Monday, May 13, 2019

U.S. and China play Trade Chicken, and both are likely to win

Global markets are in the midst of another panic attack that appears to be the direct result of an escalating game of trade-war chicken between the US and China. Who's likely to win? I believe the odds are in favor of the U.S. winning, especially since a trade deal with China to Trump's liking is likely to end up being a win-win for all concerned.

The vast majority of economists would agree that the best trade policy is free trade, with no tariffs, barriers to entry, or subsidies. Free markets and global trade have proven to be the best way to promote global prosperity. Tariffs are best viewed as a tax on imports, with the cost being paid by the consumer, not by the producer. Taxes serve only to reduce private consumption in order to fund public consumption, which in the end is less efficient. The country that taxes its imports least is therefore the country that will benefit most from trade. By the same logic, countries that subsidize their exports only hurt themselves while benefiting those who buy their subsidized goods and services. (We should welcome any country's subsidies!)

The vast majority of economists would also agree that there are second-order effects that stem from tariffs. By making imported goods more expensive, countries that impose tariffs on imported goods give domestic producers a degree of "protection" to the extent domestic producers can charge higher prices and still compete with imports. But this only reinforces the argument that at least part of the cost of tariffs is born by consumers. Protectionists also argue that tariffs save jobs—and to some extent they do, in the "protected" industries—but only at the expense of consumers. Tariffs, in short, benefit a relative few at the expense of the many.

Trump understands this, and said so at the G7 summit meeting last year: "That’s the way it should be, no tariffs, no barriers … and no subsidies. ... that would be the ultimate thing." The only way to understand Trump's apparent love for tariffs today is that they are, as Larry Kudlow noted a few months ago, "a negotiating tool. They are part of his quiver." And tariffs are a policy tool over which Trump has direct control. That makes tariffs irresistible to deal-maker Trump.

A war of escalating tariffs between the US and China would be damaging to both countries. If carried to an extreme, a tariff war with China would most likely endanger the global economy by weakening both the huge U.S. and Chinese economies. Bad! And in that sense Trump is crazy to be engaging in a tariff war with China. Worse, he falsely argues that his tariffs are paid by the Chinese and that the money goes straight to the federal government's coffers. To his credit, Trump's economic advisor (and my good friend) Larry Kudlow yesterday correctly admitted that tariffs are in fact paid by U.S. consumers, not the Chinese. But he also correctly added that higher U.S. tariffs will hurt the Chinese as well. So the question then becomes, Who will suffer the most? Who will likely back off from this game of chicken the first?

Tyler Cowen is a well-respected economist at George Mason University who has a reputation for not having a partisan bias. Today he wrote a column for Bloomberg (which certainly does have a strong liberal bias) in which he argues persuasively that China stands to lose more from a trade war than the U.S. does, even though it is clear that Trump's higher tariffs on Chinese imports impose burdens on U.S. producers and consumers.

Here's Cowen's conclusion (read the whole thing for the important details):

In my numerous visits to China, I’ve found that the Chinese think of themselves as much more vulnerable than Americans to a trade war. I think they are basically correct, mostly because China is a much poorer country with more fragile political institutions.
My argument isn’t about whether Trump’s policy toward China is correct. I am only trying to get the basic economics straight. Next time you hear that the costs of the trade war are simply being borne by Americans, be suspicious. In their zeal to make Trump look completely wrong, on tariffs or other issues, too many commentators pick and choose their arguments. A more fair and complete economic analysis indicates that China is also a big loser from a trade war. Trump’s threats are exerting some very real pressure on the country.

Markets are usually efficient at discounting the future, if only because they reflect the consensus of millions of participants with skin in the game. Right now they are saying that although both the U.S. and Chinese economies are hurting, the Chinese are hurting more.

