A Contrarian Take on the Trade War

Last year, the United States imposed a 10% tariff on $200B worth of Chinese goods with a 25% tariff scheduled to take effect at the end of 2018 [1]. In December, President Trump and President Xi Jinping announced a temporary reprieve, postponing further escalations for another 90 days [2]. By all accounts, both sides need a deal. China’s economy is slowing down much faster than expected, and there are growing concerns about the impact of the government shutdown. Both sides show willingness to deal, with China’s Vice Premier scheduled to meet with US Trade Rep Lightzhier and Treasury Secretary Mnuchin later this month [3].

Despite public overtures, Chinese concessions, and a need on both sides, we should be skeptical. The wildcard remains, and has always been, President Trump. He needs a win, badly. 51% of the American public blames him for the shutdown [4]. His approval ratings, though declining, remain stuck between 40%-44%. On the surface, one might think this statistic is meaningless. Trump won the 2016 election with historic disapproval numbers and he doesn’t need much more than ~44% to win re-election due to his strengths in the electoral college. However, there are emerging signs of weakness. White voters without a college degree, a core constituency also concentrated in swing states, are at their lowest levels. His approval rating among this group has fallen 6% [5].

Taking a tough stance on China remains one of the few ways to regain the support of this demographic. Anti-trade, anti-China, and anti-Mexico rhetoric helped Trump win these voters, and it’s likely that he’ll use it again it to win them back. The implication is worrying: Trump is willing to throw negotiations with the Chinese to look tough, save face, and show that he’s standing up for one of his campaign promises. If he meets the Chinese halfway, he scores economic and political wins but not the wins he needs to regain the support of his base. Trump would rather have a 42% approval rating and 90% with his base than a 45% approval rating and less support with the base. The base shows up to vote.

If Trump pursues this approach, financial markets will plummet. It’ll erode one of Trump’s core messages for re-election: “The stock market is doing well because of me.” At the end of the day, none of that matters for Trump. He cares about winning, no matter what the cost. Unfortunately, he’s running out of options. Taking a hardline stance on China is one of the few moves left.

Sources

[1] https://www.cnbc.com/2018/09/17/trump-puts-new-tariffs-on-china-as-trade-war-escalates.html

[2] https://www.bloomberg.com/news/articles/2018-12-13/white-house-said-to-officially-delay-china-tariff-hike-to-march

[3] https://www.politico.com/story/2019/01/15/liu-he-washington-trade-talks-1084246

https://www.cnbc.com/2019/01/17/trump-loses-support-among-core-voters-as-the-shutdown-drags-on-polls.html

[4] https://www.reuters.com/article/us-usa-shutdown-poll/half-of-americans-fault-trump-for-shutdown-despite-his-blaming-democrats-poll-idUSKCN1P92QV

[5] https://www.cnbc.com/2018/09/17/trump-puts-new-tariffs-on-china-as-trade-war-escalates.html


So, what do you think ?