US President Donald Trump speaks during a trade meeting with China's Vice-Premier Liu He at the White House in April. Photo: AFP / Jim Watson

President Trump’s morning tweet announcing that the Chinese were coming to Washington to make a deal buoyed US stocks, although a warning that US tariffs will elicit “countermeasures” later in the session reduced gains.

Asset prices moved with every trade rumor. Trading against the news is a mug’s game. Investors have to take a position based on conviction and stand or fall with it. I continue to recommend buying Chinese stocks on the dip.

Both sides are coming to the negotiating table in Washington tomorrow in painful awareness of their own strengths and weaknesses.

China’s growth accelerated during the first quarter despite a nearly 15% drop in exports to the US, year-on-year.

Exports to Europe rose by 6%, meanwhile. It would be interesting to know how much of the increase came from telecommunications equipment. Exports to Asia were largely flat.

Even more indicative is the shift in China’s import profile. All of its Asian trading partners increased their shipments to China early this year except for Taiwan, a major source of components for products assembled in China and then exported to the US.

Imports from the US plunged by more than 20% year-on-year.

To a considerable extent, the data show, China’s growth has decoupled from its trade with the United States, and its trading relationships are shifting to Eurasia. The shift in China’s trade profile suggests that the damage to China’s economy in a full-scale tariff war would be considerably less than a static analysis might suggest.

For the past twenty years the world has taken for granted that the US consumer is the marginal source of demand in the world economy. That surely was true between 1998 and 2008, when the US ran current account deficits of $600 billion a year and absorbed virtually all of the world’s free savings. The US consumer may not be in crisis, but the contribution of US consumption to GDP is too tepid to move the needle in the world economy.

China has substituted domestic demand for international sales and relied on infrastructure spending rather more than it would prefer. China very much wants a deal with the United States, because any remedy it might apply to the impact of the trade war would be less than optimal. But in the worst case scenario, China will be able to manage even if the US imposes 250% tariffs on all Chinese exports to the US.

Donald Trump, as I argued yesterday, sells buncombe. He doesn’t buy it. He kept a reality show going for 14 seasons, a remarkable record, by meticulous attention to the detail of ratings and by taking preemptive action to correct any weaknesses.

The buncombe he is selling at the moment is the strength of the US economy, including his tweeted boast this morning that the US is collecting $100 billion a year in tariff revenues on China (an exaggeration, but no matter). What he knows, because he spends a good part of his day reaching out to business leaders, is that uncertainty over the trade war has suspended capital spending around the world.

The net contribution to GDP growth of new plant and equipment in the US was zero during the 1st quarter of 2019.

The impact of trade pressure on China may be to accelerate China’s shift away from economic dependence on the United States. Of far graver strategic consequences than tariffs on washing machines or smartphones is Washington’s attempt to isolate China’s flagship telecommunications company Huawei.

Washington’s inability to persuade the British – let alone the Germans – to keep Huawei out of the rollout of 5G mobile broadband is perhaps China’s greatest diplomatic triumph of the past twenty years, a gauge of Chinese technology, innovation and industrial organization.  The US president will consider carefully his team’s failure in the Huawei matter and draw the obvious conclusion about the limits of American pressure on Beijing.

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