Chart #1

Chart #1 compares the value of yuan vis a vis the dollar (blue) with the level of China's foreign exchange reserves (red). Here we see that since the beginning of the U.S.-China tariff war (March-April 2018) the yuan has fallen by about 8% vs. the dollar. That means that the amount of yuan that Chinese producers receive for each dollar of sales to the U.S. has fallen by 8%. This chart also shows that China's foreign exchange reserves have been relatively stable for the past 30 months, at just over $3 trillion. China's central bank is apparently targeting a stable level of reserves, and allowing the yuan to fluctuate in value as capital attempts to enter or leave the country (this is a legitimate monetary policy, though one not often used). The weaker yuan thus directly reflects weaker net investment in China and a loss of Chinese purchasing power. Bad!

As Cowen notes in his column, China's lack of "guarantees against espionage, intellectual property theft and unfair legal treatment ... makes investing in China less desirable for many multinationals, not just U.S. ones." If China were to agree to Trump's demands in these regards, its economy would almost certainly benefit from increased investment and a stronger yuan. Good!

Chart #2

Chart #2 compares the value of the MSCI China Index (in HK dollars) to the value of the S&P 500. Chinese equities have greatly underperformed their US counterparts since China's "opening" to the world in 1995. Moreover, since the US/China tariff war started last year, Chinese equities have fallen by almost 18% relative to US equities. Equity markets are clearly saying that China will be the biggest loser.

Chart #3

Chart #3 shows that Chinese exports to the US and imports from the US have both fallen since the beginning of Trump's tariff war (in dollar terms). This is the result not only of a reduced volume of trade but also the yuan's reduced value. US/China trade represents a far greater share of China's economy than it does of the US economy: China's exports to the US are roughly 4 times greater than China's imports from the US, while the US economy is roughly half again as large as China's. China thus stands to lose much more from any trade disruptions.

Chart #4

Chart #4 quantifies the market's renewed sense of unease over trade relations. Though not yet as acute as what we saw late last year, it's a similar pattern. Rising fears are driving down the value of equities.

Meanwhile, swap spreads and credit spreads remain relatively low. Liquidity conditions have not deteriorated, the Fed is not too tight, the dollar is not collapsing, and the US economy is likely to continue growing. What we see in the markets today is another panic attack which will likely be assuaged once the Chinese figure out a face-saving way of capitulating to Trump's demands. That shouldn't be too hard, since it ultimately will lead to a positive result for both the US and Chinese economies.


marcusbalbus said...

good god, the charts

ckhajavi said...

scott - even if we get a deal it sounds like tariffs will be used as the enforcement mechanism - hence if i’m a multinational that wants to invest in production abroad and sell some of that product to the us why on earth would i choose china even if we get a trade deal - you would have no clue whether tariffs would hit you at any point for reasons totally out of your control - hence the mega trend seems clear and that’s massively lower fdi in china - a country that has a very fragile economic system - what are your thoughts on this dynamic?

Scott Grannis said...

ckhajavi, re "even if we get a deal it sounds like tariffs will be used as the enforcement mechanism"

You're right that tariffs would be the enforcement mechanism for any deal. But they would only be used if China reneged on its commitments. Would China be foolish enough to go backwards (e.g., by re-imposing restrictions on US imports, restrictions on investment, and by stealing intellectual property)? Presumably, if a deal is cut, then China will surely benefit to some degree by being able to export more and by receiving at least some of the capital outflows that have occurred in recent years. It's hard to put the free trade/prosperity play back into the bottle, I would argue. But of course that will always remain a chief source of risk for any investment in China.

Roy said...

"Here we see that since the beginning of the U.S.-China tariff war (March-April 2018) the yuan has fallen by about 8% vs. the dollar. That means that the amount of yuan that Chinese producers receive for each dollar of sales to the U.S. has fallen by 8%. "

1.If CNYUSD went down, chinese exporters' CNY would increase as they are paid in USD.

2. Even if recent and declared tariffs are canceled, one of these two countries would still: have very high tariffs on the other country's products; would not have a market economy; have an extremely closed economy which is now similar to the size of the other's economy; have a stock market which has little to do with the real economy, no rule of law etc.

3. That climbing the wall of worry graph, for the past two years, it's starting to look less like climbing a wall and more of "try not to stumble and fall down".

Scott Grannis said...

