Category: US – China Trade

Dotcom Crash Déjà Vu

On September 24, 2018

In Tariffs, Trade, Trump Trade War, US - China Trade

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Image: investopedia.com

The present euphoria about the U.S. being able t0 win a trade war with China is fueling the stock market to new highs. While, consumers reading the tariff headlines are beginning to pull up purchases scheduled for a later time. This author talked with a consumer who heard that tariffs were going up 25 % in January, 2019 so she wanted to move her purchase of a refrigerator up to now just in case. She didn’t know if refrigerators were even going to be taxed or if the tariffs were going to happen for sure. The tariffs are creating a buying contagion. This buying fever is catching on with businesses too, as the West Coast ports report 4 times the normal amount of freight volume being offloaded last month.

This urgent pulling forward of buying has happened before on a large scale in the U.S. in 1999. The year 2000 fear that software would not be able to handle the switch from 1999 to 2000 due to program limitations triggered both corporate buyers and consumers to purchase new hardware and software that would fix the bug. Sales were pulled forward into 1998 and 1999 then in 2000, sales dropped fast ‘like the lights were turned out’ the CEO of HP, Carly Fiorina said.

Source: Statista, 9/23/18

Computer software and hardware sales in stores fell 20 % by 2000 and another 19 % the following year. Computer and software companies laid off workers, companies with high levels of debt defaulted and a recession ensued. Note that even as sales began to come back up by 2008 another recession hit slowing sales progress until reaching par level with 1998 in 2011.

Consumers and businesses are hit by the tariffs in several ways: first, they see prices go up due to contagion buying from fear of prices going up, second there is a lack of merchandise as suppliers run out of product and finally when tariffs kick in the buyers are hit with another rising price wave.

Next Steps:

We have outlined in earlier posts the disastrous effects of broad trade tariffs with no clear goal in mind hurting consumers and businesses alike with high prices, loss of contracts and reduction in jobs. The latest round of tariffs on $200 billion in Chinese goods is ratcheting up the war to a new level with China retaliating with $60 billion in tariffs against U.S. goods. Plus, many businesses report non-tariff barriers being thrown up by the Chinese; slowing approval of shipments, asking for more paper work, requiring more inspections and delays in communication. Farmers in the Midwest are losing soybean contracts to Russia and Brazil as the Chinese switch suppliers. The consequential damages to the U.S. economy are mounting while the GOP Administration thinks a trade war can be won. Corporations and consumers are accelerating purchases to beat tariff dates which will create a mirage that the tariff policies are working until January 2019 arrives and sales spiral down due to all the advance purchasing.

We appeal to the White House to end the trade war, focus on the use of WTO offices, work with our allies and come up with a negotiated agreement with that is a win-win for all. If China slips into a recession from this trade war or incurs a damaged economy it will not help U.S. businesses who are looking to China as a new high growth opportunity – the Chinese will have limited cash to buy any of our goods or services.

Taxpayers Pick Up $12 billion Trump Trade War Cost

By Patrick Hill

On July 25, 2018

In Protectionism, Tariffs, Trade, Trump Trade War, US - China Trade

Image: 99getsmart.com

The Trump Trade War has cost corn, wheat, and soybean farmers over $13 billion in lost contracts and revenue already. As we have noted in previous posts, as China stocks up on crops from Russia, Brazil and other countries our farmers lose their incumbent status. U.S. farmers have to go back to their customers now doing business with China and unhook that deal to write more contracts to replace the business they lost. Our agriculture industry will be challenged by not being the incumbent supplier.

The Administration announced yesterday that the Department of Agriculture will begin offering direct cash subsidies to farmers impacted by the tariffs. Farmers would be compensated based on the projected size of their harvests, they can begin signing up in September. The direct payments by the government due to tariffs would be the first time ever by the Agriculture Department. In addition to direct cash payments, the government will purchase surplus food products and distribute them to food banks, schools and other nutrition programs. The cash and surplus purchase program will cost taxpayers $12 billion.

We believe the cost to taxpayers is just the start. As China and other countries hunker down, as the Administration is buying time for its tariffs, more subsidies will be implemented. Other industries in other sectors will ask for loss compensation in steel, aluminum industries and consumer products on the Administration’s tariff list.

Next Steps:

POTUS is now compounding a disastrous trade war strategy with no exit plan by subsidizing his errors. No, ‘trade wars are not easy to win’ as last May 1100 economists sent the President a letter admonishing him not to enter into a trade war. Sen. Charles E. Grassley, R – Iowa, noted in a statement yesterday, “What farmers in Iowa and throughout rural America need in the long term are markets and opportunity, not government handouts.”

