The market is really upset by the Trump Administration’s hawkish trade tariff talk.
But what he’s doing is simple. Trump is just playing for the midterm elections.
He has 3~4 months to pull a rabbit out of a hat and impress the voters with his ability to bring home the bacon.
Will it work? Maybe.
You see, Trump is in a position of strength from a negotiating standpoint.
To begin with, Trump is mostly right when he says that U.S. trade agreements are imbalanced.
China does steal technology. It’s trying to acquire and steal more. European tariffs do exceed the U.S.’s.
This makes Trump’s timing for a trade war great: both China and Europe’s economies are slowing and both want and need access to the U.S. market.
Conversely, the U.S. economy is turbo-charged and looks to be able to weather short-term jitters.
But not China. Panic seems to have set in. Chinese KraneShares Bosera MSCI China A Shares ETF (NYSE: KBA) is down by about 15% in June. The Chinese stock market fell by $500 billion (B) last week alone. Money is flowing out.(The U.S. stock market fell a similar amount, but our market cap is ~3x that of Hong Kong and Shanghai’s).
Regarding tariffs, Europe doesn’t have many cards to play. It’s why the rumor mill confirmed they will soon be rolling back tariffs.
I believe China will also capitulate. They have to buy agriculture products like soy and hogs. Banning U.S. products means they have reduced supply and will end up paying more for those goods elsewhere.
The U.S. farmer will then sell their soybeans on the global market at a higher price. Meanwhile, the U.S. can easily slow the purchase of smartphones without much pain (sorry Apple).
In a sense, Trump is spending the Summer ripping the band-aid off and letting things heal.
But he is also under the gun.
He has to show results no later than September if he is to win votes in November. And that’s the leverage over him that China and the E.U. have.
There is a pot of gold at the end of the rainbow, but for now the market will be jittery.
Editor of Moneyball Economics