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‘Shooting From The Hip’: High Noon Arrives For Trump’s Trade War

Wilbur needs you to understand that everything is under control.

Somebody woke Wilbur Ross up on Tuesday, and after being briefed on everything that’s happened since he went into cryosleep three weeks ago, he showed up on CNBC to talk about Trump’s latest trade escalation with Beijing.

Ross assured CNBC that he and Navarro aren’t gunslingers and that Trump isn’t “shooting from the hip,” with the tariffs. Color me skeptical.

He also suggested they’ll only be a “minimal inflation impact” from the new levies. That’s Wilbur rehashing the points he illustrated earlier this year when, in another interview with the network, he famously used a can of Campbell’s soup to try and convince Americans that the metals tariffs won’t matter for the products they buy.

For the umpteenth time, Wilbur is blowing smoke. Eventually, tariffs will cause the prices of consumer goods to rise and the odds of that happening obviously increase with each successive round of tariffs. That’s not even an attempt to malign the President’s policies, it’s just a statement of fact. Either companies eat higher input costs and take a hit on their bottom lines, or they pass those costs on to consumers. Wilbur knows that, even if Trump doesn’t.

Speaking of “successive rounds of tariffs”, Ross had this to offer on what happens if China retaliates:

If China takes retaliatory action against our farmers or other industries, we will immediately pursue phase three, which is tariffs on approximately $267 billion of additional imports.

China of course will retaliate and they indicated as much overnight. Here’s a snippet from the commerce ministry’s statement:

The U.S. insists on increasing tariffs, which brings new uncertainty to the consultations between the two sides. It is hoped that the U.S. will recognize the possible negative consequences of such actions and take convincing means to correct them in a timely manner.

The odds of Trump “correcting” this situation (let alone in a “timely manner”) are of course zero. The fact that Trump is starting with a 10% rate and moving to 25% starting in 2019 could conceivably be seen as an indication that the White House expects this to last for the foreseeable future.

Additionally, the fact that the administration is prepared to use retaliatory measures from China as an excuse to escalate things further suggests Trump is itching for a fight.

Meanwhile, Chinese equities dodged a bullet on Tuesday, surging in afternoon trading to close sharply higher. While you could chalk it up to attractive valuations and a lack of details on what China might do in the event Trump “goes to $500 billion“, I’d be more inclined to call this state buying:

SHCOMP

Remember, the Shanghai Composite closed below its 2016 closing lows on Monday. Those levels were a trigger for state support last month and there’s no reason to think they wouldn’t prompt similar state intervention this month. That goes double now that the new tariffs are official. The last thing Beijing wants is for retail investors in China to lose confidence in the stock market like they did in 2015.

For what it’s worth, here’s a look at valuations for H-shares and A-shares in case you want to go “bargain” hunting:

ChinaValuations

(Goldman)

The big question going forward is what China will do now that their capacity to retaliate is constrained by the disparity shown in the following chart:

(Bloomberg)

As you can see from the top pane, it is not mathematically possible for China to respond in kind, which means going forward, Beijing will need to get “creative”. That could entail undermining U.S. efforts to forge a relationship with North Korea. Here are some other options, from a Barclays note out in July:

Follow up with non-tariff retaliations. Such measures, most likely at a company or industry level, could include: 1) intensifying inspections of goods shipped from the US (as is already being observed), 2) guiding state-owned enterprises to diversify away from the procurement of US products and services, and 3) applying greater scrutiny to operations of US companies in China.

We’ll see.

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