In an interview with Fox Business Network broadcast on Thursday, President Donald Trump suggested the whole relationship between the U.S. and China could be cut off, saving the United States $500 billion dollars.
Reuters reported that this certainly is referring to the estimated U.S. annual imports from China, which Trump often refers to as lost money.
From an economist’s point of view this raises a couple of questions:
- It’s not clear what cutting off the relationship with China precisely means.
- It’s also not clear why Trump moves from claiming the greatest trade deal ever in the history of deal making to cutting off the whole relationship with China.
Trump also said about Xi, quote: “Right now I don’t want to speak to him.”
While an increase in anti-Chinese rhetoric was expected ahead of the November Presidential election, this does seem to be more aggressive than financial markets might have expected.
There were further comments that seem aimed at controlling capital flows.
As financial markets start to look beyond the lockdowns and consider what life will be like in the bounce back, Sino-U.S. relations are likely to assume more importance.
While markets have begun paying less attention to the variability of Trump’s comments, strong language still gets attention.
Trump also signaled that firms could be taxed if they do not move their supply chains.
Now, as the trade tariffs (taxes) last year have demonstrated, supply chains cannot be shifted back quickly, and so, this would be an additional burden on U.S. companies, just like the trade tariffs last year were paid by U.S. companies.
However, the threat may be redundant. It’s a fact that globalization peaked some time ago and the fourth industrial revolution is encouraging localization.
Automation and robotics have reduced and continue to do so the benefits of low cost labor while manufacturing close to the consumer reduces the costs of inventory and supply chain management.
For example, TSMC (Taiwan Semiconductor Manufacturing Co.), which is the world’s largest contract manufacturer of silicon chips, said today it would spend $12 billion to build a chip factory in Arizona, as U.S. concerns grow about dependence on Asia for the critical technology.
TSMC had been talking to U.S. officials as well as to Apple Inc., one of its largest customers, about building a chip factory in the U.S. for some time, but the conversations gained momentum recently as concerns mounted about the fragility of the Asian supply chain, people familiar with the matter told the Wall Street Journal.
U.S. chip makers have backed off on building cutting-edge chip factories domestically in recent years largely because of their cost, and a rapid development cycle that means the benefits of being ahead don’t last long, the Journal reported.
The coronavirus has accelerated the long term structural change of the fourth industrial revolution, no doubt about that.
Besides all that, China’s National Bureau of Statistics (NBS) informed China's retail sales of consumer goods, a major indicator of consumption growth, declined 7.5 percent year on year in April as the COVID-19 epidemic hit the economy. The figure rebounded from a 15.8 percent decline in March.
Retail sales still fell on the year as was to be expected but the pace of decline is slowing. The retail sales data were supported by car sales and things like communication equipment as people restructure their domestic infrastructure to suit working from home.
As a general point, it’s worth noting that people spending on home communication equipment could act as both consumption and investment, although would only be reported as consumption. This is because, if people use their own devices for home working, companies can achieve to sustain productivity with less spending.
Using one device rather than two is good for efficiency and it’s good for the environment, but it doesn’t help GDP too much because GDP is a fairly poor measure of living standards.
From its side, in the U.S., retail sales sank 16.4 percent from a month earlier in April, worse than forecasts of a 12 percent drop. It is the sharpest decrease in retail sales ever due to the coronavirus pandemic which forced Americans to stay at home and many businesses to close.
As an investor, I would prefer remaining patient and certainly not engage in buying now. I still think that we haven’t seen the bottom yet.
Also, there are still too much unknown unknowns out there…
Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.
© 2021 Newsmax Finance. All rights reserved.