Tags: trump | china | trade | threat | economy political | noise

Trump's Trade Threats Against China More Drama Than Substance

Trump's Trade Threats Against China More Drama Than Substance
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Friday, 06 April 2018 02:39 PM Current | Bio | Archive

The U.S. trade figures for February that were released yesterday showed a widening deficit. This is hardly a surprise.

President Donald Trump’s policies over the past year have been calculated to increase the size of the U.S. trade and current account deficits.

One could easily say, rightly or wrongly, that the policy has essentially been focused on “Making China Great Again.”

A deficit financed tax cut was always going to widen the U.S. trade deficit. The American consumers have spent their promised cash on imported goods.

So, does a current account deficit matter economically?

What it means, in the simplest of terms, is that Americans have a higher standard of living today than they would otherwise have had.

Does a current account deficit matter politically? Yes, it does.

In the trade dispute with China, Trump has fired another shot, or actually, two shots: one at China and the other at the rest of the world.

The Chinese are targeted with what the president has described as a $100 billion of tariffs. What the president meant apparently, is that U.S. consumers would be taxed on a $100 billion of imports, not that the tax would be $100 billion.

Remarkably, the president’s spin is more dramatic than the substance.

That would mean, if carried out, that U.S. consumers of $150 billion of imports, partially made in China, would now be subject to a significant tax.

The Chinese did not respond because of the two-day sweeping holiday of the Qingming Festival (Chinese Memorial Day).

The Chinese could not impose taxes on a total of $150 billion of U.S. imports because they don’t import as much as a $150 billion from the United States.

To be fair, aside from Canada and Mexico, no country in the world imports as much as $150 billion from the United States.

The second shot is that the rest of the world would be affected by a pledge to subsidize American farmers.

If that is a deficit financed subsidy, that would of course make the U.S. trade deficit larger.

However, subsidizing American farmers might lead to a response from other countries because the subsidies would give American farmers an unfair competitive advantage.

So, is this a trade war?

No, it is not!

These are thorns with the threads of future actions. The fact that the U.S. is threatening to beat up Chinese exporters after school, or rather at the end of May, doesn’t mean that it is actually going to happen.

Negotiations are still the most likely outcome.

One of the main reasons why negotiations are the most likely outcome, is President Trump’s taxes to date have been largely invisible to the U.S. consumer.

The more the tariffs are applied, the more likely it is that the U.S. consumer notices that they are being taxed.

Put 25 percent on the price of sports shoes or smart phones and the tax suddenly becomes very visible indeed.

That is a powerful political argument against actually following through on the threats.

The employment situation data that were released today show that U.S. unemployment rate remained at a 17-year low of 4.1 percent for the sixth consecutive month in March, which was slightly above market expectations of 4 percent. The number of unemployed decreased by 121,000 to 6.59 million and employment fell 37,000 to 155.18 million. The labor force participation rate dropped to 62.9 percent from a five-month high of 63 percent in February. Average hourly earnings increased to 2.7 percent, up from 2.6 persent in February.

It shows that the economy continues to perform perfectly well and ignores most of the political noise.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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The economy continues to perform perfectly well and ignores most of the political noise.
trump, china, trade, threat, economy political, noise
Friday, 06 April 2018 02:39 PM
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