There is an even more ominous aspect to these subsidies is the idea of ‘hunkering down’ for the long term. With no plan for ending the trade war except vague goals of ‘fair deals’ the Trump Trade War can easily get out of hand. The following analysis by Oxford Economics shows how a full-fledged trade war with China could cost the U.S. billions of dollars to the US economy and shave off 1 % cumulative GDP growth by 2020. Needless to say, a trade war of this magnitude will trigger a recession which will be deep and difficult to turnaround. By creating angst with our allies and customers, it will be difficult to win back their trust and their business.

Source Oxford Economics, The Wall Street Journal, The Daily Shot – 7/24/18

Stop the trade war now! Reverse all the ill-advised, poorly throughout and threatening oriented tariffs. Work through the WTO, which the U.S. helped to create, use other means to get more fair trade deals, work with our allies to focus on specific markets and opportunities without using myopic goals missing important data – like total trade deficit in goods and services not just goods. It is not too late, the armistice announced today with the EU on any new tariffs is a good start. Will the Administration come to an armistice with China? Considering how this Administration works, we are not holding our breath – just hoping for the best but preparing for the worst.

Farmers First Casualties of Trump Trade War

By Patrick Hill

On July 9, 2018

In Farmers, Trade, Trump Trade War, US - China Trade

Photo: geneticliteracyproject.org

The financial mainstream media focus on policy declarations from White House policy spin masters like Larry Kudlow, Chief Economic Adviser to the President saying of the trade war, “it is trade dispute among family members.” Meantime, American farmer family incomes are being sacrificed as the first casualties of the trade war.

Sources: Bloomberg, U.S. Department of Agriculture, The Wall Street Journal, The Daily Shot – 7/6/18

As Net Farmer Income drops along with the price of soybeans, the Chinese are cancelling their contracts with U.S. farmers and buying soybeans from Brazil and other suppliers like Russia.

Sources: China National Grain and Otis Information Center – 7/5/18

Sources: Bloomberg, China Customs – 5/18/18

It is a basic business reality that when customers go to other suppliers and secure contracts if the customer is pleased with the quality of new products they will stay with the new supplier. Our farmers are being cut out of business they have been building for decades, and now their livelihoods are being sacrificed to charge on in a lose-lose Trump Trade War (TTW). In the future, it will be difficult to impossible to get back much of the business farmers are losing as new suppliers become the incumbent.

Next Steps:

We need to stop being complacent about the costs and sacrifices of TTW, there are real costs being borne by farmers, businessmen and their families. We agree with 1100 economists who sent a letter to POTUS imploring him not to use tariffs as a mechanism for trade dispute negotiation and resolution. There is no evidence of trade wars solving trade issues, except for damaging the economies of all those countries involved, and in the case of the Depression setting the stage for WWII. The fact that the GOP Administration is minimizing the damage from their no strategy tariff program, is alarming and needs to stop. Farmers did not ask to be sacrificed for the TTW, and all the other businesses and families being hurt by this disastrous trade policy. They need our support by making our concerns known to the White House and Congress. We agree with Prime Minister Merkel who stated last week in regard to auto tariffs being renegotiated that any discussions should be pursued via the World Trade Organization in fairness to all parties. For over 40 years the United States has supported building the WTO and using trade treaties to open doors for American businesses, now is not the time to use bullying, intimidation and threats as tactics for solving economic issues.

POTUS Employs ‘Whack a Mole” Trade Tactics Launching the Trump Trade War (TTW)

By Patrick Hill

On June 4, 2018

In Mexico - US Trade, NAFTA, Protectionism, Trade, Trump Trade War, US - China Trade, US - Mexican Trade

Image: danbyink.bangordailynews.com

After declaring two weeks ago a trade truce with China, POTUS declared last week that 25 % tariffs would be imposed on $50 billion of Chinese of Chinese goods if they don’t commitment to purchases of US energy and agriculture products. Commerce Secretary, Wilbur Ross left China on Sunday with no real progress except to make the Chinese angry, confused and upset.

The bullying, intimidation, zero sum negotiating tactics may work in the rough and tumble of New York real estate but not international trade where over 70 years of careful negotiations by all the major trading partners have put into place a trading platform with rules and fairness wherever possible. Now it is true that some nations take advantage of the slow, ponderous and confusing decision making of the World Trade Organization. But blowing up the present trade agreements by saying things like Vice President Pence said last week to Canada and Mexico that the NAFTA agreement should be revisited every five years is insulting, duplicitous and lacking in good faith. So last Friday, to heap more chaos on the NAFTA negotiations POTUS says he is thinking of just pulling out of NAFTA completely. Welcome to a POTUS caused trade war, we call The Trump Trade War (TTW), as history books will likely record.

