In our January 2017 blog post, “Only Smoke So Far”, we warned that the possibility of a trade war unilaterally imposed through tariffs (which do not require input from Congress) would degrade global trade relationships and stifle our economy. At the time, the suggested tariffs – a 20% tariff on Mexico to pay for a southern border wall – were only a topic of discussion and, in retrospect, never enacted. Instead, while there have been a few targeted tariffs towards Mexico and Canada, most of the administration’s ire has been focused on China.
Today, for instance, the US put another 15% tariff on $100 billion of Chinese imports. As a commensurate response, China is increasing import taxes of 5% & 10% on many American products while opening a suit with the World Trade Organization. Additional taxes now apply to roughly two-thirds of the goods both countries export to each other.
So…. Is that all? Is this what everyone was worried about? Is this the long discussed trade war fully realized?
In short, no. This is a proportional negotiation, not a war. If it were a war, China would be restricting rare-earth exports and selling US treasuries. If it chose to, China could easily create the conditions for a full own global recession which absolutely pull the US down its wake, no matter how resilient the US consumer is. Instead, China’s decision to respond with limited, proportional reactions are designed to limit collateral damage to their own long term growth goals while still achieving their goals. For reasons we explained in our monthly newsletter, “the China Siege”, they can afford to be patient.
Besides, China reasons, there may already be sufficient catalysts for deceleration due to global instability. October 31st could see a no-deal Brexit. Germany is on the brink of a recession due to falling manufacturing and exports. Global trading hubs (Singapore, South Korea, and Taiwan) are already hurting. Mexico has already had one negative quarter this year (Q1), but barely edged out (0.2%) a defined recession in Q2. If US consumer sentiment / confidence numbers pull back enough, that would be enough of a push to kick-start another coordinated global slowdown.