Even Trump recently tweeted, “The US economy is soooo good, perhaps the best in our country's history. . .” Of course that isn't accurate. Yet business profits are doing well for the top economic 40% of Americans. Plus, the (massaged) unemployment is low and the stock market is up. So why does Trump want to potentially sabotage it with a trade war?
Many American firms are doing very well in China.
China's 2001 inclusion in the World Trade Organization (WTO) has been a boon to many American companies.
From then until 2017, U.S. exports to China rose by 580%, while our exports to the rest of the world were up by only 100%. This has opened opportunities for many publicly listed American companies. General Motors sold more than 4 million vehicles in China last year, marking the sixth consecutive year in which China was a larger retail market than the U.S. for GM.
China contributes 18% of Apple's revenue in the third quarter of 2018.
Nike shoe sales in China rose 31% year over year during the most recent quarter and accounted for about 16% of its global shoe revenue.
And China contributes roughly 15% of global earnings for firms such as Nvidia, Dolby and Tesla.
Trump‘s economic advisor, Larry Kudlow, sneakily stated that imports from China led to 2.4 million U.S. job losses. The truth is those jobs were lost over a more than 10-year period. Another study instead found that U.S. exports to China directly and indirectly supported 1.8 million new jobs in 2015 alone.
While some American companies are blocked from the Chinese market, many are very profitable there. The American Chamber of Commerce in Shanghai represents 1,500 companies, and their latest member survey found that over three-quarters of U.S. firms in China were profitable last year, the same share as in 2016. Nearly 58% of companies reported higher revenue growth in China than globally.
It is worth noting that the value, in dollar terms, of retail spending in China was equal to 90% of U.S. retail spending last year, up from 27% a decade ago. Within a few years, consumer spending in China will be greater than that in the U.S.
If we start a trade war with China, Beijing will most likely retaliate by shutting American companies out of their market. Our stock markets in many economic sectors may reverse course as a result.
A trade war with China will inflict serious pain on American workers, farmers, and family businesses.
Trade and labor deals with China and other emerging economies has helped American families stretch their increasingly tight budgets. Consumer prices for personal computers, for example, declined 96% between 1997 and 2016. A tariff on any imports is effectively a tax on American consumers who buy those goods.
If Trump blusters his way through with his trade war, the prices of everything from mobile phones (80% of imports came from China last year) and laptops (93%) to Christmas ornaments (94%) and toys (88%) will rise.
American jobs will suffer from Trump’s trade war.
Take Boeing as an example. The multi-state jobs company is America's largest exporter, and China is its largest market. The company expects China's domestic and international air travel to grow at an average annual rate of 7.6% over the next 10 years. Boeing employs more than 50,000 factory workers and 45,000 engineers across all 50 states, and supports an additional 1.3 million supplier-related jobs in the U.S. Some of those jobs would be at risk if China responds to a trade war by instructing its airlines to buy more from Europe's Airbus and less from Boeing.
Apple, which says it is the largest U.S. corporate taxpayer, is another example. Most of its products undergo final assembly in China, the company said in a recent letter to the Trump administration “Every Apple product contains parts or materials from the U.S. and reflects the labor of 2 million U.S. workers across all 50 states.”
American farmers and small manufacturers will be hurt economically
China is our largest overseas market for agricultural goods. About one-third of the U.S. soybean crop is sold to China, which would force China to cut its US purchases and buy more from Brazil and Argentina.
The global supply chain is also critical to small firms that manufacture goods in the U.S., and China is a key supplier. A prolonged trade war would simply accelerate the dispersal of that supply chain from China to other Asian countries and would not result in production and assembly of those goods moving to the U.S.
New taxes on those components will instead lead to a mix of lower profits and higher final goods prices in the U.S., as well as layoffs.
China is less and less trade-dependent, so a trade war is not effective leverage over China's increasingly domestic-driven economy, so attempting to attack its exports will not inflict much pain.
Specifically, global exports today account for just 2% of China's GDP, down from a peak of 9% in 2007. In contrast, domestic consumption in China now accounts for more than two-thirds of China's economic growth and more than half of its GDP.
Last year, Chinese exports to the U.S. accounted for only 19% of total Chinese exports, limiting significantly the impact of new tariffs applied only by the U.S.
Hence, much of the impact of new U.S. import taxes (tariffs) will not be borne by Chinese companies; about two-thirds of the 25 largest exporting companies based in China are foreign-owned. Moreover, China’s Xi government will undoubtedly step in to provide financial aid to companies that are hurt by the Trump tariffs.
With fiscal revenue up more than 10% year over year during the first eight months of 2017—the fastest growth rate in seven years— Beijing has the resources, as well as the political will, to subsidize its exporters, just as it did a decade ago during the Global Financial Crisis.
The Chinese economy is relatively healthy
In August of 2017, Trump’s economic advisor Larry Kudlow stated the lie that the Chinese economy “looks terrible” and “business investment is just collapsing,” suggesting that this puts pressure on Xi to give in to U.S. demands. This comment is nothing more than Trump administration false information to justify his trade war.
Yes, Chinese stock market is weaker than it was a year ago, with the price of the Shanghai Composite Stock Index down 19% year to date, but earnings growth for larger industrial firms (including many not listed on a stock exchange) remains very healthy.
Chinese Industrial profits rose 17% year over year during the first few months of 2018, an impressive pace given that earnings rose 21% during the same period just last year. Profit margins are at their highest levels in eight years. Manufacturing investment, far from collapsing, is up 7.5% this year, compared to 4.5% during 2017.
Of course China is growing more slowly, on a year-over-year basis, as the economy matures and because the economic base has become very large. And policymakers in Beijing do face significant challenges, such as high debt levels and a weak social safety net.
But the macro economic numbers in China remain quite strong. Inflation-adjusted (real) retail sales rose 7.4% during the first eight months of this year in China, compared to a 2.9% growth rate in the U.S. (Online sales of goods in China rose 28%.) Real household income rose 6.6% in China for the first half of 2018, vs. 2.1% in the U.S.
Over the last 10 years, real per capita income rose 123% in China, compared to 9% growth in the U.S. We should not start a trade war based on the mistaken belief that we face an economically weak opponent.
In 2017, China accounted for 31% of global economic growth, compared to a 9% share for the U.S.
Overall these numbers indicate that a healthy Chinese economy is also a good thing for the United States and the global economy.
(Economic data borrowed from Matthews Asia Investments, an independent mutual fund company)