Prime Minister Trudeau of Canada has condemned the way the US administration has been treating a valued partner calling the actions “frankly insulting”, and in return he receives more trumped (pun intended) up national threats. He continued in an NBC interview:

“The idea that the Canadian steel that’s in military, military vehicles in the United States, the Canadian aluminum that makes your, your fighter jets is somehow now a threat?” Trudeau declared. “Our soldiers who had fought and died together on the beaches of World War II… and the mountains of Afghanistan, and have stood shoulder to shoulder in some of the most difficult places in the world, that are always there for each other, somehow — this is insulting to them.” Maybe our POTUS doesn’t understand that dying for a common cause is a higher value than provoking, bullying and intimidation to make an extra short term buck.

EU ministers are confused and upset at being grouped in with China in steel and aluminum tariffs. The United Kingdom, France, Germany, Mexico, Canada, Turkey and Japan have either announced or launched retaliatory tariffs on US goods and are reviving trading alliances that the US has abandoned like the TTP (Trans Pacific Partnership).

Sources: The Wall Street Journal, The Daily Shot – 6/4/18

The TPP non – US nations are in a dialog with China who is excited about filling the role the US once occupied. Experts note the long term effects and loss in business for the U.S., Adam Posen, president of the Peterson Institute for International Economics observed, “It will be hard to establish trust in the U.S. again, and all the uncertainty will drive down investment and productivity.”

US businesses are busy trying to minimize the damage to their export revenue streams,. Farmers in the midwest have already found that China has cancelled some sorghum shipments causing ships to be turned back, as the Chinese are making deals with Russia for agricultural goods. American businesses are being cut out of customer contracts now, resulting in lost business that will be extremely difficult to get back once new suppliers are in place. Still incredibly, the White House trade team blows up the present world-wide trade framework replacing it with nothing, which results in uncontrolled reprisals and chaos. Seems like economic missiles have been launched and attacked nations are sending economic missiles back (sounds like a trade war to us, the TTW (Trump Trade War).

Next Steps:

To begin, our political leaders need to stop being invisible as the world trade fabric unravels. Next Congressional leaders need to bring all key trade factions, business and trade representatives and develop an alternative to the destructive protectionist policy now being implemented. Sound trade policy based on win – win negotiations, fair agreements, protections for labor, working within the WTO, and legal order will win over allies and concessions from adversaries. The GOP administration needs to stop going it alone, and work with our allies, build consensus, and make improvements in the present painstakingly developed agreements over the past 70 years. Over 1100 economists, the US Chamber of Commerce and world leaders have condemned the declared TTW which needs to end now.

1100 Economists Predict Trade War Disaster

By Patrick Hill

On May 7, 2018

In Protectionism, Trade, US - China Trade

Image: knowledge.wharton.upenn.edu

The economist group letter to President Trump quotes passages from a 1930 letter that was ignored by government leaders at the time leading to a trade war and the Great Depression, many economists believe.

“Much has changed since 1930 — for example, trade is now significantly more important to our economy — but the fundamental economic principles as explained at the time have not”, the economists declared including last year’s Nobel winner Richard Thaler and former George H.W. Bush economic advisor Gregory Mankiw. Economists in 1930 advised against the Smoot – Hawley act at the time causing a trade war and a disastrous economic downturn for all Americans.

The trade war with China has already begun as we noted in our April 23^rd blog the Chinese have not stood back waiting, they placed at 179 % tariff on sorghum shipped from the US causing China bound ships to reverse course. Soybean orders have been cut way back by the Chinese as well:

Sources: Bloomberg, The Wall Street Journal, The Daily Shot – 5/7/18

Corn contracts are in jeopardy as well in the Midwest as the Chinese threaten tariffs on those crops as well. Corn farmers are already facing increased competition from Brazil and other countries undercutting their prices.

The reality is the Trump Trade War is on! Companies and nations are already acting on the threats and in some cases the implemented tariffs that the present Administration has in a misguided manner put in place.

We do not understand why the White House is ignoring the lessons of history, their own constituents in the Farm Belt and 1100 economists in implementing a catastrophic policy that will hurt every American’s pocketbook and many of our foreign allies.

