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July 19, 2018

Who's Winning The 'Trade War'?

By George Yacik , INO.com

Just how crazy is Donald Trump?
Back at the beginning of March, the president famously tweeted:
“When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win. Example, when we are down $100 billion with a certain country and they get cute, don’t trade anymore-we win big. It’s easy!”
- President Donald Trump
You probably don’t remember what the exact reaction to that was, but you can probably guess it involved hoots of derisive laughter. After all, the idea of the president of the United States upsetting the world apple cart by supposedly starting a trade war with China and our biggest trade partners and closest allies was the height of lunacy.
But who’s laughing now?
Since then, the Chinese stock market has been in practical freefall, the dollar is soaring, U.S. stocks have pretty much outperformed other major countries, and long-term U.S. Treasury yields have dropped fairly sharply.
In the first half of this year, the Shanghai composite index, the main equity index tracking mainland Chinese stocks, dropped nearly 14% in local currency terms, including more than 10% in the second quarter. By comparison, the S&P 500 was up 1.7% in the first half, excluding dividends, and up 2.9% in Q2. NASDAQ was up, even more, 8.8% for the half and 6.3% for the quarter.
Meanwhile, the dollar was up 5.5% against both the Chinese renminbi and the euro in the second quarter, 4.2% against the yen, and 6.1% against the British pound.
And of course, long-term Treasury yields are down well below their earlier peaks. The yield on the benchmark 10-year note ended the half at 2.86%, down 27 basis points from its mid-May peak of 3.11%, and the 30-year bond ended June at 2.99%, down from 3.25%.
This wasn’t supposed to happen. After all, if Trump started a trade war, it could only end badly for everyone, worst of all for America, or so we were told. Yet the U.S., as measured by some important financial benchmarks, isn’t doing so badly, while the rest of the world is suffering. Of course, the argument might be made that if Trump hadn’t started this mess for no apparent reason, everything would be a lot better, with all of the world’s stock markets rising as before. But we don’t know that.
Maybe Trump was on to something after all. As Jim Cramer commented on CNBC last week: “We simply, as a people, seem to be united that the president's position is wrong. I hear more of that on TV than I hear reality. I think that there are a lot of people [who say], ‘Thank you for standing up for us.’”
Certainly, the markets have overreacted to just about every utterance or tweet by Trump – and the responding rejoinders by China, Canada, the European Union, et al. – since this debacle began, rather than treating them as the negotiating positions and tactics that they are. It’s clear that no matter how many times we’ve been told to read Trump’s 1987 bestseller, The Art of the Deal if we want to get inside the president’s head and learn how he thinks, it doesn’t seem that many people actually have. Perhaps they should.
(It’s actually a pretty good book, even if you read it just for the entertainment value. But as the book shows, Trump seems to operate the same way today that he did more than 30 years ago, so shame on you if anything he does takes you by surprise).
The Financial Times, not known for being particularly friendly to Trump (it’s not), astutely noted back in late March that “there is some truth to the observation that in a trade war, deficit countries [like the U.S.] hold an advantage over those with trade surpluses [like China]. China’s trade surplus swells its economy each year, while net imports subtract from U.S. growth. From this perspective, economists say Mr. Trump is correct that he has less to fear from a decrease in trade with China than President Xi Jinping.”
“In principle, a trade war is something that deficit countries with diversified economies should win, and surplus countries always lose,” added Michael Pettis, a finance professor at Peking University’s Guanghua School of Management. “So it’s not really an even battle.”
So far, if their respective stock market and currency performance is any indicator, that’s proven to be the case.
Perhaps many of us need to get over the mental hump that everything Trump does, especially in the economic and financial sphere, is bad, and everything our adversaries and rivals do must, therefore, be good. So far, the major financial benchmarks tell a completely different story.
Courtesy of George Yacik, INO.com
The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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