(What’s Left of) Our Economy: Why This Trade War Hasn’t Been “Easy to Win”

Tags

China, Hong Kong, Huawei, One Belt One Road, Taiwan, tariffs, Trade, trade war, Trump, Xi JInPing, {What's Left of) Our Economy

Friday’s U.S.-China trade war escalation leaves little doubt that I was wrong about the conflict in one major respect. So was President Trump.

Just as Mr. Trump was first unilaterally tariff-ing Chinese products in response to Beijing’s wide-ranging economic predation (which of course extended far beyond trade flows into intertwined investment and technology issues), I confidently stated that Beijing wasn’t about to risk antagonizing its most important market by far with any retaliatory moves. Indeed, although I didn’t agree with his near-blanket statement that “trade wars are good,” I was fully on board with his claim that they’re “easy to win” – or at least reasonably so.

China’s announcement yesterday of new tariffs on $75 billion worth of American goods in response to the most recent round of Trump trade levies was just the latest evidence that Chinese leader Xi Jinping in fact has little compunction about risking American official ire and even believes he might prevail.

Even so, the President and I have an excuse. Our mistake wasn’t maintaining that the bilateral economic balance of power didn’t overwhelmingly favor the United States. Just check out the new claim by the founder of Huawei that U.S. national security sanctions – which could cut the Chinese tech giant off from access to the  U.S.-brand semiconductors central to its products operations – has confronted this entity with a “life and death” crisis. Moreover, trade flows remain as grotesquely lopsided as ever, meaning that the export-heavy Chinese economy still remains much more dependent for adequate growth on selling to the United States than vice versa.

Instead, our mistake has been underestimating just what a delusional bonehead Xi is, and how he can’t seem to resist the temptation to overestimate China’s power and prospects. He’s clearly overreaching in his treatment of Hong Kong, in the process courting a global public opinion backlash that’s likely to dwarf that following the Tiananmen Square massacre of 1989 – and turn him into a rival and even replacement for President Trump himself as a worldwide punching bag. He’s clearly overreaching regarding Taiwan, even given Beijing’s longstanding view of the island as a renegade province and equally longstanding practice of threatening it militarily. As a result, the United States will be selling the Taiwanese armed forces $8 billion worth of advanced fighter jets. He’s also clearly overreaching in connection with his ballyhooed One Belt One Road global infrastructure project – which is increasingly being recognized as at best the biggest potential white elephant in world history and at worst an equally gargantuan engine of pollution and corruption.  (See, e.g., this post for a typically negative review.)

Even more noteworthy are the signs that Xi’s trade war overreaching is seriously damaging China’s own economy. Just a few of the recent signs: the lowest overall economic growth rate in 27 years; the worst industrial production growth (which includes mining and utilities as well as manufacturing) in 17 years; and all-time record official unemployment in China’s cities.

That last milestone is especially important, since keeping people at work is the top economic priority for China’s leaders. The reason: jobless Chinese workers could turn into politically restive Chinese workers, and pose big dangers to the employment status of Xi and the rest of the ruling Central Committee.

And surely more worrisome for Xi: He must know better than most that China’s official economic data strongly tend to overstate China’s economic performance. In other words, the domestic economic picture is likely even worse than Beijing is letting on.

Why then does Xi keep standing on his high horse? Of course, I have zero inside info. But the only answer that makes sense to me is that he and his colleagues have decided that if they can prick enough American economic fingers (whether among consumers or farmers or investors), the resulting complaints will be amplified through a deafening chorus of gloom-mongering from the staunchly anti-Trump Mainstream Media. Eventually, Americans could talk themselves into a recession that would ensure the election in 2020 of a much more pliable Democrat – chiefly, former Obama Vice President Joe Biden.

That’s not a crazy plan by any means, especially since the President is no slam dunk to win reelection. At the same time, it’s far from clear that Xi or whoever’s advising him on American politics are such whizzes on the subject. If they were, would China under his rule have acted belligerently enough on trade, national security, and human rights to have helped elect Mr. Trump in the first place?

Advertisements

Making News: On i24News Tonight Updating the Escalating Trade War!

Tags

China, Huawei, i24News, Making News, tech, tech war, Trade, trade war, Trump

I’m pleased to announce that I’m scheduled to return to the U.S.-Israeli TV network i24News tonight to analyze all the China trade war news that’s broken lately.  The network’s programs are normally available only to paying subscribers, but you can watch the segment, slated to start at 7:00 PM EST, if you sign up in time for a free trial at this link.