Roy: not so. 1) The US market dictates the prices that Chinese manufacturers can sell at. A decline in the dollar value of the yuan does not result in an equal increase in the dollar price of Chinese goods in the US. A weaker yuan therefor dictates that Chinese exporters receive less yuan for the items that they sell in the US. 2) The Chinese economy is definitely smaller than the US economy, and the rule of law hardly exists in China. What threat does that pose to the US economy, which is far more free and dynamic? 3) See #2.

Rich said...

Fighting trade skirmishes with our allies while going against our economic rival is stupid and counterproductive. A unified front would increase the odds of being successful against China.

Benjamin Cole said...

1. China cannot change. I do not see how this will play out. Beijing operates a centrally planned, authoritarian, mercantilist, dirigiste economic model, run by the Communist Party of China, and they have had incredible success with this model for 40 years. They have not really liberalized their economy; they opened up a manufacturing platform for multinationals. They do not honor moral hazard, the price signal, or intellectual property rights. Or any kind of human rights.

2. More than that, I think Trump deserves credit in a way I never see expressed.

Maybe 70 years ago, the US power structure was dominated by domestic companies. So, one could posit US trade policy was dominated by protectionism, or domestic manufacturers.

But today the big names are Apple (all product made in China), GM (sells more cars in China than the US), Wal-Mart (importer) or the world’s largest investor BlackRock ($1 trillion invested in China and counting), and so on.

The US power structure is dominated by the globalists and multinationals. And they fund think tanks, media, academia, trade associations, lobby groups, and even political campaigns.

It is remarkable—-whether right or wrong, Trump is taking on the power structure today.

Oddly enough, Trump is a revolutionary. Yes, Trump.

Trump started a couple of years ago with no base, was a reality TV show host and object of ridicule. Now he is taking policy positions in direct confrontation with the largest and most powerful global commercial interests on the planet, all of whom have aligned themselves with the Communist Party of China, the largest and most powerful political party on the planet.

The multinationals and internationalists (and the Communist Party of China) are much affronted that a US president is confronting the globalist vision.

I think Trump is right in his trade policies, and he may be right if he shrugs his shoulders at the reality of China, and leaves 25% tariffs in place forever (or until some weasel President cuts them).

Nevertheless, Trump is an amazing story. Whatever one says about Trump, he is not following the expedient path.

Trump has chosen the hard way. I admire that.

Trump is a nut, Trump is a cipher. But anyone who thinks Trump does not understand trade is making a mistake.

Frozen in the North said...

Scott: Although I entirely agree with your analysis, I disagree with one aspect, both countries are the losers, in this case, the problem is that the question is being framed as who is the biggest loser! Not a title than anyone wants, but still, even second place is not that great. Most economists agree on two aspects: (a) the rest of the world gains by this fight, second the economic consequences are "not that bad" is also correct, yes we are talking about billions of dollars, but again it's largely inconsequential in such a large economy. Some groups are hurt other benefit.

The question becomes is America looking for an autarkic economic system. When you think about it trade is an unusually small percentage of America's GDP (Hence the comment that America will "win") on the other side, the implication is two-fold (1) there is a wealth transfer from consumer to certain producers, and (2) It doesn't lead to something more a hot war.

There is no doubt that there is a conflict brewing between America (the global leader) and China (the pretender), for China the advantage of Trump is that his geopolitical interests are very limited (aside from wanting to start a war in Iran), the truth is that he likes chaos because that's his game plan -- wrecking the EU and NATO is another (independently of the worth of either institution).

I think the US economy is resilient, that over time jobs will either move back to the US, or possibly other low-cost producers (the winners)-- like Vietnam. I actually applaud Trumps willingness to cover the cost to America's farmers -- in a sense, if Trump really believes in mercantilism (which he seems) then the consequence is that the country will be better off, if all those who "temporarily" lose int he fight or maybe not made whole but at least given a way out to cover some of their losses.

However, aside from all the brave talk of making the farmers whole, I have serious doubt that Congress will agree to appropriate these amounts; first, the Democrats are looking to "stick-it" to Trump and the GOP really is against this trade war, especially if its going to cost them money

Popo Dean said...

Sorry Scott but I think Roy is right on the yuan-dollar relationship.

