President Donald Trump’s trade war with China won’t end anytime soon, with Chinese President Xi Jinping thinking that he’d get a better deal with a Democrat if Trump loses in 2020. While Xi knows there’s no guarantee, Trump’s committed to pushing ahead with a deal, sending U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin to Shanghai to hammer out a deal starting July 29. Xi wants Trump to end all tariffs in exchange for China implementing laws to protect U.S. patents-and-copyrights, plus removing existing tariffs on U.S. agriculture. “I think China will probably say, ‘let’s wait,” Trump said, July 26 in the Oval Office. “When I win, like almost immediately, they’re all going to sign deals.” Secretary-General of the Washington-based International Monetary Fund [IMF] Christine Legarde says the U.S.-China trade war has shaved one-half percent off U.S. Gross Domestic Product.
Second Quarter U.S. GDP beat expectations at 2.1%, almost certainly affecting Federal Reserve Board Chairman Jerome Powell’s decision July 31 to cut the federal funds rates. Wall Street rallied over the last two weeks expecting the Fed to slash 50 basis-points off, trying to provide stimulus to the economy. With the economy looking stronger than expected, it’s doubtful Powell will cut more than 25 basis-points at the July 31 Federal Open Market Committee [FOMC] meeting. Powell will no doubt look carefully at GDP and the inflation rate to decide how far to go, if at all, cutting rates. Powell also looks at any drag on the U.S. economy coming from the U.S.-China trade war, hurting both economies’ bottom line. Both sides seem equally dug in, especially China insisting that the U.S. withdraw all tariffs before any substantive discussion about resolving trade disputes.
Trump’s been talking about the $500 billion trade deficit with China since the 2016 campaign, largely because so many U.S. manufacturers opted to make use of cheap Chinese manufacturing. Trump tried to encourage U.S. manufacturers to return to the U.S., when many prefer the reliability, consistency and cost savings in China. Lighthizer and Mnuchin won’t get anywhere trying to reduce the trade imbalance with China, largely because it benefits U.S. manufacturers. Lighthizer and Mnuchin could make progress toward a trade deal with China on the issue of intellectual property theft or copyright and patent infringements. Whatever happens in Shanghai next week, if Trump wants a deal with China he’ll need to cancel existing tariffs on Chinese goods. Meeting at the G20 June 28, Xie and Trump agreed to work to settle their trade dispute at the earliest possible time.
Heading into 2020, you’d think Trump would do anything to stimulate the economy, including ending the U.S.-China Trade War. If the IMF’s right, cutting a deal with China could add 0.50% on GDP, boosting it to 2.6% by year’s end. If the trade war continues, it’s hard to know what unexpected events could sabotage U.S. GDP, especially geopolitical events like a skirmish with Iran. Whatever benefit Trump found in slapping China with tariffs, it looks outweighed by the impact on GDP. There’s only so much Powell can do July 31 to stimulate the economy without creating more adverse side effects, like more inflation. If Trump wants to stimulate the economy, he needs to look no further than his trade war with China. Blaming Powell won’t fix whatever’s wrong with the economy. Ending tariffs would be a welcome start to accelerating growth in 2019 and beyond.
China has shown no willingness to end the trade war unless Trump reverses tariffs on over 300 million in Chinese goods. Trump agreed at the G20 to put any more tariffs on hold until both trade delegations could work out their differences. Trump hasn’t come to grips with the fact that much of today’s trade deficit with China involves U.S. manufacturers, like Apple, which succeeded in becoming the world’s riches company. Trump can’t expect companies like Apple to bring manufacturing back to the state when they’ve had so much success building products overseas. Xi and Trump have been at loggerheads for over a year, each digging in to their respective positions. If Trump ends Chinese tariffs, he’d have the best chance of stimulating the economy, saving a dreaded downturn that would play into Democrats’ hands. Trump can’t wait much longer if he’s going to make a move.
Stretching out the trade war with China makes zero sense for the U.S. economy, certainly Trump’s reelection bid. With the 2.1% Q-2 GDP, it’s highly unlikely that Powell will cut more than 25 basis-points, if anything at all. Continuing the tit-for-tat tariffs hurts a wide swath of U.S. businesses, certainly agriculture. Trump just signed a $2 trillion extension to the U.S. budget, adding another $2 trillion to the National Debt. With the federal budget deficit nearly $1.4 trillion, the economy’s already chugging along, hoping to avoid a downturn. No one benefits from the economic downturn more than Democrats, making a compelling case to change hands at the White House in 2020. Knowing that Xi won’t sign a deal until Trump ends the tariffs, there’s no possible reason to continue the tariffs. Both economies would benefit by ending tariffs, especially U.S. farmers hoping for more China sales.