If that’s not possible, as soon as I get it, I’ll post a link that will enable you to watch a video of the appearance.

And keep checking in with RealityChek for news of upcoming media appearances and other developments.

Making News: On National Radio Tonight Updating the Trade and Tech Wars

Tags

China, Gordon G. Chang, Huawei, Making News, tariffs, tech, The John Batchelor Show, Trade, trade war, Trump

I’m pleased to announce that I’m scheduled to return to John Batchelor’s nationally syndicated radio show tonight.  The planned subjects:  both the latest twists and turns in the trade conflict between President Trump and China (which RealityChek readers were briefed on last week); and the latest developments in the bilateral “tech war” that’s revolving around Chinese telecom giant Huawei.

The segment is slated to begin at 10:15 PM EST, and by clicking here, you can listen on line to what’s sure to be a lively, informative discussion among John, co-host Gordon G. Chang, and me.  As usual, if you can’t make it, I’ll be posting a link to the podcast as soon as one’s available.

And keep checking in with RealityChek for news of upcoming media appearances and other developments.

(What’s Left of) Our Economy: Trump’s Latest China Tariff Moves – & Why They’re Mistaken

Tags

China, consumer goods, consumers, Hong Kong, inflation, producer goods, tariffs, Trade, trade war, Trump, Xi JInPing, {What's Left of) Our Economy

If you’re confused by President Trump’s latest China tariffs moves, don’t feel bad. They’re really confusing!

Much clearer is their main implication: Once more, the President has needlessly let China off the trade war hook – and significantly reduced the odds of U.S. success no matter how it’s defined.

To summarize the chain of announcements and decisions that have produced the present situation: As of August 1, in various stages, the United States had imposed 25 percent tariffs on $250 billion worth of goods imports from China based on the latest data. And on May 5, Mr. Trump threatened to place tariffs of 25 percent on the rest of China’s merchandise shipments to the United States (about $300 billion worth).

That announcement was seen as especially significant because the previous tariffs mainly hit what businesses and economist call “producer goods” or “intermediate goods.” They’re the parts, components, and materials that companies use to produce final products, including consumer products. As a result, even when they do lead to higher consumer prices, the role played by these duties is difficult for consumers (i.e., voters) to identify, much less complain about to the politicians responsible.

In addition, as I’ve frequently noted (e.g., here), tariffs on these producer goods often don’t lead to any inflation, or much inflation, at all, for a variety of reasons and combinations of reasons. In many instances, retailers and other businesses simply lack the needed pricing power. As a result, they often seek to persuade their entire supply chain to preserve market share by eating some or all of the higher prices and accepting lower profits. Alternatively, various parts of the supply chain – including the final customer – can try to offset tariff-induced price increases by boosting productivity. That’s actually good for the economy in the long run, as improved efficiency not only enables companies to absorb cost increases while maintaining and even increasing margins. Such better productivity tends to spur the development of new efficiency-enhancing products, services, and technologies – a great way to boost living standards in a healthy, sustainable way.

Yet the May Trump $300 billion threat – which stemmed from the President’s unhappiness with the lack of progress in the trade talks with China – would have finally hit most consumer goods imports. Therefore, it would have created the risk that shoppers would blame the President for any price increases they did encounter. Even worse, the timing of the threat practically ensured that these higher prices would start appearing just as holiday shopping heated up – or typically heats up.

In late June, however, after meeting with Chinese leader Xi Jinping at a global summit in Japan, Mr. Trump agreed to a trade truce and to hold off on the $300 billion threat. Two weeks later, though the threat was back on the table, according to a Trump tweet.

On August 1, following a new round of apparently unsuccessful trade negotiations and the President’s belief that China had broken a promise connect with the late June trade truce to buy more American farm products, Mr. Trump specified that ten percent tariffs on the $300 billion worth of consumer goods-dominated imports from China would begin on September 1. Just four days later, his administration announced another “hawkish” trade war decision – officially designating China as a country that manipulated its currency to gain trade advantages (by keeping its products artificially cheap and therefore making goods and services from trade competitors artificially expensive in comparison). At the same time, the currency decision by law doesn’t automatically result in new tariffs, although it could eventually bring about some other penalties.

