China’s stock market performance continues without taking a breath, and the next round of trade news should keep the momentum going.
There’s no doubt that President Trump is worried about US economic growth. Otherwise, he wouldn’t have sent my friend and former Bear Stearns colleague, Larry Kudlow, to tell CNBC that the Federal Reserve should drop the short-term lending rate by 50 basis points.
And the president is aware that the trade war with China is hurting US output, especially capital investment, which remains low despite the biggest corporate tax cut in US history. I presume he knows that, because everyone knows it. Union Bank of Switzerland economists warned on March 27 of a “sharp, but temporary slump in real growth,” adding, “The main driver from our perspective is the trade war with China, disrupting supply in manufacturing.”
Other factors are slowing the US economy, but trade war is one of the big ones. Big corporations have postponed capital spending plans until they know the rules of the game for international supply chains. As a result, orders for new nondefense capital goods orders have fallen year-on-year. It should have been obvious that this would happen; I warned repeatedly CapEx would suffer.
There’s no doubt, either, that President Trump is aware that China has bounced back from the trade war’s initial shock. Last year he cited the outperformance of the US stock market as evidence that he had the advantage over China.
Now that China’s main stock market index has risen by 33% during 2019, we don’t hear the president saying that China has the advantage over him. Nonetheless, the chatter among the talking heads on financial television now asks whether China will want to make a deal with the US, now that their economy and stock market have bounced back.
I’ve argued for the past year that the tariff war against China will hurt the United States as much as it hurts China, and it is undeniably the case that US growth has fallen while China’s has not. That is all the more remarkable given the damage to China’s export trade.
China’s exports have fallen by more than 20% year-on-year, in the context of a slump in world trade that has also dragged down the exports of all the major trading nations.
Nonetheless, China’s economy appears to be growing at 6.5% a year, the same rate as last year, while the US economy has slowed sharply. The reason is that China is no longer as dependent on exports as it used to be.
Exports comprised a full 36% of China’s GDP in 2005; since then, the proportion has fallen to below 20%. China made a concerted effort to shift from exports to internal consumption even before the great financial crisis of 2008-2009, and has continued to reduce export dependency over time.
Trump’s trade threats to China are ten years late and a trillion dollars short. Through tax cuts, monetary ease, and infrastructure spending, China has managed to create enough new domestic demand to compensate for the decline in its exports. Other big trading nations like Germany, South Korea and Taiwan haven’t been so lucky; their exports are crashing and their economies are at or close to recession, in both cases representing collateral damage in the trade war. That doesn’t do any good for American influence in the world.
China has succeeded in sustaining economic growth for the time being, but it wants an end to the trade war as much as Trump does. As I reported from Beijing last October, President Xi Jinping’s economic advisers believe that China will be the world’s largest economy by 2035, far too big to intimidate—so why pick a fight with the United States now?
China will write a check for anything the US wants to sell it. It wants to open parts of its economy to American and other foreign companies, especially in the financial sector, where Germany’s Allianz Insurance and the Union Bank of Switzerland have already obtained licenses for wholly-owned subsidiaries.
It will agree to some form of monitoring for intellectual property protection. There is no simple way to accomplish this, and whatever mechanism might be agreed to will require years of evaluation to determine whether it is a success or a failure. The only issue is whether Trump is willing to declare victory and go home (as the late Senator George Aiken of Vermont proposed during the Vietnam War).
I think he will. It’s in his personal interest as a 2020 presidential candidate, and it’s in the interest of the United States, which has taken as much pain as it has dished out in the course of the tariff war.
If the US wants to maintain a predominant position in the world economy, it will have to fix what’s wrong with the US economy rather than try to sandbag the competition.