February 2020 Volume 2

ECONOMIC UPDATE

FIA Quick Read Economic Update By Christopher Kuehl, Ph.D.

Now that there is a truce, will there be much change? Thus far the future indicators say no. The Chinese will not easily recapture markets lost to other nations but if the total landed cost of a product is lower than the competition again, the US consumer will see it in their stores again. The US farmer was hit hardest by Chinese retaliatory tariffs and many expected an immediate reaction to the truce as far as soybean prices but they have barely budged as many remain skeptical that China will really buy more and besides the US now exports more soybeans and other farm outputs to other nations – trade flows like water after all. Finally, the growth in China has dipped to levels not seen in almost 30 years. The major problem has been the trade war with the US and the subsequent reduction in export activity but there have been internal issues as well.The growth rate is now at 6.1% and that is half what it was just a few years ago. The government is now attempting all manner of stimulus plans but they are not expected to have a major impact as long as the export sector is compromised. While this trade deal will take some of the pressure off, it will do nothing to address the issues of consumer spending or the issues in their banking system. Political Risks of a Trade Deal with China The battle between the US and China over trade has always been about far more than trade. It has always been highly politicized with implications for both Trump and Xi when it comes to domestic politics. The relationship between the US and China is perhaps the most complex in the world today. In almost every respect the two countries are enemies – not just rivals. Their military is pointed at the US and its allies and the US devotes a significant part of its military to countering Chinese moves. We have flashpoint conflicts over Taiwan, North Korea, Tibet, the Uighurs, South China Sea and the two nations support opposite sides in conflicts all over the world. Analysis: China is not popular in the US as far as the traditional Trump base is concerned and it is not popular with many within the Democratic Party either. It is the nation blamed for the loss of millions of factory jobs – whether that is exactly true or not. It is clear that jobs once done in the US shifted to China as companies moved or changed how they sourced. Many detest China for its persecution of religious groups and people and for their human rights violations. Consumers get angry at the shoddy and dangerous merchandise foisted on the US. The long and the short of it has been that opposing China allows US politicians to score points with many voters. Now that there is a deal that voter expects to see China change and expects things to be different and if they are not there will be frustration with the US political leaders who made that deal.

Will the Trade Truce with China Make a Difference? Now that the US and China have seemingly called a truce all eyes have shifted to a more monitoring position – can the Chinese really live up to their promises. Given the reaction of the business and economic community it seems there are many skeptics. The deal looks pretty good for the US on paper as it calls for the purchase of billions of dollars’ worth of everything from farm goods to machines and other commodities. There is just one major problem. The Chinese economy doesn’t appear to be in the best of shape and that is going to affect their level of demand regardless of the political position of the US and China. The economy is now growing at the slowest pace it has seen in over 40 years and that will affect every decision the country makes as far as consumption and even production. For that matter, did the trade war make much of a difference? There have been many theories and discussions regarding why nations engage in trade with one another. Some of the rationale is easy – when a nation lacks something it needs it will buy it fromanother but there is very little the US needs that can’t be provided for internally and the vast majority of the trade in the world is between nations that are buying and selling each other the same item. Japan makes cars and so does the US and we buy each other’s cars. Trade has been compared to flowing water – it finds the path of least resistance. The consumer buys what is desired at the price they are willing or able to pay and rarely care much about anything else. Analysis: The expectation was that a trade war between the US and China would have an immediate and near catastrophic impact on the consumer in the US. How could it not? The US imports billions of dollars of goods from China every year – our stores have been chock full of “made in China” for decades. By the same token we sold China billions of dollars’ worth of food and equipment and parts. There was indeed some reaction but nothing close to what had been expected. Why? There are really no simplistic answers as each product has its own set of demand and supply realities, but in general the reason there was less impact than expected is that trade flows like water. As product from China became more expensive the supplier to the US consumer changed. Few shoppers pay the least attention to where their purchases come from and few noticed that lots more of these items were coming from Vietnam, Sri Lanka, Brazil, India and a host of other nations. Many products continued to come from China but only after a stop in Malaysia or Taiwan or Mexico. The consumer noticed none of this. After two years of tariffs and trade wars and radical attempts to reduce the US trade deficit it remains at $779 billion (roughly 1.5 trillion in exports and $2.2 trillion in imports). The US has narrowed that gap a little but the reality is that US consumers want those imported goods for a variety of reasons.

FIA MAGAZINE | FEBRUARY 2020 36