The tariff wars are raging between the USA and China. Supposedly, this is all leading to a deal with the Chinese. But what if it doesn't; what happens then? The people who trade using computers on the stock market have decided that it will be a disaster for the world economy. That doesn't mean they are correct, however. Remember, those same computers drove the stock futures down nearly 1000 points on election night in 2016; these traders were sure that Trump's victory would bring bad times for the economy. Of course, by the next day, the people began voting with their investing dollars. We've seen one of the greatest runs of all time in the markets, rather than the collapse.
But back to China; what happens if there's no deal. Indeed, what happens if Chinese goods get hit with 100% tariffs in the USA and American goods get hit with the same in reverse. Add in that the US market gets closed to Chinese products from companies that produce strategic goods like those for 5G phone systems. What happens then?
The simple answer is that American business will be hurt, so will American farmers and energy producers who sell to China. The damage to the farmers and energy producers will be temporary since those markets will simply redistribute the production to other consumers. The loss of the Chinese market, however, will impact those American companies which export to China on an ongoing basis. Meanwhile, however, the companies that produce goods in China for export to the USA will be hit as well. But here's the main point: China sells the USA something like 600 billion dollars more goods each year than the USA sells to China. When you take out items like energy and food, the difference is even larger. If the US economy loses 0.8% of its production, it will slow economic growth. On the other hand, if China loses 3or 4% of its production, it will face a recession. Further, if factories leave China in order to be able to keep the US market, the impact could be even larger. Add in that the cost of food and energy in China would rise if the imports from the USA are lost, and the impact on the Chinese market is major. In other words, the trade war could give the US market a minor cold, but it would inflict pneumonia on the Chinese economy.
The real question is whether or not the leaders of China are prepared to push that country into a recession in order to fight with Washington. My guess is that ultimately they won't do that.
UPDATE: I got some push back on this post from those who tell me that China may just wait for a year and a half in the hope that President Trump loses and a Democrat comes in who goes back to the old way of dealing with China (by doing nothing to stop its trade violations.) That could be, but President Xi understands that such a course would bring really bad results if Trump is re-elected. I don't think China will want to depend on predicting the election outcome.
But back to China; what happens if there's no deal. Indeed, what happens if Chinese goods get hit with 100% tariffs in the USA and American goods get hit with the same in reverse. Add in that the US market gets closed to Chinese products from companies that produce strategic goods like those for 5G phone systems. What happens then?
The simple answer is that American business will be hurt, so will American farmers and energy producers who sell to China. The damage to the farmers and energy producers will be temporary since those markets will simply redistribute the production to other consumers. The loss of the Chinese market, however, will impact those American companies which export to China on an ongoing basis. Meanwhile, however, the companies that produce goods in China for export to the USA will be hit as well. But here's the main point: China sells the USA something like 600 billion dollars more goods each year than the USA sells to China. When you take out items like energy and food, the difference is even larger. If the US economy loses 0.8% of its production, it will slow economic growth. On the other hand, if China loses 3or 4% of its production, it will face a recession. Further, if factories leave China in order to be able to keep the US market, the impact could be even larger. Add in that the cost of food and energy in China would rise if the imports from the USA are lost, and the impact on the Chinese market is major. In other words, the trade war could give the US market a minor cold, but it would inflict pneumonia on the Chinese economy.
The real question is whether or not the leaders of China are prepared to push that country into a recession in order to fight with Washington. My guess is that ultimately they won't do that.
UPDATE: I got some push back on this post from those who tell me that China may just wait for a year and a half in the hope that President Trump loses and a Democrat comes in who goes back to the old way of dealing with China (by doing nothing to stop its trade violations.) That could be, but President Xi understands that such a course would bring really bad results if Trump is re-elected. I don't think China will want to depend on predicting the election outcome.
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