Among the first casualties of the Trump trade war on China was the American agricultural industry. With US exports of soybeans losing their substantial market share in China due to reciprocal tariffs from Beijing, the US government continues to subsidise once profitable domestic farmers whose soybeans and other crops are currently rotting in vast storehouses. And yet Donald Trump’s continued insistence that he remains popular among middle-American farmers in spite of taking away their profitable Chinese sales and replacing them with subsidies was always meant to divert attention towards the stated aim of the trade war – the security and expansion of US industrial jobs.
Throughout the first three quarters of 2018, signs were hopeful that the trade war would not have a big impact on the American economy as employment numbers remained far better than in the Obama years while the stock markets remained bullish. By October however, things had begun to change. International shipping companies had begun warning of the reality of partially filled containers becoming an increasingly common sight at some of America’s busiest ports. Yet these warnings were merely a harbinger of what was to come.
By the end of the third quarter of 2018, China had actually increased its trading surplus with the United States. Yet 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. Yet even beyond the tech stocks that are prone to overheating, some of America’s industrial leaders have been feeling the strain in recent weeks and months.
Among some of America’s largest corporations that have been hit hard by the rising cost of materials supplied by China have been Caterpillar and Boeing. Shares in both companies took a substantial hit in October 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.
Yet while the “October surprise” of a perfect storm of tech and industrial stock market nosedives were being explained away by supporters of the trade war, the boardrooms of America’s biggest car makers, General Motors and Ford were finalising plans to cut thousands of American jobs. Historically, the American car industry has been a barometer for the general health of heavy industry in the US. While it is true that in recent decades the US arms and related aerospace industries have been more consistent than the automotive industry, since much of what General Motors and Ford make are mass produced and consequently deeply familiar consumer products, there is never the less a lot riding on the success of such companies. This is why General Motors was unceremoniously bailed out by the US government when the company faced potential collapse after the Great Recession of 2008.
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. The announcement from Ford is expected before Christmas and may be even more devastating than the news coming from General Motors.
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.
The massive job cuts and substantial factory closures at General Motors prove the following about the trade war:
–The increased cost of Chinese goods used to manufacture finished products in the United States kills jobs and industrial productivity in America
–When US industrial giants are cut off from the Chinese market they cut production starting in the US rather than in their Chinese factories that are necessarily immune from reciprocal tariffs
–As trade wars progress, the price of goods on US shelves continues to increase while the disposable income of many American workers simultaneously dries up
–When it comes to trade, China’s falling Renminbi has actually cancelled out much of the effects of US tariffs on Chinese exporters to North America while inversely, a strong US Dollar has the opposite effect on American industrial exporters
While these facts are not novel, very recent events have transformed all of them from theoretical truisms to real life consequences of the trade war. The possibility of entire industrial regions of the American Midwest and Ohio in particular facing economic recession is now the reality staring thousands of people directly in the face. This is the case as multiple medium and small businesses in General Motors factory towns may now lose their customer base as factories close, workers leave or are forced onto welfare, while local companies supplying the factories lose their main source of income. Yet the pessimism that the US trade war has brought to mainstreet USA is not being felt in China.
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.
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.
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.
When earlier this month, Trump tweeted that he thinks a trade deal with China is possible, US markets reacted as bullishly as one would expect. Since then, US officials have sent multiple mixed signals to China and indeed to the US private sector, while a recent US Naval provocation in the Taiwan Strait is clearly a sign of ill-will but also one of desperation after recent local elections in Taiwan saw the stridently anti-Beijing Democratic Progressive Party (DPP) lose and lose badly.
While Chinese officials have remained cautious when it comes to expressing optimism about President Xi’s forthcoming talks with Trump in Argentina, the fact of the matter is that one of the biggest complaints from American “economic nationalists” has been that it is not easy to get US goods into the Chinese market – something which incidentally hasn’t been particularly true for some time. That being said, China’s accelerated opening of its markets to imports from around the world is tailor made for US producers looking to sell their products in the world’s largest national market. In fact, the longer the trade war goes on, the more other producers including those from the European Union will have an advantage over US manufacturers in China.
Apart from China signing a deal that opens its markets to the US while allowing the US to put tariffs up on more Chinese goods (something that no sane nation would stand for), China is already proposing (and has done so for well over a year) what the US itself claims it wants – open access to China’s growing market. Therefore, the pragmatic thing for Trump to do is end the trade war when he meets with Xi. Meanwhile, China is happy for Trump to pretend that his loss in the trade war was somehow the victory he said would be “easy” to achieve as China cares about results rather than grandiose rhetoric.
China’s approach to trade is grounded in reason, pragmatism and long term thinking. Yet America’s trade war has self-evidently been guided by emotion, flippancy, childishness and a basic misunderstanding of America’s own economic needs. The time to end the trade war is now, but unless America gets rational and gets rational quickly, the closure of the General Motors plants will represent the future of American industrial decline rather than an unfortunate casualty of a trade war that has hurt all sides while hurting American workers, companies and consumers most of all.