osaka, Japan. Trump still believes he can win a trade war with China threatening more tariffs. Trump’s key economic advisers, including Larry Kudlow and Peter Navarro, can’t possibly think that tariffs benefit U.S. manufacturers like Apple Inc., whose business depends on cheap Chinese manufacturing. Citing trade deficits to squeeze China into making more concessions does not take into account the fact that U.S. manufacturers rely heavily on China for their fulfill their supply chains, not the other way around, China relies less on U.S. manufacturing.
Waiting to the G20 to resolve his trade dispute with China puts U.S. markets in chaos, uncertain which direction to take. Trump can’t fathom the fact that U.S. companies need China far more than China needs U.S. companies to fulfill their supply chains. “If we don’t have a deal,” more tariffs would be applied, said Trump. “The China deal is going to work out. You know why? Because of tariffs,” Trump said, kidding himself that Xi is under the same pressure to resolve the trade imbalance. There’s little-or-no incentive for China to resolve the trade deficit, since most the manufacturing is done by U.S. firms in China. If market perceive that Trump’s going ahead with his new plan to tariff $325 billion in new goods, the Dow Jones Industrials, tech-rich Nasdaq and S&P 500 will give back this month’s gains. No one thinks Trump’s really in the driver’s seat.
Wall Street’s five-day rally, recovering most of the losses in 2019, directly relates to Trump backing off on his threat to tariff Mexico for illegal immigration. “If we didn’t have tariffs, we wouldn’t have had a deal with Mexico,” Trump said on a call with CNBC’s Myron Brilliant, currently head of the U.S. Chamber of Commerce. Saying he’d suspend plans to tariff Mexico causes a furious Wall Street rally. If Trump could do the same with China by the end of the month, he hit Wall Street with a major stimulus. If he finds no end to the tariff issue with Xi in Osaka, it could pop Wall Street’s bubble, sending markets plunging again. Trump also complained about the European Union’s high tariffs on California wine, sometimes a high as $0.29 per 750 ml bottle. U.S. tariffs the EU only $0.05 per 750 ml bottle. Trump would like to see the EU equalize the tariffs with the U.S.
When it comes to China, Trump can’t win the trade war with tariffs because of the disproportionate number of U.S. business manufacturing in China. It’s unrealistic for Trump to think that a trade war hurts China more than the U.S., when so many more U.S. companies depend on cheap Chinese labor, especially mass merchandisers like Walmart and Target. Tariffs are passed directly on to consumers, causing inflation in consumer products, especially clothing. When you consider the damage caused by tariffs to U.S. farmers and manufacturers, it’s hard to believe Trump thinks he can win a trade war with China. While it’s difficult to ferret out the effects of tariffs on the over U.S. economy, Trump likes to point fingers at the Federal Reserve Board. Trump believes Federal Reserve Board Chairman Jerome Powell hurt U.S. economic growth in 2018 by raising interest rates four times.
Whatever the reasons slowed economic growth, Trump can only control what he does, not what Powell does or anyone else. Tariffs discourage business activity on both sides of the equation, not just China. Calling Powell’s rate hikes “very disruptive to us,” Trump wants to shift attention away to the damaging effects of tariffs on the U.S. economy. Monetary policy is only one variable affecting U.S. growth, certainly any drag on business activity like tariffs does the same thing. “They certainly don’t listen to me because they [the Fed] made a big mistake: They raised interest rates far too fast,” Trump said, refusing to acknowledge the negative effect of tariffs on the U.S. economy. Trump has a limited window to stem the damage from tariffs to U.S. Cross Domestic Product [GDP]. Expectations about Powell cutting the federal funds rate when the Open Market Committee meets June 18 fueled the latest market rally.
When Trump meets with Xi on the sidelines of the G20 in Osaka, Japan June 28, he better be prepared to make some concessions. Threatening Xi with more tariffs will backfire, causing more distress to U.S. farmers and manufacturers. Since more U.S. manufacturers stand to lose more than China, Trump must acknowledge the trade war has become counterproductive. Trump once thought that China would buckle under U.S. pressure. He knows now that China can outlast the U.S. in any trade war, because China’s businesses are used to doing with less. Minute 25 basis-point cuts in interest rates won’t stop the economy’s downward slide if Trump continues slap tariffs on China. Trump’s kidding himself that the threat of more tariffs will sway Xi to sign a trade deal, covering copyright and patent theft or the trade imbalance. Ending tariffs is the only way to assure continued GDP growth.
