trade war effect on US economy

Water Cooler Investing
#1

do you think the trade war will lead to a global recession? do you think countries will pick a side between US/China or just work collectively with both?

india’s economy is struggling significantly and had its worst auto sales in 20 years. Central bank is dropping rates from 20s to 10s. Oil prices are increasing due to the saudi arabian production hit by 5m barrels/day (50% of their production) and india is a net buyer of energy, which doesn’t look good for the nation. Having said that, Trump is having a rally in Houston with Modi called Howdy Modi GREAT NAME BY THE WAY which is where they will likely finalize a trade agreement between US-India

at the same time, Japan has had negative interest rates for many years and if i recall correctly over half of all Japanese market public equity shares are owned by the central bank of Japan. Aging population will be an issue. Major producer of steel and trades heavily with China. Used to be reliant on nuclear for energy but after fukushima they are now importing coal and wood derivatives for their energy needs. WeWork was a failure for the giant SoftBank fund (think they lost a couple billion on this alone). Japan-US is near a trade deal.

Argentina’s Kirchner party may win coming up which has spooked markets and led to its first debt default in years; IMF providing $50 billion loan to a country that really doesnt seem like they have enough industry to pay back the loan. Peso has dropped significantly this year. Private industry could once again become part of the government as it was a few years ago. Only market they’ve got a chance of building revenue is the soybean crushing / export market, which china has started buying finally to punish US tariff situation…plus oil in NW part of country

US has strong relations with Brazil via Bolsonaro - Brazil is building rail capacity in the years to come to accommodate farm exports: softwoods and grains. This is being led by the large sugar co. Brazil is by far the world’s largest producer of sugar, India comes next and India’s consumption is off the charts. Brazil has been exporting quite a bit of grain to China and it has gained significantly from the trade war between US-China. Iron ore mainly exported to China.

China - focused on geographical tariffs to hurt Trump supporting states. for example, southern yellow pine has a higher tariff rate than west coast wood types. Regardless, West coast is getting crushed from the drop in trade volumes. Struggling with Hong Kong control. China produces 50% of world steel: last year’s production was UP 10% y/y. Where is this steel going? 90% of Chinese steel is produced via blast furnace ie by IRON ORE. Rest of world barring a few focus on electric arc furnace using steel scrap as main input. Why does this matter? bc China is a huge piece of the iron ore demand from Brazil and Australia. 50% of world aluminum is produced in China. approx 7% of total chinese energy consumption is through aluminum production.

Canada - Saudis have quietly bought large volumes of grain elevators/terminals. Still have massive amounts of oil in Alberta but struggling to bring to market: not enough pipelines and not enough rail. Restrictions on production, max ceiling set earlier this year. Accused of subsidizing milk/cheese industry as well as forest products to USA. Trade agreement w Europe about to go into effect.

Europe - brexit coming up in october (finally…) GBPUSD dropped from 1.60 (probably even 1.80) down to 1.25. Germany has negative ‘growth’ rates due to crushed auto demand worldwide. Threat of tariffs. CETA coming online (trade agreement with Canada), and agreement with Mercosur coming up too.

guyana - exxon next big oil production

#2

There are major underlying sources of weakness that are being completely ignored or misatributed to trade conflicts.

#3

I agree, tariffs are certainly not helping though. What types of underlying weakness are you referring to?

#4

comapred to most developed countries we are doing a lot better, the us has been stable chugging along at 2% gdp growth. everyone else has seen slowing growth, which is why almsot 20% of all debt has negative interest rates. this trade war is basically a showdown between old money (the us), and new money (china). other countries will probably benefit more wit hthe us because we have 35% of all the wealth, so we are the consumer who can choose where to spend. china on the other hand, wants to connect with other places to sell their goods and make more money, save and eventually become richer than us.

the us is doing the right thing by imposing tariffs on china. this weakens the rising giant, and gives other countries (including itself) an unfair advantage. china on the other hand needs to sell their products elsewhere or at least grow their consumption internally. the key to smart spending is to increase your productivity. its similar to a person using his money to buy say a big tv vs buying a computer so you can work more.

right now, trump’s goal is to basically negatively affect every country we have a negative trade deficit with. in china for example, prior to the tit for tat tariffs. trump just wanted to cherry pick certain products where the us is also an efficient producer. but now it has turned to scorched earth, where we reject chinese 5g even if it were to increase our productivity, citing “security concerns” and encouraging us companies to step up their game. to be fair china did the same thing by banning us tech companies to give their companies a chance to grow.

lastly, imo, the chinese will win. they have more people and each person cost 1/5 the us. chinese tech has already reached the same level as the us, they were very great copycats. the us tariffs are only a short term solution that will slow china down and improve their competitors. ultimately for the us to win long term, we will have to innovate more and prevent that tech from reaching china. AI is the goal. if we can create ai, then we negate the chinese advantage of greater numbers and cheaper workers.

#5

How is this an unfair advantage? China has higher tariffs on us than we did with them for many years. The rhetoric is a bit over the top, but I do not see the global ‘unfair’ claim from all these other countries that have been siphoning from the US coffee for any years.

also, labor rates may be lower but you also have way more workers that will either be getting paid nothing or out of a job in 10 years, which could have an opposite effect - more of a drain than a gain.

