Trump’s Trade War Backfires as General Motors Closes Four US Factories

The justification for every trade war in history is that without erecting tariff barriers, jobs will be transferred abroad. What such a simplistic analysis overlooks is that reciprocal trade agreements allow for existing factories to expand their global market share, thus ensuring the creation of more jobs rather than fewer. Today, Chinese drivers are eager customers for all varieties of cars and General Motors vehicles are no strangers to Chinese streets. This is so true that the flagship brand of General Motors, Cadillac sells more vehicles in China than anywhere else in the world with some special models of Cadillac being produced exclusively for the substantial Chinese market. Yet in the midst of the trade war, General Motors has taken the decision to close four factories in the United States and one in neighbouring Canada. According to further reports, Ford plans to cut potentially thousands of US jobs after the company lost one billion Dollars since the onset of the current trade war.

General Motors has justified the closure of the North American factories based on the fact that the models made in the soon to be shut plants are going to be discontinued from future model years. But while the automaker alluded to the fact that some of the factories may be re-purposed for other vehicles, Donald Trump has already expressed his anger at America’s biggest car maker for shutting down plants in crucial US industrial regions including in the politically crucial state of Ohio.

At a time when China is opening up its own markets to more imports than at any time in the history of the People’s Republic, companies like Cadillac could have seen their market share in China go even higher as buying foreign products becomes ever cheaper and easier for the average Chinese consumer. As such, some of the soon to be shut factories could have been re-purposed to build entire vehicles or important components up to and including engines and transmissions for vehicles destined for the Chinese market.

Instead, the trade war which has seen China place reciprocal tariffs on the United States against its own wishes has led to US companies growing hesitant regarding the production of goods destined for China on US soil. In this sense, the closure of several General Motors factories is just one stark example of how the short term thinking behind trade wars is not only bad for consumers in the US who will now face rising prices of imported goods and manufactures like General Motors that even before the job cuts lowered growth forecasts due to rising steel costs as a result of the trade war, but such nationalistic economic policies are also equally unhealthy for once stable and high paying industrial jobs.

As China now represents the world’s largest single national market in terms of both purchasing power parity (PPP) and in terms of the sheer number of adult consumers, it would behove any country looking to create more domestic industrial jobs to promote its products in China. The long and short of the reality is that the more popular a foreign product becomes in China, the more demand there will be for the product which will necessitate the need for more production while also driving up the cost per unit of a much sought after item. Under the kinds of reciprocal agreements China is signing with partners from throughout the world, it would have been perfectly possible for General Motors to open up new plants in the US to produce items that will eventually go into cars on Chinese roads.

With Donald Trump’s meeting with Chinese President Xi Jinping just days away, there ought to be more impetus than ever for the US President to strike a modern, pragmatic win-win trading agreement that will allow the US to more easily get its goods into China’s increasingly wide open market. In this sense, the Chinese consumer can help to save US jobs so long as the US government gets out of the way.

Below is Eurasia Future’s full report on the forthcoming meeting between Xi Jinping and Donald Trump at the G20 summit in Argentina:

October had seen US stocks take several prominent nosedives as the effects of the US trade war with China began to take their effect not just on emerging markets but also on the US tech, construction and manufacturing sectors. While at the end of the third quarter of 2018, China had actually increased its trading surplus with the United States, for a US economy whose health is typically determined by confidence in the stock market, recent trends that have seen plunging numbers of the Dow Jones and Nasdaq have sent shockwaves through a US economy that saw stocks overheat to record highs earlier this year. The fact that American tech stocks in particular have been leading the recent nosedive makes it all the more apparent that the Trump instigated trade war with China has shaken investor confidence in the US private sector.

On the first of November however, stocks in the US and throughout the world rebounded after Donald Trump Tweeted about a positive phone conversation he held with Chinese President Xi Jinping. According to the US President:

“Just had a long and very good conversation with President Xi Jinping of China. We talked about many subjects, with a heavy emphasis on Trade. Those discussions are moving along nicely with meetings being scheduled at the G-20 in Argentina. Also had good discussion on North Korea!”

The reversal of fortunes in global stock markets in the aftermath of Trump’s Tweet which at least hinted that there may be some rapprochement in the US instigated trade war with China, offers as clear an indication as any that negative domestic speculation in the US has a direct relationship to market anxiety stemming from the trade war with China.