And yesterday came the latest turnaround: Mr. Trump decided to postpone tariffs on an estimated $160 billion of the $300 billion from September 1 to December 15. Not coincidentally, as his remarks on benefiting holiday shoppers made clear, many of the items on the postponement list included particularly popular gift items like toys and smartphones.

In addition, tariffs on some $30 billion worth of imports from China would be lifted permanently (at least for now!). But new duties on some $110 billion worth of imports from China are at this point slated to go into effect at the beginning of next month, and this group, too, is dominated by consumer goods.

Commentators focusing on the postponed goods called the latest Trump move a cave to China spurred by the President’s fears of a falling stock market, weakening U.S. economy, and angry consumers. Others, pointing to the products that will be slapped with new levies, and to the continuation of previously announced tariffs, insisted that Mr. Trump was keeping considerable pressure on the Chinese.

I lean toward the former interpretation, for these reasons. First, there’s no sign that the President’s forbearance has won any concessions from China. Second, the tight Trump focus on appeasing holiday shoppers can only signal weakness to Beijing, and feed its hopes that it can prevail in the trade and broader economic conflict by waiting for the President to be replaced by a more conventional, more pliable chief executive in 2020. Third, the delay announcement came just before a batch of absolutely terrible economic data was released by China. And given Beijing’s history of publishing overly bullish figures, it’s a safe bet that its economy is even weaker than most recently indicated. Fourth, Xi Jinping is under pressure not only economically, but politically, due to the rising unrest in Hong Kong.

Fifth, it’s true that from the standpoint of China’s longer-term prospects, maintaining the tariffs on its producer goods matters crucially. For this category includes most of the high tech and other advanced manufactures that represent any economy’s hope for continued technological progress, and therefore faster, healthier growth and a stronger military. But the consumer goods matter politically – because since they’re largely labor-intensive in nature, they’re mass employers. And China’s dictators view high unemployment as a mortal danger to their rule.

Sixth, although it’s clear that U.S. investors hate the trade war, the President needs to remember that, however much he likes to tout the stock market as a barometer of his economic performance, these markets and the real economy are by no means identical. We’ll be getting some key economic data tomorrow, when the Federal Reserve releases its new report on industrial (including manufacturing) production. But so far, the manufacturing numbers have shown that, after a soft patch in the winter, both inflation-adjusted output and capital spending are trending upward again. So unless these and other upcoming data break notably from their most recent patterns, recession – and even further slowdown – predictions will keep looking far-fetched.

Importantly, none of the above analysis means that I’ve changed my view that no China trade deal acceptable for U.S. interests is possible because of insurmountable verification obstacles. Instead, America’s only realistic option is to keep disengaging economically from China – both to reduce U.S. economic reliance on an increasingly hostile power, and to weaken further the only country capable of posing noteworthy national security threats. As a result, however, Washington should pass up no opportunity to inflict pain on China’s economy. And although no one would be shocked if he reversed course yet again before too long, that’s exactly the mistake that President Trump just made with his latest China tariffs delay.

(What’s Left of) Our Economy: Decoupling is Still the Biggest – & Still Growing – U.S.-China Trade War Story

Tags

China, exports, GDP, gross domestic product, imports, tariffs, Trade, trade deficit, trade war, Trump, {What's Left of) Our Economy

Amazing as it sounds given the rush of developments and headlines over the last week, one big U.S.-China trade-related story remains largely overlooked, even though it keeps getting more and more important: Mainly because of President Trump’s tariffs and retaliatory duties from Beijing, the American and Chinese economies not only continue decoupling from each other. The decoupling so far has been unmistakably good for the United States. More specifically, U.S. economic growth has less and less to do all the time with trade with China, whether we’re talking exports or imports.

The story begins with the importance of two-way U.S.-China trade to the American economy as a whole. Since the Trump tariffs began, in the spring of 2018, it’s shrunk dramatically in the goods category. (Timely info on bilateral services trade isn’t available – and it’s a relatively small share of total trade anyway.) The table below shows goods exports and imports between the two countries as a share of the U.S. economy (gross domestic product, or GDP) in pre-inflation dollars – the measure most commonly used and followed. As you can see from those left-hand column numbers, since the current U.S. economic recovery from the last recession began (in the middle of 2009), this figure rose steadily through 2014, and has nosedived rapidly this year. (The 2019 figures measure growth since the first and second quarters of 2018, respectively – i.e., over most of the course of the trade war so far.)