You make several good points. I’m interested in seeing what happens the next couple of years

#6

Well the main difference is that the us believes in a free trade policy. The idea that just because we run a trade deficit does not mean that we are weakening our country. In fact proponents of free trade would argue that the deficit allows consumers to purchase at a cheaper cost, freeing up their cash to more productive areas. Anyways China doesn’t follow that policy, their goal is to just get rich.

Personally I think the Chinese strategy is smarter and that free trade ideals should be more situational. The us does not import items from China that make us more productive, in addition the lower prices from China just leads to excess consumerism.

Anyways most people believe that the us should run trade deficits as we are the richest country in the world. Applying tariffs would be unfair since it will just make the us even richer if we spend less money.

Good point on labor, it’s a double edged sword depending on age distribution. Too many old people and you will end up like Japan. But if you have a large set of working age people then you will be an economic powerhouse. China has a pretty uniform distribution though that will be a bit old heavy in 2050. also china doesnt have any social welfare for the elderly. the old people depend on their children. so the burdens to the state is not as cumbersome at all. in comparison the us uses 2 trillion dollars or roughly 50% of the budget on social security, medicare, and veteran benefits alone.

#7

^ You ignored all of Stockton’s valid points. Even if the US believes in free trade, that in no way means it is unfair for the US to stand up against other countries abusing the system and not following free trade policies. It’s like saying if you believe in peace it is unfair if you stand up to someone who is repeatedly pursuing acts of war. Free trade is expressly about open and equal trade, it’s not about richer countries transferring wealth to poorer countries or running trade deficits. There is no economic theory that suggests running chronic current account deficits will do anything but end poorly, that is ridiculous. Even Europe gets the memo and has been running surpluses for decades (even to China). The twin deficits problem further reinforces this.

Ultimately you’re confusing your own notions with economic theory and conflating free trade with economic equality. Free trade is about open and equal terms of trade, which have not existed over the past decades with the countries in question. There is nothing hypocritical about that. People are free to disagree about how this is being handled, but the fact is China and Europe have been following mercantilistic policies while the US alone pursues free trade and it has been hurting our long term competitiveness and creating holes in our domestic economy for years (see rustbelt).

#8

Arguing that having more cheaper goods is always better is overly simplistic. It’s like saying McDonalds can only be good because it allows people to have more food cheaply and easily. At some point, the long term effects build up and you have an unhealthy society. Binging on cheap Chinese goods sold by violating developed world environmental controls and the core tenets of free trade leaves you with an unhealthy and imbalanced economy.

#9

free trade has nothing to do with equal trade. free trade literally just means no tariffs or quotas etc. if they impose protectionist policies on you, then the idea is that they are only hurting themselves since they are not receiving cheaper priced goods of the same caliber. and that more of their money is not being used efficiently. essentially free trade means that it doesnt matter whether we run trade deficits or surpluses. it’s just a hands off approach.

personally, i dont agree with that idea. sometimes you have to impose protectionist policies when you are uncompetitive and need an unfair advantage. this is what china did. and now this is what the us is doing. simply put, the us is losing which is why it needs protectionism.

#10

Wrong, wrong and wrong.

Free trade as an economic theory requires equal terms of trade by all parties to reach an appropriate equilibrium. Believe it or not, there is basic math behind the theory of free trade and these are the assumptions for it to work. You again fell back on some over simplistic cheaper goods argument. The premise of free trade falls on increasing the overall demand pie by producing more efficiently. If you violate the underlying assumptions all you are doing is shifting the constitution of the demand.

Central to your misunderstanding is the basic fact we’ve touched on before that GDP nets out net trade, so if you’re running a current account deficit, two things are happening, one you have shrunk your GDP (and your counter party has gained GDP, hmmm that doesn’t sound bad for them!) and two you’re forced to balance the equation by funding your deficit with debt that will likely haircut future GDP. Ultimately you wind up opining on uncompetitiveness, I guess it’s surprising in some circles that tariffs can have that effect.

FROM THE IMF

https://www.imf.org/external/pubs/ft/fandd/basics/current.htm

When persistent is too persistent

Does it matter how long a country runs a current account deficit? When a country runs a current account deficit, it is building up liabilities to the rest of the world that are financed by flows in the financial account. Eventually, these need to be paid back. Common sense suggests that if a country fritters away its borrowed foreign funds on spending that yields no long-term productive gains, then its ability to repay—its basic solvency—might come into question. This is because solvency requires that the country be willing and able to generate (eventually) sufficient current account surpluses to repay what it has borrowed to finance the current account deficits. Therefore, whether a country should run a current account deficit (borrow more) depends on the extent of its foreign liabilities (its external debt) and on whether the borrowing will finance investment with a higher marginal product than the interest rate (or rate of return) the country has to pay on its foreign liabilities.

