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What effect are the US-China trade wars having? (Macro Macchiato 10/06/19

We’re told by Those Who Know that the US-China trade wars are cutting global trade and economic growth. We should be Very Afraid. GDP forecasts are down and luminaries at the World Bank and the IMF are warning of slower global growth as a direct result of the trade spat.

But the economic data from both the US and China continue to defy the Cassandras.

The latest US jobs report showed 75,000 new jobs created in May, half of the expected rate, but US jobless data aren’t growing with unemployment in May holding steady at 4.6%. Wages in May grew by 3.1% overall and at 3.4% for non-supervisory workers. Despite wage growth and higher import costs, inflation is holding steady, with April’s index showing an annual 1.5% rise after 1.4% in March. The Dow Jones Industrial Average ended 2018 on 23,327.46 points. Last Friday it stood at 25,938.94 points, 11% up in six months. Admittedly this is in part because investors have moved out of bonds as the yield on T-bills has fallen following hints from the Fed that interest rates will have to come down to prevent recession. But the macro data don’t indicate any imminent recession. The inverted yield curve (lower short-term rates than long term rates on T-bills) has correctly indicated several past recessions, but its timing is off this year.

Maybe the tariff effect is visible in US port statistics? Actually, it isn’t. In March, the Port of Los Angeles reported its worst monthly volumes since March 2016, with import values down USD 2.67 Bn. Forbes Magazine wrote that “It was another sign that the U.S.-China trade war, with the 25% tariffs President Trump imposed on Chinese imports and retaliatory tariffs on U.S. exports, was having an effect.” In April, the Port of Los Angeles trade totalled $22.18 billion, a 12.8% increase, suggesting that the March data actually reflected the Lunar New Year holiday in China, when ship loadings fall seasonally, which cuts unloading volumes when the ships arrive in the US.

The Port of Oakland announced its volume data for the year to April last Friday. Throughput was up 4.8% year on year after a bumper 2018. 38% of Oakland’s business originates in China and it hasn’t slowed down this year. Oakland’s Maritime Director John Driscoll told American Shipper magazine, “We thought our numbers would go down because of the trade war. It could still happen, but it hasn’t so far.” Perhaps the trade war just hasn’t appeared in the data yet, as Mr Driscoll hints. Well, the trade war has been live for a year now and traders have had plenty of opportunity to price in further tariffs, so when will they show up in the trade and macro-economic data?

Perhaps the data from China give more support to the thesis that the trade war will cut global economic trade and GDP. According to today’s Wall Street Journal, “Economists expect China’s exports and imports to both have dropped 4% in May after declining 2.7% and rising 4% in April, respectively. Increased tariffs from the US and softening global demand should continue weighing on China’s exports in the coming months.” Today Xinhua news agency reported Chinese customs data for Jan-May 2018. China's foreign trade of goods rose 4.1% year on year in the first five months of this year to RMB 12.1 Tn (about USD 1.76 Tn). Exports increased 6.1% year on year to RMB 6.5 Tn during this period, while imports grew 1.8% to RMB 5.6 Tn. May trade rose 2.9% to RMB 2.59 Tn. Exports grew 7.7%, reaching RMB 1.43 Tn, while imports dropped 2.5%. So much for Forbes’ panel of forecasters. The doomsayers can take solace from the China-US trade data. This showed a year on year fall in trade of 9.6% to RMB 1.42 Tn. Presumably this fall will show up in the US data in the coming months.

The Chinese customs data also show that China’s largest trading partner 2019 so far is the EU, with bilateral trade volume up 11.7% from one year earlier to RMB 1.9 Tn. ASEAN nations’ bilateral trade with China is up 9.4% to RMB 1.63 Tn. Trade with countries participating in the Belt and Road Initiative totalled RMB 3.49 Tn, up 9% year on year, 4.9% faster than the overall pace and accounting for 28.8% of China's total trade volume, up 1.3% points from the same period last year. The country's private businesses reported faster trade growth in the first five months, with the trade volume increasing 11.1% to 5.02 trillion yuan. The amount accounted for 41.4% of the total trade volume in the period, up 2.6% year on year. The Shanghai Stock Exchange composite Index closed at 2,852.13 today, up 14% from 2,493.89 at the end of 2018.

Finally, the customs data show that China imported 205 Mn T of crude oil in Jan-May this year, up 7.7% year on year, plus 4.8 Mn T of refined products, up 3.7%. However, iron ore imports were down 5.2% to 424 Mn T and soybean imports were also down, by 12.2% to 31.75 Mn T.

The Take Away

China-US bilateral trade has clearly fallen this year, but US economic growth continues unabated and Chinese exporters have found new trade partners to compensate of the loss of their US customers. The US tariffs are in danger of becoming an irrelevance to their intended target. Meanwhile, if they do slow down US economic growth and undermine Americans’ prosperity, the tariffs will be exposed as a self-imposed economic wound. A century ago, an isolationist US contributed to a global recession. Standard economic theory encourages us to fear that it could happen again. But this time around, the world appears to be taking US isolationism in its stride. The intended victims are moving out of range of US fire, leaving Uncle Sam to shoot himself in the foot.

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