If a Chinese exporter sells a product here for $20 and the yuan weakens from 6 to the dollar to 7 to the dollar, then in yuan terms he receives MORE yuan not less --> from 120 to 140 if he keeps the US price stable.

Now that exporter may decide to pass the forex gain along and keep his yuan price at 120, but that means cutting his price in US dollars to about $17. This is often done, but not always and rarely in the short term.

There is no way a weaker yuan per se results in a Chinese exporter receiving FEWER yuan if the US price is unchanged. There would have to be some sort of knock-on effect for what you argue to become true, but it is not true by itself.

Popo Dean said...

PS -- this is precisely why the Chinese allowed the yuan to weaken towards $7/USD to offset the effect of Trump's tariffs.

1) We start with a US price of $20 and a yuan/$ rate of 6.5. Chinese exporter receives 130 yuan per unit sold.

2) Trump imposes 10% penalty tariffs. If passed on, US price will rise to $22 and probably becomes uncompetitive.

3) Instead, Chinese exporter cuts his price to $18.20. After 10% tariff, product continues to be priced at $20 in US.

4) Chinese govt allows yuan to devalue to $7 per USD. Chinese exporter still receives roughly the same amount in yuan ($18.20 x 7 yuan/$ ~ 130).

Thus yuan devaluation neutralizes the tariff effect. This is also why Trump was trying to jawbone the dollar lower, so that his penalty tariffs had more bite.

ckhajavi said...

your math is correct but the issue is they risk capital outflows and em contagion with negative repercussions domestically if they devalue much further from here - it’s not that simple and to scott’s point china is walking a tight rope here so i think eventually they need to make a deal just like we need to - right now we are feeling out how much pain the other can stand

Charlie said...

So the left now embraces free trade, and the right protectionism. And folks write blog comments here to self-rationalize and get comfortable with their own tribe's new position.

Grechster said...

Charlie: I had to chuckle at your post.

Yes, so much has changed. Could anyone have ever imagined, just a couple decades ago, the Left being so supportive of the CIA/FBI, the very core of the Establishment?

And could anyone have ever imagined a Right so opposite of the tenets of the Bob Taft Republicans (small government, non-interventionist foreign policy) of yesteryear?

I mean, you can't make this stuff up!

Rich said...

Today’s development with regard to delaying auto and auto parts tariffs on Europe for six months, and possibly coming to an agreement with Canada and Mexico on steel and aluminum supports my contention above that you can’t fight your allies while trying to pressure a common rival.

Scott Grannis said...

Popo Dean: thank you for correcting me. I think your explanation makes clear what is happening: the devaluation of the yuan offsets the higher tariff. However, there are other factors at work as well. A weaker yuan means the Chinese have reduced purchasing power when it comes to buying stuff from other countries. A weaker yuan can also lead to higher inflation. Devaluation, in short, has a limited ability to stimulate exports or counteract higher US tariffs, since it can create other problems.

I'm not sure, though, that it is correct to say that the government "allows" the yuan to weaken. As I point out in the post, the central bank for several years has been following a policy of targeting an unchanged level of forex reserves. The yuan is left to float, weakening if there is a net outflow of capital, and strengthening if there is a net inflow. Under this system, a weaker yuan is not the result of government policy. Rather, it is the result of weaker demand for yuan, which in turn is driven by capital flight or loss of confidence in the economy.

Frozen in the North said...


Again your analysis is right on! Michael Pettis often stated that China's central bank exchange rate policy is driven by reserves and not level. Not really free-floating currency the way we see it, but there is an objective of balance in reserves level. In a sense selling T-bills would allow the Chinese is an indication that the Central bank is near its peak in terms of reserves and looking to reduce these, by selling US dollar assets, that would lead to an appreciation of the Yuan...

actually, Pettis' recent analysis is interesting insofar that the US should have trade surplus (very much like Germany) when in fact its been generating a deficit for nearly 50 years.

Rich said...

How does anyone work for this guy?!/trump-had-it-out-with-kudlow-as-economic-advisor-contradicted-him-20190515

Scott Grannis said...

