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China is now winning the trade war

Donald Trump has a major problem. He uses the stock market as a proxy for his own presidential prowess, but his trade war could put the gains seen since he won the Oval Office at risk.

China is now winning the trade war
Garry white employee

by
Garry White

in Features

03.09.2019

Many observers have noticed a pattern in the presidential announcements. Each time the market falls, he tweets some positive news on discussions with China to reverse its course. However, the effect of these market interventions is now starting to wane, resulting in the S&P 500 falling almost 4pc over August. Has the president now overstretched himself and put his own re-election at risk?

Markets participants have called these interventions the ‘Trump put’, because they act in a similar way to a put option which pays out when an asset price falls to a specific level. In derivative trading, a put option is a potentially valuable hedge if a bullish bet on an asset goes wrong. Unfortunately, as both Beijing and Washington dig in, it looks like the Trump put has now started to expire. 

Market observers have been fairly sanguine about the trade war because they believed that any meltdown in equity markets would moderate the president’s trade-war tactics. It really isn’t a secret that President Trump wants a buoyant stock market next year to help propel him back into the White House. This is why there is constant pressure on Jerome Powell to cut interest rates. The President has even asked in a tweet whether the Federal Reserve Chair was a bigger “enemy” than Chinese president Xi Jinping because he won’t do his bidding and slash rates to put rocket fuel under equity markets.  

Managing the market

One example of the Trump put was seen this week. Markets went into a tailspin last Friday after China said it would implement retaliatory tariffs on $75bn of imports from the US and the president responded in his usual petulant manner. President Trump tweeted that the US didn’t need China, and that he “hereby ordered” US companies to stop doing business with the country and bring manufacturing operations home.

But, over the weekend, he appears to grow concerned about the market response. On Monday, he tweeted that China had telephoned “our top people” on Sunday evening to “get back to the table” to restart negotiations. Markets bounced but, unfortunately, China denied that any such call actually took place. President Trump stretched the truth too far in this intervention and it is likely to mark the beginning of the end of the Trump put.

One other big mistake came on August 13. This was the day that tariffs on electronic products were delayed from September 1 to December 15, which President Trump said was to avoid hitting US shoppers this Christmas. The delayed tariffs were on goods that are substantially imported from China and include mobile phones, laptops, monitors, game consoles, some toys and LED lamps. This was a mistake for two main reasons.

Trump told the truth

The first was that it contradicted the president’s oft-repeated claim that it was China that paid the tariffs and not US consumers.  He also made a similar admission when he said that Apple chief executive Tim Cook “made a very compelling argument” that tariffs on China will hamper Apple’s ability to compete with Samsung. The second problem was that it underscored to the Chinese just how much the president gets upset about any fall in equity markets. It highlighted a major weakness.

China is now in a relatively good position. Key data indicates that the trade war is having a minimal impact on its economy. Recent trade data was better than expected, despite the elevated US tariffs.

Exports rose in July, defying expectations for a fall, while imports fell by less than predicted, indicating the economy remains resilient in the face of the US attacks. From January to July, China’s trade surplus with the US totalled $168.5bn. This is the outcome that Trump was keen to avoid and explains why Beijing is being pretty nonchalant in its attitude to the talks. Donald Trump has more to lose now than Beijing and he made this very clear in his tweeting pattern.   

Of course, the most sensible and bullish Trump put would be for the current administration to end the tariff campaign and sign a trade deal with China soon. However, if markets do start to fall, China may be happy to prolong the dispute and damage his re-election chances. It really does look now that China is now in pole positon in this protracted trade dispute.

A version of this article appeared in Friday’s Daily Telegraph.

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