Tags: trade | wars | trump | tariffs

US Economy Can Withstand Trade War While Other Global Rivals Can't

US Economy Can Withstand Trade War While Other Global Rivals Can't
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By    |   Tuesday, 26 June 2018 03:34 PM

The war has begun.

For many months now, the stock market has been held back by fears of trade frictions.  It appears that those fears are coming to fruition. 

The Trump administration announced that it will go ahead and impose tariffs on $50 billion worth of Chinese imports.  China announced its intention to retaliate by imposing $50 billion in tariffs on American exports.  The Trump administration is now looking into tariffs on an additional $200 billion of Chinese imports, with the threat of more if China retaliates to that.

In addition, in response to U.S. imposed tariffs on steel (30%) and aluminum (10%), the European Union (EU) is threatening tariffs on U.S. exports including blue jeans, motorbikes and whiskey.  President Trump has since threatened a 20% tariff on European automobiles sold in the U.S.

This week the rhetoric is intensifying.  There are reports of new efforts by the Administration to block Chinese sales on investment in U.S. technology firms.  As a result the tech-heavy NASDAQ fell 2.4% on Monday.

It’s game on.

Large American exporters like Boeing (BE), DowDuPont (DWDP) and Caterpillar (CAT) are taking it on the chin.  All the major U.S. indexes were down big on Monday, after being down most days in the last two weeks.

Let’s put this in perspective.  A trade war is bad for the U.S. market and economy.  It will hurt the earnings of U.S. exporters and likely trim economic growth.  But trade frictions with the U.S. are really, really bad for the other economies, especially China.

The U.S. market has leveled off of late, after rising like crazy for 15 months.  It’s true the Dow is negative for the year but the S&P 500 is still up slightly and the NASDAQ is 8.43% higher for the year.  Trade frictions might hurt economic growth, but the economy is booming.  The Atlanta Fed is forecasting 4.8% GDP growth in the second quarter and the rest of the year looks strong as well.

While global growth is again sputtering, the U.S. has been the shining beacon.  In short, the U.S. is in a great position to take a punch and these other countries are not.  The Chinese economy was already slowing significantly. 

As well, the Chinese market has fallen far more dramatically than ours on news of recent trade frictions.  The fact is China has much more to lose than we do in a trade war, as does Europe, Canada and Mexico.

It’s also worth noting that these other countries are in the wrong.  Free trade is ideal, but it cuts both ways.  China has stolen intellectual property, skewed their trade policies against and U.S. and generally gotten away with murder.  Europe talks a good game but they impose a tax on American exports and Canada and Mexico have their own shenanigans. 

The U.S. is treated unfairly and these countries know it.  But the unfairness has been to their benefit and they won’t go gently into that goodnight.  To them, it appears at this point that it is worth a high stakes game of chicken with the U.S. to maintain their advantage.

They see how politically divided this country is and they are hoping that international tensions will create too much pressure on the Trump administration and it will abandon its retaliatory measures.  I think they are most likely mistaken.

This Trump administration is not afraid to be controversial.  It’s Trump’s trademark.  At the same time, it has the booming economy at its back.  Meanwhile, political pressure is mounting in these other countries.  China is conducting an economic experiment that may fail, and they can ill afford trouble with the U.S., by far their biggest trading partner.  European growth is again sputtering while populist forces continue to gain traction in many member countries.

That said, these trade frictions could last until the U.S. midterm elections in November.  But if the elections don’t result in a change in U.S. trade policy, I believe these countries will have to cave.

Things will likely get uglier before they get better and the US markets may be flat or down for most of the rest of this year.  But it is likely that ultimately the U.S. will prevail in these trade showdowns.  And as a result, the longer term trajectory of the market will improve.

Tom Hutchinson is a Wall Street veteran with extensive investing and finance experience.

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TomHutchinson
While global growth is again sputtering, the U.S. has been the shining beacon.  In short, the U.S. is in a great position to take a punch and these other countries are not.  The Chinese economy was already slowing significantly.
trade, wars, trump, tariffs
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2018-34-26
Tuesday, 26 June 2018 03:34 PM
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