For some added color on the impact of Trump's tariffs on the US consumer and the US economy, I recommend Brett Arends' column at MarketWatch:


"It wasn’t long ago the media was complaining because Trump was cutting taxes. Now it’s complaining he’s raising them. Confused? Me too.

And the amounts involved are trivial. Chicken feed.

President Trump just hiked tariffs from 10% to 25% on about $200 billion in Chinese imports. In other words, he just raised taxes by … $30 billion a year."

Rich said...

Even Obama wanted to cut corporate taxes, so they were an unalloyed positive to all but the anti-corporate left. The media’s opinion is irrelevant In part because there is no unified media position.

I remain anti-tariff.

Benjamin Cole said...

Retail sales were soft. Property is soft.

The Fed should be easing already....

Grechster said...

Breakevens, level and direction, warrant a cut, as well.

Scott Grannis said...

Re Fed rate cuts: 2 cuts are already priced in to the bond market. One this year, one next year. Inflation breakevens are 1.75% - 1.85%. Swap spreads are very low. Credit spreads in general are low. Liquidity conditions are excellent. Equities are doing just fine. The economy is not booming (retail sales were weak, but they are very volatile month to month and anyway they are a lagging indicator of economic strength, housing has taken a long pause and now appears ready to start rising again—mortgage rates are extremely attractive—and industrial production is soft), but neither is the economy on the verge of collapse by any means. Taking all into consideration I think the bond yields are very low and don't need to fall further. Maybe the Fed cuts one more time, but there is no pressing need for a cut at this point.

Grechster said...

Scott: The frustrating thing about our Fed is that they continue to focus on the wrong thing. Esther George recently reiterated that our historically tight labor market will/could lead to inflation. She actually continues to believe that employment leads to inflation. And never mind the fact that the tightness of the labor situation is greatly overstated. She's just one among many on the Fed who believe this tripe.

And when they say these things most of us just nod our heads as if they're saying something profound, like it's not just repeated buffoonery.

And why are they so insistently blind to MARKET-BASED readings of inflation expectations? Break-evens, as you acknowledge, are below 2%. So why wouldn't they want to cut (at least) a quarter? Seriously, what answer can they possibly give that stands up to scrutiny?

Even if one moves away from market-based readings, we'd come to the PCE, the Fed's preferred metric. This is well below 2% now and they have struggled for years to get it up to 2% for any length of time. So... even in their own minds how do they justify not lowering?

Why do they complicate things so badly?

I'm just looking for consistency from the Fed. And I'd love to see them avoid such obvious mistakes, like the ones they made in late 2015 and late 2018. Those market swoons were mostly avoidable.

Think about how great the financial world would be if Powell came out and said: we are targeting the 10-year breakevens. Every time we get below 2%, we'll print. Every time we get above 2% we'll drain. Boom. Done. Then everyone can invest/plan accordingly. No more of this demeaning reading of the tea leaves and parsing words as if these average people are some sort of insight gods, which they most certainly are not.

Scott Grannis said...

Grechster: I agree with you. The issue here is that the Phillips Curve refuses to die. It's been around for a long time, and yet it's never been proven to be correct: inflation is not caused by tight labor markets or by rising wages. Inflation happens because of the Fed. Period. The good news is that Powell has been arm-twisted to agree with this. That's what the big kerfuffle in late December/early January was all about. It looked like the Fed was going to tighten at a time when markets were fragile, all on the basis of tight labor markets. Trump took Powell to the woodshed and read him the riot act. Powell apologized and changed his tune. Things have been good since then. And as you say, there is not objective reason for a tightening. Inflation is just fine, even though it's a bit below 2%. Heck, 1.5% is good enough for government work. The Fed's margin of error has to be at least a half percentage point. Monetary policy is not capable of fine-tuning inflation down to anything less than 0.5%. With any luck, Powell is going to strongly resist the message of the Phillips Curve and instead keep his eyes on market-based indicators, all of which say that things today are pretty much Ok.

The Cliff Claven of Finance said...

Or both could lose.

Over optimism is just as dumb as over pessimism.

Trump is a great negotiator ONLY in his own mind.

Trump can't be helped by the pressure of harsher Democrat attacks on him that will last until the 2020 election -- four years longer if he gets re-elected.