Next Steps:

Our blog on April 2nd outlined two distinct factors that the Administration policy makers need to take into consideration:

“First, we need to understand how corporations, suppliers and customers respond to political uncertainty. Corporations either buyer or seller are seeking certainty around first of all selling their products and second at the highest price. Second, when our government starts picking winners and losers in the US economy and linking unconnected segments like sacrificing US agriculture for intellectual property theft by China from US high technology companies – then any economic shot is fair game. Just the threat of tariffs on certain goods is enough to cause customers, in this case Chinese buyers of US agriculture goods to find other lower cost suppliers. Once these buyers discover new suppliers with lower prices and similar quality they are likely not to switch back to US suppliers. Sales for US agriculture companies are likely to drop as a result.”

The solution is in working within the international frameworks of the WTO and our agreements with other nations to peacefully solve these economic issues. Sound economic policy is based on win-win agreements that put in place long term relationships that both sides can build their economic futures on. Plus, these are complex integrated trade issues and cannot be settled by blunt, prejudiced based ideas that history has proven are false.

Trade War Heats Up – China Slaps 179 % Tariff on US Sorghum

By Patrick Hill

On April 23, 2018

In Protectionism, Trade, US - China Trade

Image: asissentinel.com

Two grain ships filled with sorghum grain reversed course or headed to new destinations as China announced last week that they would require a 179 % deposit on the commodity.

Image: The Ship RB Eden Turning – Bloomberg – 4/20/18

US farmers shipped about $1 billion per year over the past two years of sorghum to China according to the Wall Street Journal. China is specifically targeting Trump states to make the point that a tit for tat trade war will end badly for US producers.

As other countries mount their own tariffs to US goods, and the US slaps tariffs on imported goods prices will go up. When prices go up, inflation increases causing interest rates to rise, which means that interest rates rise on credit cards to mortgages. Every consumer has some debt and the inflation wave will crash through the US financial system, ending the 2^nd longest economic growth period since WWII – though the economy has helped the top 20 % the most versus the 80 % in the working class.

Next steps:

As we have noted previously, business leaders are already making decisions and calculations like turning ships around. The Administration’s announcement and follow through on steel aluminum and lumber have distorted markets artificially causing increased prices and supply disruptions. Our leaders need to stop this bullying approach toward our trade partners, use international forums and work within our trade alliances to settle trade issues. Starting a trade war will cause everyone to lose money, jobs and trigger an economic downturn. The working class will be hurt the most, as they have the least amount of money saved and are usually the first to be fired in any falling economy.

China Retaliates in Trump Trade Battle

By Patrick Hill

On April 2, 2018

In Protectionism, Trade, US - China Trade

Image: asiafinancialpublishing.com

China announced yesterday they will be placing tariffs on 128 American goods for a total of $3 billion dollars in response to the Trump administration tariffs of 25 % on steel and 10 % on aluminum. The situation is posed to escalate as the President is expected to announce $60 billion of new tariffs on Chinese imports this week.

The US agriculture industry is reeling from increased competition from overseas countries like Brazil and now the administration is throwing a trade war into the mix. Farmers are perplexed as to how to navigate these new trade waters.

Source: US Department of Agriculture, The Wall Street Journal – 4/2/18

The US agriculture industry is one of the bright spots in US exports accounting for $140.5 billion in exports for 2017 according to the US Department of Agriculture. China receives about $22 billion of US exports last year in pork, and meat products. While the $3 billion in tariffs is not large it maybe just an opening round in the economic shots being fired by the US and China.

While some industry analysts look at just the dollar amounts involved we see a very disturbing trend in the tenor of the conduct of this trade conflict. This administration has distinguished itself by being bullying, intimidating, impulsive, vengeful and unpredictable – not good traits for a positive trade negotiation outcome.

Next Steps:

First, we need to understand how corporations, suppliers and customers respond to political uncertainty. Corporations either buyer or seller are seeking certainty around first of all selling their products and second at the highest price. Second, when our government starts picking winners and losers in the US economy and linking unconnected segments like sacrificing US agriculture for intellectual property theft by China from US high technology companies – then any economic shot is fair game. Just the threat of tariffs on certain goods is enough to cause customers, in this case Chinese buyers of US agriculture goods to find other lower cost suppliers. Once these buyers discover new suppliers with lower prices and similar quality they are likely not to switch back to US suppliers. Sales for US agriculture companies are likely to drop as a result.

We have said in our Insight Byte of March 6th that starting a trade war linking disconnected parts of the economy, not using international bodies like the World Trade Organization will just lead to lose – lose economics for global corporations and consumers. Lost jobs will result, economic recession or depression will spiral downward and it will take years to recover. Sound, research based trade policies based on win-win partnerships are the only way to turn this situation around. This administration has opened an economic Pandora’s box that it will not be able to close.