And of special significance, as this shrinkage has gathered steam, the United States has turned in most of its strongest recent growth numbers. This development can be seen by comparing the left-hand column with the middle column (showing annual current-dollar growth rates). Or look at it this way: Two-way bilateral trade was last in this neighborhood as a share of the economy in 2009 – as an historically deep recession was ending. Nowadays, however, growth is solid by the last decade’s standards.

This relationship is even clearer from the right-hand column, which shows the relationship between China trade as a share of the U.S. economy and U.S. growth rate. Specifically, under the Obama administration, as this trade was rising as a share of GDP, the latter strongly exceeded the former only once (that is, approached the results of the Trump years) in 2014. (That is, the number on the left of the colon was significantly higher than the “one” on the right.) But during all of the Trump years, these results have hit that lofty level – and then some.

2-way China trade/GDP   GDP change   ratio of China trade/GDP to GDP change

2009:      2.53                        -1.79                                    n/a

2010:      3.05                         3.76                                  1.24:1

2011:      3.24                         3.67                                  1.13:1

2012:      3.31                         4.21                                  1.27:1

2013:      3.35                         3.63                                  1.08:1

2014:      3.38                         4.42                                  1.31:1

2015:      3.29                         3.98                                  1.21:1

2016:      3.09                         2.69                                 0.87:1

2017:      3.25                         4.30                                 1.32:1

2018:      3.21                         5.43                                 1.69:1

1Q 2019:  2.51                       4.64                                 1.85:1

2Q 2019:  2.61                       4.04                                 1.55:1

Then there’s the notion that the U.S. economy usually happens to grow fastest when its trade deficits overall (including with China) balloon – supposedly meaning that these trade shortfalls at least reflect strong economic performance, and that any policies meant to reduce them are dangerously misguided. But the latest U.S. data continue to debunk that notion completely.

The table below shows annual pre-inflation percentage GDP growth in the left-hand column, starting in 2009 and ending with the figures for the years ending in the first and second quarters of this year. The middle column shows the annual percentage growth rate of the American goods deficit with China, and the right-hand column shows the ratio between the two.

          GDP change                      China goods trade deficit growth          ratio

2009:     -1.79                                                -15.36                               -8.58:1

2010:      3.76                                                  20.35                                5.41:1

2011:      3.67                                                    8.13                                2.22:1

2012:      4.21                                                    6.72                                1.60:1

2013:     3.63                                                     1.14                                3.18:1

2014:     4.42                                                     8.20                                1.86:1

2015:     3.98                                                     6.53                                1.64:1

2016:     2.69                                                   -5.58                                   n/a

2017:     4.30                                                    8.25                                1.92:1

2018:     5.43                                                  11.75                                2.16:1

1Q 19    4.64                                                 -11.92                                  n/a

2Q 19    4.04                                                   -8.44                                  n/a

The above results for one of the Obama years shows robust U.S. economic growth as the goods trade deficit with China surged. But that year was 2009-10 – the first recovery year, when all U.S. trade snapped back sharply following an especially deep recessionary dive (as made clear in the 2008-09 results). Once the economy settled into a more sustainable mode, the supposed relationship breaks down completely.

And the results for the latest Trump years demonstrate strong growth occurring side-by-side with major reductions in the U.S.-China goods trade deficit.

Faring no better is the claim that many U.S.-based industries need inexpensive Chinese inputs (parts, components, materials) for their products in order to remain globally competitive. The following table shows the annual rates of change for the nation’s goods imports from China and its economic growth (or contraction, as in the case of 2009). Otherwise, how could the economy have registered its strong performance over the last year even as goods imports from China have been falling at double-digits percentage rates?

               US goods imports from China                  GDP change

2009:                  12.26                                                  -1.79

2010:                  23.14                                                    3.76

2011:                    9.43                                                    3.67

2012:                    6.57                                                    4.21

2013:                    3.48                                                   3.63

2014:                    6.37                                                   4.42

2015:                    3.14                                                   3.98

2016:                  -4.30                                                   2.69

2017:                   9.26                                                   4.30

2018:                   6.82                                                   5.43

1Q 19:              -13.11                                                   4.64

2Q 19:              -10.89                                                   4.04

And the idea that access to the China market is vital for the American economy?