Trump is below average as a negotiator -- consider North Korea, whose nuclear program is still in progress, the nothing-burger NAFTA 2.0, not likely to get approved by Congress, and the Shut the Government fiasco to get LESS money from Democrats for the needed border wall, than their original offer !

And it's obvious the China negotiation is not going well -- has China even admitted to the problem of intellectual property theft -- I haven't heard that -- don't you have to admit to a problem BEFORE doing anything about it ?

Over 40% of imports from China are American company goods.

They get affected mainly by the "last $300 billion of tariffs".

And China could levy some new export tax on them too, in retaliation.

The biggest question mark is Trump's character -- he has a knack for creating a Trump Derangement Syndrome like no other president in history -- he gets people angry too often, and then their emotions replace reason.

Xi knows he's "elected for life", and can "fix": their GDP numbers at will -- Trump needs a victory with China to win in 2020, since the border / immigration is worse than ever and Democrats are blocking any progress -- a lame agreement with China that accomplishes little, like NAFTA 2.0, will not fool anyone.

The Cliff Claven of Finance said...

Scott said, and it makes no sense to me:
"President Trump just hiked tariffs from 10% to 25% on about $200 billion in Chinese imports. In other words, he just raised taxes by … $30 billion a year."

The goods for the 10%, now 25%, tariffs were deliberately selected to have the least impact on imported consumer goods.

Therefore, the next 25%, on the remaining $300 billion, will overemphasize those consumer goods.

Those current 25% tariffs are only strike 1

The next batch of 25% tariffs are strike 2

Significant Chinese retaliation would be strike 3.

The cost of tariffs to American consumers is not just simple multiplication.

There's no way to know how much of the tariff corporations will absorb, and how much they will TRY to pass on.

Passing on cost increases is not a free lunch, or corporations would have done so before anyone started talking about tariffs.

If Apple hikes their phone prices 12.5% to pass on a 25% tariff (I assume the tariff is on the wholesale price of their phones and I assume the wholesale price is 50% of the retail price), then Samsung might raise their phone prices 10%, even though no new tariff affected them.

Trade wars can include a lot more than tariffs -- how about the Chinese halting purchases of US soybeans? -- very painful to some American farmers.

The Chinese could target products made in states that Trump needs to win in 2020 -- a Communist dictator has a lot of "flexibility".

Trump has an election to win in 2020.

Xi has lifetime employment.

Benjamin Cole said...

I will exaggerate to make a point:

The Fed knows one way to fight inflation and that is to kick the employee class in the nuts. They have one way to fight a recession, and that is to raise asset values.

Oh gee, do you suppose voters might become cynical about the establishment in the United States?

steve said...

I would like someone to tell me where my logic is mistaken in the following:

Tariffs are a tax on consumers. When you impose tariffs the cost of goods goes up and therefore we as consumers pay more. If China wants to give away their "stuff", take it! All day long, take it. It serves to help keep inflation in check and helps consumers-especially those who can least afford higher prices. To the extent that China disallows US goods (especially tech) to be sold there IT HURTS CHINESE CONSUMERS. US tech companies are doing fine, thank you. This utter nonsense about somehow targeting certain goods for tariffs Vs others is nothing but cherry picking winners and losers and has no successful end game. OPEN markets even if it means China doesn't will put US consumers and ultimately the US in a much stronger position until China finally relents and opens their markets due to consumer demand.

Trump is NOT an intelligent person. He lied for years about his net worth and somehow parleyed that into becoming POTUS. I am a conservative who disdains arrogance and stupidity and Trump smacks of both.

The problem -of course-is the alternative is worse!

Kman said...

The Huawei ban and unprecendented, unrealised spinoff effects is still being absorbed by the industry, market and consumers. I think this is now offically war.

Having a Huawei smartphone myself and being shut off from google is not exactly "cool" and to quote pult fiction "It's pretty Fkien far from ok".
We are heading down a pretty slippery slope here.

You guys are smart, so u can see the implications.Now,if you are China, what would you do ?

I'm not so sure this is just about trade. I watched this talk last year, very good context for looking at the current situation.