Among some of America’s largest corporations that were hit hard in October due to the rising cost of materials supplied by China have been Caterpillar and Boeing. Shares in both companies took a substantial hit at the end of the third quarter of 2018 due to worries over rising costs derived from the tariffs placed on Chinese goods required by both companies in order to manufacture their products. Furthermore, as US tech companies are heavily reliant on Chinese materials, it is unsurprising that this sector has been hit particularly hard in terms of share prices. With Donald Trump implying that Chinese microchips used in American branded products could come under legal pressure from Washington based on un-evidenced and therefore inflammatory claims that the Chinese chips are “espionage” devices, there remains a privately held fear in the US tech sector that if cut off from both the Chinese industrial base and the lucrative Chinese market, products will become more expensive and global sales will fall dramatically as the trade war has hit both American and Chinese consumers of major American brands.

Thus as China’s trade with the wider world including the US reaches historic highs and while China’s model for a new era of economic openness has seen China become the leading global recipient of foreign direct investment (FDI), the fact of the matter is that after three quarters of an unrelenting US authored trade war, China’s economic fortunes have generally improved while for the US, after months of bull markets, reality is beginning to bite in a big way. The aggregate effect of the trade war through three quarters of the financial year makes it clear that while China and the US have an important economic relationship, the statistics show that the US remains more reliant on China than China is reliant on the US.

As Chinese sources revealed that it was Trump who instigated the phone conservation with Xi, it becomes increasingly clear that Trump has in fact listened to his own domestic private sector and may well be keen to at least partly put an end to the increasingly damaging trade war. The China People’s Daily further describes Xi’s position as offered during his phone call with the US President in the following way:

“In the telephone conversation held at the invitation of Trump, Xi said he is glad to talk with Trump over phone. And he also attaches importance to a good relationship with Trump.

Xi said he is willing to meet Trump during the G20 summit in Argentina and further exchange views on bilateral ties and other major issues.

Xi said both he and Trump have good visions for a healthy, stable development of the China-U.S. relations as well as expanding economic and trade cooperation, and they should make efforts to realise the wishes.

Xi noted in the conversation that China has repeatedly made clear its stance on bilateral ties, and hopes that both countries will promote a healthy, stable development of bilateral ties in accordance with the important consensuses reached between him and Trump.

The essence of the China-U.S. cooperation on economy and trade, said the Chinese president, is mutual benefits and win-win results.

The two sides have disagreed on trade issues for some time, Xi noted, saying that it has caused a negative impact on the relevant industries in both countries as well as on the global trade. This is not what China wants to see, said the Chinese president.

The upcoming CIIE has shown China’s willingness to increase import and further expand its opening-up, Xi said, adding that he is glad to see many U.S. companies enthusiastically participate in the event.

There were successful examples in the past that China and the United States solved their trade differences through coordinated cooperation, said Xi, urging the economic teams of the two countries to increase their contacts and conduct consultations over issues of mutual concern so as to reach an agreement which is acceptable for both sides”.

With all of this in mind, it is instructive to remember that China has long been vocal about wanting to end the trade war as ultimately the instability caused in emerging markets by US trade and monetary policy effects the purchasing power of the developing world which incidentally represents some of China’s most rapidly expanding export markets and Belt and Road partners. While Donald Trump has threatened further tariffs after November if China and the US cannot reach a deal, whether Trump is bluffing or merely saving face as his trade war has clearly backfired, the US stock markets have clearly reacted accordingly and they have not responded in a bullish fashion regarding Trump’s hostility towards China. Inversely, when Trump tones down his hostility towards China, the markets react in a commensurately positive way.

Therefore, when Trump and Chinese President Xi Jinping meet on the sidelines of the forthcoming G20 summit to be held in Buenos Aires starting on the 30th of November, the eyes of the global business community will be looking carefully. The fact of the matter is that if Trump and Xi can reach even a mild detente in the trade war, it is guaranteed that the US stock markets will respond with a positive uptick as investor confidence has been hit the hardest as a result of the trade war. Inversely, if no agreement of any kind is made, the correction to overheated US stocks may well continue into the new year.

Days prior to his phone call with Xi, Trump offered a typically ambiguous response to a question regarding his prognosis for the meeting at the G20. According to the US President,

“I think we will make a great deal with China, and it has to be great because they’ve drained our country”.

While the notion that China “drained” the US economy is somewhat laughable given that it is the trade war with China that has hit the share prices in major American companies, Trump’s prediction that a great deal will be made does give some indication that an end to the worst of the trade war may be in sight as it has never been the Chinese side that has insisted upon unrealistic terms for a settlement of the Washington instigated dispute – one that the US private sector has been largely opposed to from the start.

As China has long been ready to engage in constructive negotiations with the United States, Trump’s self-proclaimed business acumen will be tested less by China in the coming days than by his own private sector that is suffering the hardest from the effects of a needless trade war.

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