- Donald Trump likes to tweet about stocks, approval ratings and unfair trade practices, among other things.
- Economists at BAML believe Trump will continue to target China on trade until US stocks or his Presidential approval rating begins to take a hit.
- It thinks China will respond to any any additional tariffs from the US by staging a war of economic attrition.
US President is a prolific Tweeter, who likes to tweet about the US stock market, particularly when it is moving higher.
Dow goes from 18,589 on November 9, 2016, to 25,075 today, for a new all-time Record. Jumped 1000 points in last 5 weeks, Record fastest 1000 point move in history. This is all about the Make America Great Again agenda! Jobs, Jobs, Jobs. Six trillion dollars in value created!
— Donald J. Trump (@realDonaldTrump) January 5, 2018
He also doesn’t mind tweeting about his Presidential approval rating.
“President Trump's approval rate among likely U.S. voters hit 50 percent on Monday, which puts him higher than former President Barack Obama's score at the same point into his first term, according to a new poll.” Via: @Anna_Giaritelli @DCExaminer pic.twitter.com/ZzycNoDCQJ
— Donald J. Trump (@realDonaldTrump) April 3, 2018
Trump also doesn’t mind voicing his concerns about global trade, particularly when he feels the playing field isn’t level for US exporters.
China, the European Union and others have been manipulating their currencies and interest rates lower, while the U.S. is raising rates while the dollars gets stronger and stronger with each passing day – taking away our big competitive edge. As usual, not a level playing field…
— Donald J. Trump (@realDonaldTrump) July 20, 2018
Given the three topics mentioned above — stock levels, approval ratings and trade — economists at Bank of America Merrill Lynch (BAML) have a come up with a theory as to whether trade tensions between China and the United States will increase or decrease in the period ahead.
Much depends on whether it begins to drag on stocks or Trump’s approval rating ahead of US midterm elections in November.
“The US is likely to continue to take measures against its trading partners until the equity markets respond or there is a dip in the president’s approval rating,” say Aditya Bhave, Ethan Harris and Helen Qiao, economists at BAML.
With US stocks at or moving back towards the record highs struck earlier this year, Trump said late last week that he was prepared to slap all Chinese imports entering the United States with new tariffs.
“I’m ready to go to 500,” Trump told CNBC, referring to the dollar value of Chinese imports last year.
“I’m not doing this for politics, I’m doing this to do the right thing for our country. We have been ripped off by China for a long time.”
Should Trump look to slap tariffs on all Chinese imports entering the US, a steep increase on the $US250 billion worth of Chinese goods that have either been hit with or under consideration for tariffs, it will create something of a challenge for Chinese policymakers given the value of US imports entering China last year was close to four-times less than those going in the other direction.
“China’s reply to the latest proposed measures — proposed tariffs on $US200 billion worth of Chinese imports — has been hesitant,” says Bhave, Harris and Qiao.
“Chinese officials have pledged to retaliate, but the exact nature of the retaliation has not been announced. One issue is that China imports only about $US130 billion worth of goods from the US.
“Since it has already imposed or promised higher tariffs on over $US50 billion of US goods, it has limited room to raise tariffs further.”
What to do when you when you don’t have the same amount of imports to slug in return?
Bhave, Harris and Qiao believe China has three options should the US introduce tariffs on all Chinese imports: slap bigger tariffs on US imports, capitulate to US demands or start a war of attrition.
The trio think increasing tariffs on US imports so they raise an equal amount of revenue as those placed on Chinese imports is unlikely, acknowledging this would mean “reordering of supply chains which would impose additional costs on the Chinese economy” and “negatively affect China’s image as an economy that is opening up and reforming”.
BAML also thinks the odds of China rolling over to US demands is also unlikely, especially when there’s popular support for a tough response to the US trade tariffs and nil political risks.
As such, Bhave, Harris and Qiao believe the most likely scenario is a war of attririton developing between the two sides.
China will probably adopt a “middle path” of engaging the US in a war of attrition. We expect some retaliatory tariffs, but in smaller amounts than the US measures. Greater restrictions and regulations on US companies operating in China are also likely. Additionally, policymakers might become more tolerant to renminbi depreciation, although they are unlikely to weaponize the currency.
Along with the “stick” of retaliation, China might also offer the “carrot” of modest concessions. Of the compromises listed above, greater imports from the US and intellectual property protection measures are likely on the table, not least because China was leaning towards these reforms even before trade tensions started to escalate.
With its carrot-and-stick trade policy and domestic easing measures in place, we think China will go into wait-and-see mode. In our view, Chinese policymakers think they can outlast the US, holding out until the US equity market corrects or the “sticker shock” effect of the tariffs starts to impact public opinion in the US.
While this may sound like an a palatable outcome for financial markets given the possibly outcomes involved, Bhave, Harris and Qiao believe it will not be without its risks.
“In a war of attrition, there is scope for miscalculation,” the trio say.
“Our game-theoretic analysis of trade negotiations suggests that visible pain is the motivator for de-escalation and compromise.
“This means that US policymakers might see China’s equity sell-off as a sign of weakness, and up the ante with the expectation that China will back down. But this would likely be a mistake since equity markets are less of a focus in China.
“On the flip side, US equities are being buoyed by tax cuts, earnings upgrades and a strong economy, which could offset the negative impact of the trade war. If Chinese policymakers are holding out for a large correction in the US stock market, they might be stuck in a holding pattern for a long time.”
BAML says this sort of miscalculation from either side would be costly for consumers and businesses alike, adding that investors should “buckle up” should such a policy misstep ensue.
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