It’s a Bear Christmas For US Stocks Due to The Anti-Chinese Trade War

Mixed signals regarding the state of trade negotiations between China and the United States continue to sink US stocks as a much desired pre-Christmas rally remains evasive. During a meeting before the World Trade Organisation (WTO), the Chinese and American envoys made statements which demonstrate that both countries continue to pursue trade from a largely incomparable basis. Chinese trade envoy Zhang Xiangchen accused the United State of “bringing back to life the ghost of unilateralism that has been dormant for decades“. Zhang further said that America’s reactionary trade policies do little more than “allow protectionism to be at large under pretext of national security“. America’s representative hit back by stating that China does not trade on a level playing field and has unfairly exploited WTO rules.

While Chinese statements opposing protectionism and US statements accusing China’s market socialist system of somehow being un-competitive in a global market are neither new nor novel, the fact that this airing of grievances has occurred in the midst of bilateral trade negotiations between Beijing and Washington has led to more pronounced pessimism on Wall Street.

Already, December has been something of a bear month for US stocks. According to Reuters,

“U.S. stocks are having their worst December performance in 16 years, weighed down by concerns ranging from trade talks to interest rates and a flattening treasury yield curve to uncertainty over the shape of Brexit.

The S&P 500 is down 5.8 percent so far this month and the Dow Jones Industrial Average is now more than 10 percent lower than its recent record closing high, joining the S&P and Nasdaq in what is known as correction territory”.

The likely forthcoming interest rate hikes from the US Federal Reserve indicate that maintaining low inflation is a priority over attempting to spurn on growth, thus adding further credence to a recent report from the Washington D.C. based Tax Foundation – a group that advocates on behalf of American tax payers. According to the Tax Foundation’s report, if the trade war continues, American households will be economically worse off in 2019 in terms of actual purchasing power while nearly 100,000 US jobs will be at risk. The report further states that the poorest working Americans and their dependants will be hit the hardest by the economic downturn.

Already, industrial jobs have come under threat from the trade war. The flimsy 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.

The decline in US industry also impacted other major industries outside of the crucial consumer car and truck industry.  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.

This comes on top of the substantial downturn in the fortunes of American farmers who are now being subsidised by the federal government so as to allow their crops to rot in storehouses after the trade war caused them to lose their once lucrative Chinese customer base that is not pivoting towards agricultural imports from nations that continue to engage in open trade relations with Beijing.

While Donald Trump has sold himself to the American public as a pro-business and pro-jobs President, the reality that is rapidly sinking in tells a different story. The US Chamber of Commerce, the wider American private sector and now the generally centre-right/pro-business Tax Foundation have all come out in opposition to the trade war. Likewise, multiple small and medium sized business federations and consumer rights groups have equally voiced their opposition to a trade war that in the imagination of some will miraculously avoid the onset of rising prices, the reality of fewer jobs, industrial decline and a race among businesses from multiple sectors to offshore key industries so as to maintain existing international trading partnerships that would have otherwise created jobs and economic growth in the United States.

With uncertainty looming due to the political crisis in France, the Brexit crisis in Europe more widely and inflationary trends in multiple emerging markets, the US can scarcely afford to further antagonise China. And yet the aforementioned realities along with arrogant statements from US Secretary of State Mike Pompeo regarding the human rights violations against Chinese national Meng Wanzhou combine to create a turgid atmosphere of hostility at a time when pragmatic diplomacy and economic realism is required.

In the trade war, the US has clearly bitten off more than it can chew, but it would appear that certain officials would prefer to choke, rather than call for the assistance of a Chinese doctor.

Comments are closed.