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An Urban's View

Urban C Lehner
By  Urban C. Lehner , Editor Emeritus
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While President Donald Trump has been pushing China to buy more American products, some of the trade hawks in his administration are says to have as their ultimate goal that U.S. companies stop doing business in China. (DTN photo by Chris Clayton)

In a famous old New Yorker cartoon a business executive shouts into his telephone, "No, Thursday is out. How about never -- is never good for you?" (https://www.usatoday.com/…)

That cartoon came to mind watching the latest volleys in the U.S.-China trade war. A few weeks ago, the two countries were tantalizingly close to a deal. President Donald Trump blew that deal up after the Chinese took back some concessions they'd previously made. At the time, I warned that the war could be long and bloody. (https://www.dtnpf.com/…)

Some observers are more pessimistic. They think it may never end. A New York Times headline speculated that "Trump's Tariffs, Once Seen as Leverage, May Be Here to Stay." (https://www.nytimes.com/…) A University of Maryland economist agrees that the U.S.-China tariffs are likely to be permanent. (https://www.youtube.com/…)

Would never be good for you?

Not if you're an American farmer or rancher. As one of the economy's leading export sectors, agriculture has taken big trade-war hits. China had been one of ag's biggest export markets. Government aid programs have offset some but far from all of the damage.

Farmers and ranchers, then, need to consider whether a never-ending trade war is likely. To help with that consideration, here are arguments for both sides of the question.

One reason to fear a perpetual trade war is the increasingly bitter edge to U.S.-China relations generally. Unlike U.S. trade conflicts with Japan in the 1980s and 1990s, with China today it's not just trade that's gone sour.

Under Xi Jinping, China has built up its military, laid active claim to international waters in the South China Sea and made no secret of its desire to push the U.S. out of Asia. Government-backed Chinese hackers have broken into the computer systems of U.S. companies and government agencies.

Fearful of further Chinese spying, the U.S. government is actively trying to derail one of China's corporate champions, Huawei, which Washington sees as a sort of computer-security Trojan horse. While complaining, with some justice, of Chinese trade barriers to American products, the U.S. is at the same time stopping American semiconductor makers from selling advanced chips to China.

Thus, a relationship that both sides once accepted as mutual dependency tinged by rivalry now feels at times more like enmity. The U.S. and Japan fought fiercely over trade but as military allies they found reasons to compromise. The U.S. and China have no comparable reason for restraint.

The Chinese government is preparing the population for a long, if not eternal, trade war. Chinese media are playing movies celebrating China's bloody fight against the U.S. in the Korean War, movies which of course portray the U.S. as the aggressor. (https://www.washingtonpost.com/…) A former Chinese official has written a popular song called "Trade War," with verses urging "bitter hate for the enemy" and proclaiming that, "If the perpetrator wants to fight, we will beat him out of his wits." (https://www.scmp.com/…)

President Trump, for his part, doesn't seem in any particular hurry to resume negotiating with China. While he's pushing China to buy more American products, some of the trade hawks in his administration are said to have as their ultimate goal that U.S. companies stop doing business in China. (https://www.ft.com/…)

Are fears of a never-ending trade war overblown? One reason to think so is the sheer economic pain a trade war inflicts. Estimates vary, but economic growth in the U.S. could slow by as much as 0.5% a year when the full tariff increases take effect. China's growth could slow twice as much. At some point, it's tempting to think, one side or the other will have suffered enough and will blink.

China expert Vincent Shih thinks China might blink first. (https://www.newyorker.com/…) His rationale? Xi Jinping has bet his premiership on economic growth. If it doesn't continue, he's in trouble -- and he may not have the option of stimulating a tariff-laden economy, having gone to that well too many times already.

"I don't believe some of this rhetoric that you're seeing out of China, saying that we're prepared to suffer great economic hardship or to continue this economic fight with the U.S.," Shih says. "I just don't think that is very credible, because clearly Xi Jinping would like China to continue on this trajectory of economic growth."

Nick Lardy, a top expert on China's economy, disagrees. (https://www.lowyinstitute.org/…) China is much less dependent on exports than Washington imagines, he says. The tariffs will slow its economy, but not so tellingly as Washington hopes. China won't "fall apart," Lardy says, if GDP growth is "five point something instead of six point something."

Might Trump blink first? The American economy is even less trade-dependent than China's, but democracies tolerate less pain than autocracies. On May 29, before Trump announced his new Mexico tariffs, the Wall Street Journal cited a poll showing 47% of Americans worry Trump's tariffs hurt the economy, up from 38%. (https://www.wsj.com/…) The poll says 62% of Americans "are either very or somewhat concerned that the trade war with China could harm their local economy."

You will, no doubt, decide for yourselves which of these arguments to believe. Me, I'm not convinced the trade war will never end. Trump's nonchalance and China's bellicosity both strike me as negotiating postures. At the same time, I think it's going to be hard for either side to back down from the positions they've dug into.

Three Wall Street gurus quoted by Bloomberg say they're adjusting their portfolios accordingly. Says one of the three, a hedge-fund manager: "This contest will be a drawn-out process that will likely last our careers." (https://www.bloomberg.com/…)

Urban Lehner can be reached at urbanize@gmail.com

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Urban C Lehner
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