Scott Grannis said...

Kman: thanks for the link to the Graham Alison TED talk. I have to believe that the world is smart enough these days to avoid a war between China and the US. All the incentives are lined up in favor of a solution, and the solution that Trump is seeking (near-zero tariffs) is in both country's best interests. War is not fore-ordained given these conditions.

Ataraxia said...

Scott- If we recess in the near future from here do you think we'll be able to avoid deflation?

The Cliff Claven of Finance said...

Tariffs are not a tax on consumers.

Tariffs are a tax on producers.

The producers can try to pass off the tax, or part of it, on consumers, but there is a cost -- fewer sales.

If producers could raise prices with no effect on sales, why would they wait for a new tariff to raise prices?

On another subject:
At least one person here, Steve, may agree with me on this: Donald "Tweeter" Trump, Nasty Nancy Pelosi, and her Three Stooges House Committee Leaders seem like they are more interested in fighting each other, than in making our country a better place. And some of the Dumbocrat candidates are even worse. I think the quality of our leadership leaves a lot to be desired. The thought of this trade war ending well increasingly looks like wishful thinking.

Popo Dean said...

Cliff Claven -- seriously stupid Trumpian economoronics.

The tariffs are on IMPORTS. The Chinese are the exporters. The importers are US customers (e.g., Walmart) or US companies manufacturing in China for sale here (nearly all of them).

If you can't at least get that right, then you should surrender your right to comment.

The Cliff Claven of Finance said...

Popo Dean, you are obviously not a college professor, but I will treat you as if you are, and ignore the fact that you went berserk for no logical reason !

I was using the generic term "producers" to describe the supply chain that gets the product to the ultimate US retail or wholesale customer.

The issue was who was going to pay the tariff -- a lot of people assume it just gets passed on to the final customer, and I wrote to say it's more complicated than that.

Over 40% of goods coming in from China are US brands such as Apple.
Many other imports are generic brands also sold here.
Some imports have Chinese brand names too.

The goods are bought by US wholesalers and retailers who pay the tariffs.

They may try to pass on a portion, or even all, of the tariffs to their customers, but doing that is not a free lunch -- higher prices also mean fewer sales, especially if there are competitive products not made in China, that did not raise their prices.

This gets even more complicated if US companies change their suppliers from China, to some other Asian nation -- then tariffs on goods made in China are avoided.

Chinese manufacturers could absorb some, or all, of a tariff to keep their factory running, and remain competitive.

Frozen in the North said...

to the clifff claven of finance

What in God's name are you going on about? Just to be clear, Apple manufactures phones in China, it doesn't "buy" phone from China, it sells phones that are manufactured in China. Those who purchase telephones are called consumers...

Tariffs are nearly always paid for by the end users. In fact, in the US, Tariffs on washing machines have led to higher prices, not only for Chinese manufactured washing machines but for all machines -- even those manufactured in the US. Everyone but you agrees that Tariffs are a TAX on consumption because it almost always leads to higher prices.

It's not a GOP Vs Democrats thing, its a tax on consumption. That may be a good thing for the GOP since its always those with less disposable income that consume most of their revenues -- therefore this tax falls on the back of "mostly ordinary folks" again that may be a good thing in your book.

Finally, this is how you spell: Democrats -- its not that hard

Ataraxia said...

Big demand for the ten year recently.

The Cliff Claven of Finance said...

Nasty Frozen in the North wrote:
"What in God's name are you going on about?"

I have tried to explain that a simpleton notion that 100% of tariffs are automatically passed on to the end consumer can be wrong.

That, apparently, is beyond your comprehension.

The example of the washing machines needs more than your superficial "analysis".

Washing machine production shifted following each new trade policy in the past, Mexico/Korea to China, then to Thailand/Vietnam, and finally to the US in 2018, as LG Electronics and Samsung Electronics opened new US plants.

All this production shifting to avoid paying import tariffs in the past six years -- why would you think it won't happen again ?

Did you know that 2012 antidumping duties against Korea led to relocation of production to China, actually resulting in lower washing machine prices in the United States ?

There are many questions that need answers, such as:

Have washing machine prices been keeping up with inflation?

