On Saturday, we asked if Trump’s trade wars are “fake news“.
That was just a kind of off-the-cuff post aimed at highlighting the following commentary from Goldman which suggests that while the market is pricing in the impact from the narrow steel and aluminum tariffs, no one seems particularly concerned about an imminent escalation:
Although equity prices have moved in reaction to the proposed metals tariffs, investors do not appear concerned about escalating trade conflict. Firms that our analysts have highlighted as vulnerable to rising steel and aluminum input costs have underperformed the Industrials sector by more than 300 bp in the last two weeks. However, the share prices of agriculture firms, luxury consumer companies, and TMT firms with high imported COGS have generally demonstrated no signs of concern (see Exhibit 3). Similarly, baskets of US stocks with the largest international sales in general and specific exposure to Europe and China have all outperformed the S&P 500 in recent weeks (see Exhibit 4). Although the domestic-facing Russell 2000 small-cap index has led the S&P 500 by 300 bp this month, positioning and earlier underperformance appear more likely causes than trade concerns.
Beyond that though, there’s a more general sense in which Trump’s trade balderdash is “fake news”, and this is something we talked about at length over the course of the last week.
Trump doesn’t care one way or another for flyover America. Hopefully, you know that. Trump is a textbook narcissist that has never demonstrated any regard whatsoever for anyone other than himself, so the idea that he was going to put “forgotten Americans” first if he was elected President was always a laughable proposition. Does this look like someone who gives a shit about “everyday Joe”?
Right. The only sense in which he cares about working Americans is in the context of his poll numbers and to be honest with you, there’s an argument to be made that he only cares about that now because he got elected. That is, there’s all kinds of anecdotal evidence to support the contention that Trump never intended to win the election in the first place and it is by no means clear that his nascent 2020 campaign is the product of his desire to govern. Rather, it seems much more likely that the only reason he’s interested in running again is because his ego mandates it.
So when it comes to the tariffs, the bottom line is that he’s just doing this so he can check a box. Here’s how we put it a couple of days ago in “With Trump Trailing ‘Generic Democrat’ In Polls, Tariffs Are Desperate Political Gambit“:
Additionally, one certainly imagines that at least some of the everyday, “forgotten Americans” that Trump claims to represent (despite being a billionaire with a penchant for arranging photoshoots that depict him and his family surrounded by gilded furnishings) have figured out that his policies are not in fact designed to benefit them at all.
Anyone who took even 30 minutes to analyze the tax plan could see that it was aimed at helping high income Americans (here are the numbers) and the best available estimates are that Trump’s family will benefit to the tune of some $1.1 billion from the tax cuts he crammed down everyone’s throats.
Between that, the fact that the promised “big beautiful wall” is still just 8 lonely prototypes in the middle of the San Diego desert, his failure to “repeal and replace”, and the bungled effort to institute the Muslim ban, he really – really– needs to engineer something he can definitively point to as evidence that he’s made good on some of his campaign trail promises.
When you throw in the fact that Republicans have been unable to break the Washington gridlock despite controlling the government and the irreparable damage Steve Bannon did to the GOP by backing Roy Moore, you end up with what looks like dire straits headed into the mid-terms.
And so: tariffs! Trade wars to the rescue!
While that’s good news to the extent it suggests this isn’t likely to spiral out of control, it’s decidedly bad news in that it suggests Trump is willing to risk the future of global trade and commerce and imperil decades of progress on globalization if it means being able to shore up his own image.
Sure, politicians are almost universally inclined to subjugate utilitarian ideals to the whims of their constituents (that’s part of representing narrow constituencies), but you don’t generally see the President of the United States making potentially momentous decisions with global implications based on shoddy economic analysis (think: Peter Navarro) just so he can say he did something. That’s clearly insane, especially when everyone with any sense knows he wouldn’t piss on a working American if a working American was on fire.
Well anyway, yet another bank is out suggesting that this is all just a political gambit and in the course of the analysis, there are some interesting points about China.
“The Trump administration’s announcement of tariffs on steel and aluminum imports seems to be oriented more toward domestic political goals than any substantial re-engineering of trade flows,” Deutsche Bank writes, in their latest fixed income weekly note, before adding that the “carve outs” for Canada and Mexico underscore the notion that Trump is just trying to create some leverage (although there, the leverage is aimed at getting the upper hand in NAFTA talks, so it’s still about trade one way or another).
As far as China is concerned, Deutsche notes that while the Chinese “could well be the major economy subject to the tariffs, steel and aluminum imports are an even smaller component of total goods imports from China than for the rest of the world [as] over the last year, steel and aluminum imports have on average amounted to just over 0.5% of monthly total goods imports.”
But more interesting is Deutsche’s discussion of how the impact of the tariffs on trade flows “is consistent with the existing thrust of Chinese policy, and for this reason is unlikely to produce a disproportionate response.”
In short, the bank argues that China is already moving in the direction of encouraging domestic consumption and purging excess capacity and given that, the tariffs aren’t likely to be met with the kind of aggressive backlash some fear – of course we’re just talking about the steel and aluminum tariffs here, and anything beyond that from Trump might be a different story. Here’s Deutsche:
One could argue that China’s attempt to rebalance its economy should lead it to (a) privilege domestic demand over exports and (b) deal with excess capacity. This would imply that China would anyway be moving towards a policy setting that, other things being equal, allows for a stronger currency, reduced current account surpluses, reduced FX reserves and reduced production of e.g. steel. To some extent these trends are already observable in the data. For instance, China’s current account surplus has declined form ~10% of GDP pre-crisis to ~2.8% in 2015 and 1.4% in 2017. The IMF currently projects that China’s current account will decline to zero in the next 5 years (left graph below). Similarly, China’s aluminum production has been relatively subdued in 2017 despite higher prices (right graph below). Thus, in some perverse way, the potential tariffs imposed by the US are not inconsistent with China’s medium term objectives.
So that’s amusing and I’m not entirely sure that’s what Trump had in mind. Or who knows, maybe a “very stable genius” has thought all of this through and talked about it with his best friend Xi who “some people call the king of China.”
You be the judge.
Oh, and the shift in China’s thinking outlined above is supportive of a rebuilding of the term premium in the U.S. over the longer haul and it’s hilarious that Trump may have just reinforced that dynamic at a time when his fiscal stimulus means more Treasury supply.