Donald Trump was pretty excited to learn that China’s economy is growing at the slowest pace in nearly three decades, a state of affairs which, in his narcissistic delirium, is wholly attributable to the trade war, despite the trend being in place long before he assumed the Oval Office.
“China’s 2nd Quarter growth is the slowest it has been in more than 27 years. The United States Tariffs are having a major effect on companies wanting to leave China for non-tariffed countries”, he said on Monday morning.
Earlier, China said the economy expanded at a 6.2% clip in Q2 (still twice as fast as the US economy, although that’s apples to oranges in a multitude of ways), the most tepid pace of growth since 1992, when quarterly data began.
It is of course true that the trade war is a drag on China, but it’s also a drag on the entire world and will eventually boomerang back to the US. Trump’s Monday morning tweets won’t do anything to foster trust with Beijing at a time when both sides are wary after the talks abruptly collapsed in May.
“The Q2 moderation mainly reflected contracting exports amid a weaker external environment and still-lackluster domestic demand”, Barclays wrote Monday.
The June activity data was upbeat, though, which Barclays attributes to “front-loaded auto sales that boosted retail sales, a low base helping to boost industrial production growth (on a quarterly basis, the Q2 average of 5.6% was still a marked drop from 6.5% in Q1), and the stabilization of manufacturing at low levels owing to a narrowed contraction in metal smelting.”
Trump went on to rub salt in the wound. “Thousands of companies are leaving. This is why China wants to make a deal with the US, and wishes it had not broken the original deal in the first place”, he said, before perpetuating the same lie about the tariffs. “In the meantime, we are receiving Billions of Dollars in Tariffs from China, with possibly much more to come. These Tariffs are paid for by China devaluing & pumping, not by the US taxpayer!”
For the umpteenth time, China is not paying the tariffs. Not by “devaluing and pumping”, not by writing a giant check and not by wiring the White House money. Importers pay the tariffs and, eventually, that will be felt in consumer goods inflation or else it will erode margins and thereby dent corporate bottom lines. It is just that simple.
The only way to avoid that is trade diversion and import substitution. Amusingly (although unsurprisingly), Trump is attempting to stamp that out by zeroing in on Vietnam, one of the main beneficiaries of the trade war. During a wild interview with Maria Bartiromo on June 26, Trump accused Vietnam of being “almost the single worst abuser of everybody”. A week later, he hit the country with 400%+ levies on steel in a bid to discourage opportunistic re-routing.
“Vietnam has been in the media spotlight recently as the foremost beneficiary of higher tariffs on Chinese exports to the US and US companies relocating out of China”, BofA wrote last week, adding that Vietnamese exports to the US jumped nearly 29% YoY in the first five months of 2019 while Chinese exports slumped.
Treasury seems poised to focus on possible currency “manipulation” by Vietnam and it’s probably just a matter of time before the administration cracks down harder. “Vietnamese imports of computers and electric products and parts from China rose by 2.4bn (+88.4% YoY), as Vietnam exports more to the US”, BofA went on to say, in the same note cited above, on the way to cautioning that “although Vietnam does not run a wide overall trade surplus against the rest of the world, the recent surge in its bilateral trade surplus against the US has already attracted attention in Washington DC”.
Getting back to China, Goldman says “the rebound in June growth was mainly driven by renewed policy support”, and warns that “the biggest risk comes from potential distractions from the trade dispute”.
“News since the G20 meeting has been mixed and there are still significant risks that the negotiation doesn’t result in a good outcome, the dispute escalates further, and domestic policy responds but not aggressively enough to maintain complete economic growth stability”, the bank goes on to say.
If Trump’s first tweets of the new week are any indication, a “good outcome” is far from assured.