US-China trade war may not be good for America, but it’s good for Trump
Nicholas Spiro says no matter how chaotic the White House policymaking process and how the US midterm elections pan out, as long as Trump retains the support of his base and US stocks stay buoyant, China should expect the US president to dig in his heels
Can anything thwart American President Donald Trump’s intensifying trade offensive? Following the US administration’s decision this week to up the ante in its trade war with China by imposing tariffs on an additional US$200 billion worth of goods from the world’s second-largest economy, it is increasingly clear that Trump is digging in his heels, convinced not only that America is winning the battle but that there is little, if anything, to be gained politically from backing down.
Much of the recent commentary on US trade policy has focused on Trump’s notoriously erratic and impulsive behaviour, which has sparked further infighting inside the White House – much to the annoyance of China's trade negotiators – and revealed the extent to which Trump is his own chief adviser, personalising the policymaking process to an unprecedented degree.
This partly explains why Trump is doubling down. While the latest batch of opinion polls show that his approval ratings have fallen since the trade war escalated in the summer – he is now behind all of America’s elected presidents during the polling era at the same point in time in their respective presidencies, according to FiveThirtyEight, a data-driven website focused on opinion poll analysis – Trump and his supporters have always distrusted traditional polling.
What matters to the former real estate mogul is that 73 per cent of his Republican Party’s voters support his trade tariffs as much as they supported the sweeping tax cuts he introduced last year, according to a new survey published in The New York Times on Tuesday.
What is more, there is a sharp partisan divide in perceptions of America’s economy, with nearly two-thirds of Republican voters believing their personal finances have improved over the past year, compared with just 16 per cent of Democratic voters.
Make no mistake, as the trade war intensifies, Trump’s base is showing no signs of having buyer’s remorse – quite the contrary.
Watch: Trump threatens tariffs on nearly all Chinese goods
To Trump, another equally important indication that his trade offensive is worth pursuing is the strong performance of US assets, particularly the buoyant stock market.
While Trump’s approval ratings have fallen since his inauguration in January 2017, the benchmark S&P 500 equity index has risen almost 28 per cent and, more remarkably, has recovered all its losses since suffering a sharp sell-off in February. On Wednesday, the gauge closed within a whisker of its latest all-time high set on August 29, having shot up 12.5 per cent since early April. An index for global stocks excluding US shares, by contrast, is down 5.5 per cent, according to MSCI, the index provider.
This divergence between US assets and those in other regions of the world was brought into sharp relief by the responses to Bank of America Merrill Lynch’s latest global fund manager survey published on Tuesday.
Investors’ outlook for US corporate earnings is the most bullish on record while their allocation to American stocks has risen to a near four-year high, according to the survey. Fund managers’ allocations to emerging market and European equities, on the other hand, have dropped to 18-month lows.
With the escalation in trade tensions undermining broader sentiment, particularly towards developing economies, the financial equivalent of Trump's “America first” agenda has taken hold in markets. International investors, the overwhelming majority of whom are dismayed by Trump’s protectionist policies, have effectively been doing the president’s bidding.
Still, Trump cannot count on US leadership in stock markets to continue indefinitely.
There are already signs that the divergence in global equities is beginning to narrow. The US dollar, whose unexpected rally this year has helped American stocks outperform, has weakened markedly over the past month. Partly for this reason, the sell-off in emerging markets has abated somewhat. Speculative bets on a further rise in the greenback have reached excessive levels, especially given the further deterioration in America’s fiscal position following last year’s tax cuts.
Yet when US stocks suffered a correction – a fall of more than 10 per cent from a recent high – earlier this year, Trump turned even more hawkish on trade. This suggests that he is unlikely to back-pedal on his protectionist policies. Indeed, even a strong performance by the Democrats in the crucial midterm elections in November is unlikely to change Trump’s calculus, which, aside from playing to his base, is aimed at insulating himself from potential impeachment.
As JPMorgan rightly noted in a report in July, Trump’s agenda is not so much “America first” as “Me first”, something China’s trade negotiators should bear in mind.
Nicholas Spiro is a partner at Lauressa Advisory