               US goods exports to China                     GDP change

2009:                    -0.34                                              -1.79

2010:                   32.25                                               3.76

2011:                   13.29                                               3.67

2012:                     6.41                                               4.21

2013:                   10.16                                               3.63

2014:                     1.57                                               4.42

2015:                   -6.29                                               3.98

2016:                   -0.24                                               2.69

2017:                  12.29                                               4.30

2018:                   -7.43                                               5.43

1Q 19                -19.56                                               4.64

2Q 19                -18.20                                               4.04

According to the above figures, that claim didn’t even hold during the Obama years. (See, e.g., 2014 and 2015). And as with imports, the economy has grown impressively during the Trump years despite record declines in sales to China.

U.S. growth at acceptable rates as trade with an ever more belligerent China shrivels is of course good news from a national security standpoint. But given China’s long record of economic predation and other interventionist policies that inevitably distort markets for goods and services, it’s good news from a purely economic standpoint, too – whether it makes headlines or not.

Following Up: Latest National Radio Interview on the China Trade War Now On-Line!

Tags

China, Following Up, Gordon G. Chang, manufacturing, The John Batchelor Show, Trade, trade war, Xi JInPing

I’m pleased to announce that the podcast is now on-line of my interview Wednesday night on John Batchelor’s nationally syndicated radio show.  So click here for a timely discussion among John, co-host Gordon G. Chang, and me on the latest escalation(s) of the U.S.-China trade conflict.  (I come in at about the 3 minute-30-second mark.) And of course feel free to listen if you’ve already heard it!

BTW, see if you can spot the sentence in which I inadvertently called the U.S. manufacturing trade deficit with China a surplus.  And the reason why Chinese leader XiJinping’s advisers aren’t likely to let him listen to the segment.

And keep checking in with RealityChek for news of upcoming media appearances and other developments.

Making News: A National Radio Update of the Trade War…& More!

Tags

China, Clare Goldsberry, CNBC.com, Gordon G. Chang, IndustryToday.com, Jake Novak, Jobs, Making News, manufacturing, Plastics Today, tariffs, The John Batchelor Show, Trade, trade war, Trump

I’m pleased to announce that last night, I was interviewed on John Batchelor’s nationally syndicated radio show, where John, co-host Gordon G. Chang, and I updated the U.S.-China conflict – which now includes not only a trade war and a tech war, but a currency war (all closely related of course).

As usual, if you couldn’t tune in (and apologies for not being able to post a heads up last night), I’ll put up a link to the podcast as soon as one’s available.

In addition this morning, Industrytoday.com republished my post from August 2 detailing the mixed trade war-related results from the latest (July) U.S. jobs report.  Here’s the link.

Also, it was great to see economic analyst Jake Novak’s Monday column for CNBC.com reference my views on Trump tariffs’ (so far marginal) impact on the U.S. economy.  You can access it here.

That same day, a piece by Plastic Today‘s Clare Goldsberry spotlighted more evidence from RealityChek showing that America’s manufacturers are withstanding the trade conflict just fine.  Click here to read.

And keep checking in with RealityChek for news of upcoming media appearances and other developments.

 

(What’s Left of) Our Economy: The Jobs Fog of Trade War

Tags

aluminum, China, Jobs, manufacturing, metals tariffs, metals-using industries, steel, tariffs, Trade, trade war, Trump, {What's Left of) Our Economy

Domestic U.S. manufacturing turned in a mixed job creation performance in July, with this morning’s figures containing fodder both for the optimists and the pessimists. And the ambiguousness extended to interpreting the results of President Trump’s tariff-centric trade policies – which is not entirely surprising, especially given the nature of the China duties, which have been imposed in phases, and where threats have displayed an on-again-off-again nature.

Overall, the optimists could point out that the new Bureau of Labor Statistics (BLS) data showed a fourth straight sequential gain for manufacturing employment, as industry added 16,000 net new jobs in July. Moreover, the monthly rate of payroll increases is up from 3,000 in April. In fact, the July sequential gain was the sector’s best since January, when manufacturers grew net employment by 17,000.

Nonetheless, the revisions were decidedly negative, with May’s increases being downgraded from 4,000 to 2,000, and June’s all the way down from 17,000 to 12,000. Moreover, July’s 157,000 year-on-year manufacturing employment improvement was the lowest in absolute terms since October, 2017’s 146,000.