In fact, there had been a years-long decline in retail prices for washers and dryers.

A new tariff is a good excuse to raise prices to catch up with inflation, and it appeared that happened..

Is the US competition going to raise prices too?

For washing machines the answer was yes, so all prices went up.

That does not automatically happen.

Why did the price of dryers go up too -- they were not affected by the tariff ?

Just a way to hide washer prices increases? (I'm trying to think like you leftists)

Perhaps just keeping up with inflation there too ?

Some American companies will ask their Chinese partners to absorb some of the tariff.

Exchange rate changes could offset some of the tariff.

Tariffs are more complicated than the "they always get passed to the final consumer" socialist view.

Re-read the production shifting sentence above, if you still think so.
I m not a Trump fan, especially his trade war with China.

His statements on tariffs and trade deficits are usually wrong.

He needed to organize a team of nations to fight against China's intellectual property theft -- yet he is going at them alone.

For that reason, I have written many articles on the subject since 2017, all critical of Trump.

The most important fact about past trade wars is you never know how they will end.

There is unusually retaliation that can be more painful than the initial tariff.

The war can be temporary, or long lasting.

There can be production shifting to avoid the tariffs.

If the economy is strong, producers are more likely to pass on tariffs to the end consumers.

A trade war can escalate and even lead to a bear market and a recession.

Any political party that spent over two years lying about the Russian Collusion Delusion, and is now supporting the insane kill the US economy New Green Ordeal, deserves to be renamed Dumbocrats.

If the trade war goes wrong -- I'll rename Republicans as Repooplicans.

And if you are one of those Democrats, you should be embarrassed by the pro-socialist, pro-open border, anti-inexpensive energy sources, pro-third term abortion loving party, represented by clueless congresspeople such as Alexandria Occasionally Coherent.

What an embarrassment to be a Democrat in 2019, and still think Hillary lost because Russians hacked the 2016 election ... while your precious female candidate WAS BEING INVESTIGATED BY THE OBAMA FBI DURING her campaign ( it was a sham investigation, with no punishment decided in advance, but the Obama Administration HAD TO pretend it was a legitimate investigation, after crooked Hillary destroyed tens of thousands of e-mails under subpoena by Congress, and smashed smart phones with hammers ! )

Christophe said...

Wow what an issue! Interesting that maybe a decade ago most smart people here could have come to agreements. However because most have been polarized (I.e manipulated), these discussions end up divided along simplistic and mostly “gut level” political lines.

Do I believe the US and most other developed nations should do or have done something about China openness since the 90s? Yes! However it is irrelevant in my attempt to figure out the outcome of the current situation on the markets.

1- More pragmatically I believe the Chinese do not welcome change. They are on the tail end of the longest and most prosperous economic run in the history of the world. Even if despite, being in the best personal and national position in term of wealth and power in centuries/millennia , lead the Chinese to want to change according to US demands, delivering it in less than a decade is not likely.

2- I suspect Trump knows he either needs a war (I.e. an enemy) or a “successful China deal” to get re-elected.

This gives the Chinese 2 main directions:
- Delay till after the presidential election and maybe even make things worth till then (accepting to endure more short term pain than the US but knowing that in the long term they will likely win).
- Give Trump a “spectacular” deal but practically void of any real changes.

Both these routes would impact the markets very differently and this is where we are in terms or making decision with money in the market.

The fight between China and US will happen, has been happening. There has never been a peaceful transition of world power in the history of the world. The Chinese could nearly argue, with a straight face, that the reformed Chinese Communist Party is a superior system than a weak democracy getting nothing accomplished in decades.

This gives me the impression that the full reality of the Sino-American relationship is not priced in the market (-20%?) but on the other hand this is partially mitigated as during chaos, the least dirty shirt win (that is the US). All in all
, I am still bullish, medium to long term (expecting a more classic ending of the business cycle) with a growing probability of a serious drop (10-20%) maybe beat the December lows before we start the next bull run.

Not doing a lot of trading lately given that any day a silly tweet might send the markets up or down 3%...


PS: Thanks Scott for sharing your knowledge and giving us a platform for exchange.