Whenever investors suspect that Donald Trump will really go through with his threats of big tariff increases, provoking retaliation abroad, stocks plunge. Every time they decide it’s just theater, stocks recover.
.. while trade is one of Trump’s two signature issues — animus toward dark-skinned people being the other — when it comes to making actual demands on other countries, the tweeter in chief and his aides either don’t know what they want or they want things that our trading partners can’t deliver. Not won’t — can’t.
.. In some ways, China really is a bad actor in the global economy. In particular, it has pretty much thumbed its nose at international rules on intellectual property rights, grabbing foreign technology without proper payment
But if getting China to pay what it owes for technology were the goal, you’d expect the U.S. both to make specific demands on that front and to adopt a strategy aimed at inducing China to meet those demands.
.. In fact, the U.S. has given little indication of what China should do about intellectual property. Meanwhile, if getting better protection of patent rights and so on were the goal, America should be trying to build a coalition with other advanced countries to pressure the Chinese; instead, we’ve been alienating everyone in sight.
.. Anyway, what seems to really bother Trump aren’t China’s genuine policy sins, but its trade surplus with the United States
.. Over all, the U.S. trade deficit is just the flip side of the fact that America attracts more inward investment from foreigners than the amount Americans invest abroad.
.. A decade ago, China’s current account surplus — a broad measure that includes trade in services and income from investments abroad — was more than 9 percent of G.D.P., a very big number. In 2017, however, its surplus was only 1.4 percent of G.D.P., which isn’t much.
.. But in that case, why is “bilateral” trade between the U.S. and China so unbalanced? The answer is that it’s largely a kind of statistical illusion. China is the Great Assembler: it’s where components from other countries, like Japan and South Korea, are put together into consumer products for the U.S. market. So a lot of what we import from China is really produced elsewhere.
.. It’s not clear why we should demand that China stop playing that role.
.. it’s not clear that China could even do much to reduce its bilateral surplus with the U.S.: To do so, it would basically have to have a completely different economy. And this just isn’t going to happen unless we have a full-blown trade war that shuts down much of the global economy as we know it.
.. Oh, and a trade war would also devastate much of pro-Trump rural America, since a large share of our agricultural production — including almost two-thirds of food grains — is exported.
If There’s a U.S.-China Trade War, China May Have Some ‘Unconventional Weapons’
There are ways to make life harder for American companies in China that need not be formal, or widely publicized.
“One of the very important tools that the Chinese have is the ability to make life difficult for a large number of American businesses,” ..
.. “They have all of these unconventional weapons that are not covered by traditional trading rules that could be potent weapons in actually fighting a trade war.”
.. As President Trump often notes, the United States does run a large trade deficit with China — especially if you look only at goods, and don’t count the value of services. That means that if China seeks to match tariffs on goods — a classic tit-for-tat approach — China runs out of “tats” pretty quickly.
.. In 2017, the United States imported $506 billion in goods from China while exporting only $131 billion in goods to China
“It mathematically means that China can’t match the U.S. dollar for dollar,” said Brad Setser, a senior fellow at the Council on Foreign Relations.
.. For example, in its planned retaliatory tariffs, the Chinese government included narrow-body aircraft but not wide-body aircraft. This makes sense strategically, Mr. Setser argued, because only two companies in the world make wide-body planes: Boeing and Airbus. If China put a tariff on planes from the American Boeing but not the European Airbus, it would lose leverage with Airbus with which to extract favorable prices and access to cutting-edge technology.
.. It is unlikely there will be uprisings in the streets of Shanghai if Kentucky bourbon gets more expensive.
.. it also risks raising food costs within China. It’s a fair bet, then, that China views remaining options as even more problematic for the prices of staple goods or the country’s industrial strategy.
.. In other words, for China the low-hanging fruit is gone. If this trade battle continues to escalate, China will have to bear a greater cost.
.. That reality could push China to seek other buttons to press.
.. American companies do significant business in China that doesn’t show up in trade data. When Apple assembles an iPhone in Zhengzhou and sells it in Shanghai, that doesn’t count as international trade, though the profits accrue to the benefit of a California-based company. The Chinese government has any number of tools to try to weaken that business if it wishes. It could decide that phones made by a foreign company are a national security threat, or shut down plants because of minor regulatory problems.
.. Making life difficult for American companies in China as retaliation in a trade war need not be formal and widely publicized. American automakers who make cars in China might find their local joint-venture partners squeezing them out. Regional governments might send safety inspectors to plants of American companies so often as to disrupt production.
.. There are more public options, too. For example, in 2013, Chinese state media accused Jaguar Land Rover and Audi of overcharging buyers for car parts, which analysts viewed as part of a campaign to pressure those automakers to locate more manufacturing in China.
.. Could China use its role as No. 1 lender to exert pressure in a trade war?
It would be a risky maneuver, in which China itself would potentially have much to lose. But it can’t be ruled out.
.. If China were to suddenly unload some of its holdings, or even signal an intention to buy fewer dollar assets in the future, that would probably cause long-term interest rates in the United States to rise
.. And this would cause some pain in the United States, as borrowing costs — whether for the federal government or individual home buyers — would rise.