Identifying a clear bottom line from the trade war-specific manufacturing employment results is just as difficult. First, let’s look at the performance of the major metals-using sectors, which have faced varying levels of tariffs on steel and aluminum since spring, 2018. (April was the first full month in which they were in place.) Here’s the comparison between their employment changes since then, and those of manufacturing overall and the American private sector overall. Also included are the figures for home appliances (where producers of large household laundry machines have been dealing not only with the metals tariffs but with separate, product-specific levies that began that February). It’s also important to note that figures for these goods and for aerospace products and parts are one month behind the rest. So for those two sectors, the results are for (from left to right), the previously reported May figures, the latest May figures, and the June figures.

An optimist could observe that two of the durable goods sectors, fabricated metals products and automotive, have increased their hiring momentum versus the broader economy, the overall manufacturing sector, and even the durable goods super-sector (where the main metals-using industries are found).

The pessimists, however, could say that through the end of 2018, the metal users in general were clearly besting all of their counterparts in job creation, and that their relative strength has faded since.

                                                       Old thru June     New thru June     Thru July

entire private sector:                     +2.14 percent      +2.13 percent   +2.25 percent

overall manufacturing:                 +1.74 percent      +1.69 percent   +1.82 percent

durable goods:                              +2.11 percent      +2.10 percent   +2.25 percent

fabricated metals products:          +1.49 percent      +1.71 percent   +1.74 percent

non-electrical machinery:            +2.92 percent      +2.73 percent   +2.40 percent

automotive vehicles & parts:       +0.27 percent      +0.33 percent   +1.06 percent

household appliances*:                -4.73 percent        -4.89 percent    -6.15 percent

aerospace products & parts*:      +7.46 percent       +7.44 percent   +7.64 percent

*data are one month behind

And two final complications: First, the low (in absolute terms) hiring gains for the automotive sector surely in large measure reflect not only tariffs on metals, but the slow decline of auto and light truck sales that began back in the summer of 2015 after a strong post-recessionary comeback – and well before any metals duties. And with the automotive sector such a big consumer of machinery and fabricated metals products, its troubles undoubtedly bleed into those industries and have dragged down their results for equally non-trade-related reasons.

Second, the aerospace industry is another big purchaser of inputs from throughout domestic manufacturing, and especially from other metals-using industries. So although its employment levels appear to have held up exceedingly well, they might be better still if not for the safety problems encountered by Boeing.

The case for optimism looks much stronger for those industries that seem to be most greatly affected by the China tariffs. But as usual, the results are surrounded by much greater uncertainties – mainly because the scope and level of these levies has changed so significantly since the first batch went into effect in July, 2018; because the use of Chinese inputs in domestic manufacturing is so widespread but also varies so considerably; and because the list of products hit by China tariffs uses a manufacturing classification system different from that used by the BLS to track jobs.

So the following China figures – presenting employment changes for what look like some of the main China-affected industries since July, 2018, plus those for broader parts of the economy to provide some context – should still be viewed with extreme caution. (I’ve added the results for non-durables, too, since the use of Chinese inputs is so widespread.) Moreover, as indicated below, the results for those main China-affected sectors are always one month late.

                                      July-May       Old July-June     New July-June   July-July

private sector:           +1.45 percent    +1.46 percent     +1.59 percent +1.71 percent

overall mfg:              +1.02 percent    +1.16 percent     +1.11 percent +1.24 percent

durable goods:          +1.22 percent     not available     +1.36 percent +1.51 percent

non-durable goods:  +0.67 percent     not available    +0.70 percent  +0.80 percent 

aircraft engines &     +1.51 percent    not available     +1.86 percent   not available

  engine parts:

industrial heating      +1.12 percent    not available     +2.24 percent   not available

  equip:

oil & gas drilling      +4.88 percent     not available    +5.56 percent    not available

  platform parts:

farm machinery        -1.00 percent     not available         0 percent      not available

  & equip

ball bearings:           +2.39 percent     not available    +3.16 percent    not available

At least through June, however, all of the apparent China tariff-specific industries have displayed much stronger recent hiring strength relative to industry and the economy as a whole. This greater momentum, moreover, is especially noteworthy given that the scale of the China duties has broadened so dramatically since July, 2018, and the tariff rates for so many products have been increased a second time.

Nonetheless, the China-related data are especially dodgy. And of course, President Trump just yesterday threatened a big new set of tariffs on the imports from China not already hit with duties. Which may or may not actually be imposed. And that may contain plenty of exemptions. All good reasons for analysts to remain data dependent – and prudent in the extreme – when judging how the U.S. economy is faring as the trade wars rage on.