But even if the country is intertemporally solvent—meaning that current liabilities will be covered by future revenues—its current account deficit may become unsustainable if it is unable to secure the necessary financing. While some countries (such as Australia and New Zealand) have been able to maintain current account deficits averaging about 4 1/2 to 5 percent of GDP for several decades, others (such as Mexico in 1995, Thailand in 1997, and several economies during the recent global crisis) experienced sharp reversals of their current account deficits after private financing withdrew during the financial crisis.

Such reversals can be highly disruptive because private consumption, investment, and government expenditure must be curtailed abruptly when foreign financing is no longer available and, indeed, a country is forced to run large surpluses to repay in short order what it borrowed in the past. This suggests that—regardless of why a country has a current account deficit (and even if the deficit reflects desirable underlying trends)—large and persistent deficits call for caution, lest a country experience an abrupt and painful reversal of financing.

What determines whether a country experiences such a reversal? Empirical research suggests that an overvalued real exchange rate, inadequate foreign exchange reserves, excessively fast domestic credit growth, unfavorable terms of trade shocks, low growth in partner countries, and higher interest rates in industrial countries influence the occurrence of reversals. More recent literature has also focused on the importance of balance sheet vulnerabilities in the run-up to a crisis—such as the extent to which companies have large liabilities in foreign currencies such as dollars or maturity mismatches that occur when companies have more short-term liabilities than short-term assets and more medium- and long-term assets relative to their liabilities. Recent research has also underscored the importance of the composition of capital inflows—for example, the relative stability of foreign direct investment compared with more volatile short-term investment flows, such as in equities and bonds. Moreover, weak financial sectors can often increase a country’s vulnerability to a reversal of investment flows as banks borrow money from abroad and make risky domestic loans. Conversely, a more flexible policy framework—such as a flexible exchange rate regime, a higher degree of openness, export diversification, and coherent fiscal and monetary policies—combined with financial sector development could help a country with persistent deficits be less vulnerable to a reversal by allowing greater room for better shock absorption.

#11

where are you getting this definition that things need to be equal for free trade to exist? its so elusive

https://www.britannica.com/topic/free-trade

Free trade , also called laissez-faire , a policy by which a government does not discriminate against imports or interfere with exports by applying tariffs (to imports) or subsidies (to exports).

https://www.ecnmy.org/learn/your-world/globalization/what-is-free-trade/

Free trade is the idea that things should be able to be traded between countries with as few restrictions or limitations as possible.

https://www.thoughtco.com/free-trade-definition-theories-4571024

In the simplest of terms, free trade is the total absence of government policies restricting the import and export of goods and services.

#12

^ From your Britannica article:

“The theoretical case for free trade is based on Adam Smith’s argument that the division of labour among countries leads to specialization, greater efficiency, and higher aggregate production. (See comparative advantage.) From the point of view of a single country there may be practical advantages in trade restriction, particularly if the country is the main buyer or seller of a commodity.”

Essentially shifting your tariffs shifts the equilibrium point (basic math) and if one player is doing it, they can game the system. It is also a very important distinction that the unmodified division of labor model assumes no persistent deficits or surpluses. Things net balance over time. The effects of persistent deficits are also simple math and outlined in the IMF piece above.

#13

the US is considering putting restrictions on chinese companies listing on US stock exchanges.

Will this have a big effect on investment into China? How big is $1.2 trillion for the country and will they receive the same funding if they listed in a different country?

as info:

The market capitalization of the 156 Chinese companies , including at least 11 state-owned firms , listed on the three-largest US exchanges — the NASDAQ, New York Stock Exchange and NYSE American — stood at a collective $1.2 trillion as of late February, according to a report by the US - China Economic and Security Review … $460 BILLION of that $1.2 trillion is one company - Ali Baba.

FRTIB, which administers the $590.8 billion Thrift Savings Plan — the retirement plan for 5.6 million federal employees and members of the uniformed services, decided on November 2017 — recommended by Aon Hewitt Investment Consulting — to shift the TSP’s I Fund Benchmark to the MSCI ACWI ex-U.S. Investable Market Index from the MSCI EAFE Index. As of Dec. 31, TSP’s I Fund had $40.7 billion in assets.The change in investment strategy is set for implementation next year. About 8% of the ACWI ex-U.S. IMI is made up of Chinese companies.

#14

I think it’s a bad idea. I always say if you can’t beat them, you should own them. The us imo will lose to China economically. Hence we should buy up their stocks. In terms of price their best companies are better than our best companies.

with that said, they may be banning it because the us govt does not trait China. Whether it is their numbers or just the fact that the Chinese will just take investor money and run. I recall Russia did this to an American before, which is why all Russian companies now trade at a laughable discount.

i imagine there Russians felt smart jacking the Americans but look at them now. Bad behavior in a quick game of game theory is often rewarded, but in the long run, it plays to be nice!

#15

you’re not comparing apples to apples, though.

Russia vs America, the overall wealth of russia is significantly less, so in order to build wealth they need foreign investors. This is not the case for the US. China has much lower overall wealth despite having high growth over the past several years.

chinese game theory is to siphon money from other countries by dumping commodities worldwide at less than domestic market value and then push towards copying the exact same infrastructure internationally as the united states with this money.