.. But it would also drive down the value of China’s existing bond portfolio, meaning China could lose billions. And it would tend to push down the value of the dollar relative to other currencies, which would actually help the United States attain more advantageous trade terms.
.. Even after all that, bond prices would most likely readjust over time as other buyers took advantage of the rise in interest rates.
.. That doesn’t mean there isn’t room to cause some near-term pain and disruption. “The Chinese have some leverage to rattle U.S. bond markets, even if the threat of substantive action is not very credible,”
.. Given that a trade war with such a major trading partner is without precedent in modern times, we don’t really know what it would look like.
Trade Wars, Stranded Assets, and the Stock Market (Wonkish)
Yet you go to trade war with the capital you have, not the capital you’re eventually going to want – and stocks are claims on the capital we have now, not the capital we’ll need if America goes all in on Trumponomics.
Or to put it another way, a trade war would produce a lot of stranded assets.
.. The costs of protectionism, according to conventional economic theory, are not that tariffs caused the Great Depression, or anything like that. They come, instead, from moving your economy away from things you’re relatively good at to things you aren’t.
American workers could sew clothes together, instead of importing apparel from Bangladesh; in fact, we’d surely produce more pajamas per person-hour than the Bangladeshis do. But our productivity advantage is much bigger in other things, so there’s an efficiency gain – for both economies – in having us concentrate on the things we do best.
.. So, what would a trade war do? Suppose the US were to impose a 30 percent tariff across the board, with other countries retaliating in kind so that there’s no improvement in the U.S. terms of trade (more technical stuff I don’t want to get into.) How much would this reduce trade? It depends on the elasticity of import demand; a reasonable number seems to be around 4. This would mean a fall in imports from 15 percent of GDP to around 5 percent – a 10-point reduction. And that in turn means a reduction in US real income of around 1.5 percent.
.. even a trade war that drastically rolled back globalization wouldn’t impose costs on the economy comparable to the kinds of movement we’ve seen in stock prices.
But the costs to the economy as a whole might not be a good indicator of the costs to existing corporate assets.
.. Meanwhile, the factories that do exist were built to serve globalized production – and many of them would be marginalized, maybe even made worthless, by tariffs that broke up those global value chains. That is, they would become stranded assets. Call it the anti-China shock.
.. Of course, it wouldn’t just be factories left stranded by a trade war. A lot of people would be stranded too. The point of the famous “China shock” paper by Autor et al wasn’t that rapid trade growth made America as a whole poorer, it was that rapid changes in the location of production displaced a significant number of workers, creating personal hardship and hurting their communities. The irony is that an anti-China shock would do exactly the same thing. And I, at least, care more about the impact on workers than the impact on capital.
Donald Trump’s Staff Shake-Up Leaves Jim Mattis in a Key Role
New national-security partners, and conflicting viewpoints, will test the defense secretary
President Donald Trump has, to great fanfare, remade his national-security team in recent days. But the most intriguing and consequential member of that team isn’t one of the newcomers, but rather the one who has been there all along: Defense Secretary Jim Mattis.
Mr. Mattis is the most enigmatic member of the Trump team. He’s the Iran hard-liner who defends the nuclear deal with Iran. He’s the warrior who argues for using diplomacy to address North Korea’s nuclear threat. He’s the military man who argues against allowing trade disputes to disrupt ties to key allies.
And he’s the one senior official who has learned how to disagree with Mr. Trump privately without being publicly skewered by the president for doing so.
All those positions were easier for Mr. Mattis to sustain when he was joined at the hip with Secretary of State Rex Tillerson. But Mr. Tillerson is gone now, and the key question is whether Mr. Mattis can continue to do his thing when paired with new Secretary of State-to-be Mike Pompeo and national security adviser John Bolton, both of whom strike quite different tones on those key issues.
“I think he’s more important than ever,” says former Defense Secretary Chuck Hagel. The question, Mr. Hagel adds, is “how long Mattis can survive in that environment.…There’s an intersection of conflict coming here, and it’s been coming.”
.. the appearance of disconnects between the president and his team on key issues. Consider: Mr. Trump has said the war in Iraq that began in 2003 was one of the biggest strategic blunders in American history. Mr. Bolton has been one of its most vocal champions. Mr. Trump has repeatedly questioned whether Russia interfered in the 2016 presidential campaign. Mr. Pompeo, the current director of the Central Intelligence Agency, has embraced the intelligence community’s conclusion that Russia did so. Mr. Trump has scheduled a summit meeting with North Korean leader Kim Jong Un. Mr. Bolton, the former American ambassador to the United Nations, has made the case for launching a pre-emptive military strike against North Korea.
.. Which makes Mr. Mattis all the more important as a stabilizing force. He has survived the crosscurrents of Trump administration intrigues through a combination of bureaucratic savvy and careful management of internal splits. Trump advisers say he has mastered the art of convincing the president he agrees with his goals while also sometimes differing with him on how to reach them. He has kept his public profile low enough that he isn’t seen as a rival to the president for attention or glory, while quietly cultivating good relations with members of both parties in Congress.