Making News: Video of Last Night’s Televised Trade War Interview Now Available!

Tags

China, Huawei, i24News, Making News, Trade, trade war, Trump

I’m pleased to announce that a video is now available of my appearance last night on the U.S.-Israeli TV network i24News covering the latest developments in the U.S.-China trade conflict.  Anchor Michelle Makori and I also discussed how the Trump administration’s national security concerns about Chinese telecommunications giant Huawei may be affecting trade diplomacy.

Click here and press the download button.  The link will work for only a few days, so don’t delay if you’re interested.

And keep checking in with RealityChek for news of upcoming media appearances and other developments.

(What’s Left of) Our Economy: A Glass Half-Empty or Half-Full Government Report on Manufacturing?

Tags

China, manufacturing, manufacturing trade deficit, tariffs, Trade, trade war, value added, {What's Left of) Our Economy

A total stunner – that’s the best way to describe the manufacturing and trade results of this morning’s Commerce Department report on economic growth during the first quarter broken down by industry. Unfortunately, they provide causes for both optimism and pessimism about whether President Trump’s tariff-centric trade policies will strengthen or weaken U.S. domestic industry over any analytically respectable period of time. And one big reason may be that manufacturers are still in the process of adjusting their business models to cope with the new policy environment.

The case for optimism rests on the quarterly growth (albeit a measly 0.03 percent) registered by American-located manufacturing despite a steep (20.25 percent) plunge in the sector’s huge and longstanding trade deficit. That kind of nosedive in the shortfall hasn’t been seen since the depths of the Great Recession – when manufacturing production was plummeting, too. (In this case, growth is measured by current-dollar “value-added,” which eliminates much of the double-counting that can result when economists calculate the production increases of final products without stripping out the previous output of the parts, components, and materials comprising them.)

The new data also contrasts with the last time of comparably meager quarterly manufacturing growth – 2016. During that final year of the Obama administration, industry grew sequentially by 0.63 percent in the second quarter, flat-lined in the third quarter, and 0.02 percent in the fourth quarter. The manufacturing trade deficit changes back then? In the second quarter, it grew by 8.96 percent, in the third quarter it increased by 7.52 percent, and in the fourth quarter is shrank – but by a bare 0.52 percent.

In fact, the last time a double-digit sequential decline in the manufacturing trade deficit took place (during the first quarter of 2016, when it sank by 10.17 percent), manufacturing production actually dropped – by 1.42 percent.

Manufacturing’s performance looks better when examined on an annual basis. Between the first quarter of 2018 and the first quarter of 2019, manufacturing value-added grew by 4.99 percent, while the manufacturing trade gap widened by only 1.55 percent. That’s greatly improved over last year’s yearly statistics by quarter.

Between the second quarter of 2017 (the first full data quarter under President Trump), and the second quarter of 2018, manufacturing production rose by 8.08 percent, while the trade deficit widened by 7.83 percent. The third quarter numbers: 7.23 percent and 12.45 percent. The fourth quarter numbers: 6.21 percent and 17.80 percent.

The second and third quarter results were clearly distorted by “tariff front-running” – businesses’ decisions to procure as much in the way of imports from China before major duties were imposed. That’s evident from the dramatic slowdown in the manufacturing trade gap’s first quarter annualized increase.

But for both sets of data, there’s a rub that should be obvious: Both between the fourth quarter of 2018 and the first quarter of 2019, and over the past year, the drop-off in the manufacturing trade deficit was accompanied by a drop-off in manufacturing’s growth rate itself. And that first quarter sequential 0.03 percent production increase was the worst such result since the fourth quarter, 2016’s 0.02 percent.

Optimists can take heart from industry’s ability to eak out growth despite continuing and even greater supply chain disruptions, and despite unusual inventory buildups triggered by tariffs and especially by their anticipation.  Also arguably encouraging manufacturing growth that’s ever less reliant on foreign inputs. Pessimists can observe out that the minimal growth indicates that adequate rates of manufacturing expansion still depend on robust net imports.

Both vantage points should recognize that domestic manufacturing remains in a state of uncertainty (as the current narrative holds) and sometimes outright confusion and turmoil – and that the threat of much more widespread China tariffs and increases on current China tariffs will greatly limit clarity going forward. Which means that both should agree that a valid verdict on the President’s trade policies won’t be possible for many months into the future.