Over the past two months, the battle lines have been drawn in the escalating global trade conflict and Donald Trump likes to pitch himself as a kind of male Wonder Woman, taking fire so that the beleaguered American worker can finally gain the upper hand in the battle to reclaim lost industrial “greatness”.
But the shrill protestations of Larry Kudlow, Wilbur Ross and Trump himself notwithstanding, China is not “losing”. To the contrary, China appears to be “winning”, or at the very least, holding serve.
On the heels of the second quarter GDP release, Trump and his advisers embarked on a concerted effort to pitch the data as evidence that the U.S. economy isn’t suffering from the trade frictions. Trump went so far as to convene a press conference at the White House to tout the data, calling it “amazing”. A week later, Kudlow convene a press conference about the Chinese economy on Bloomberg Television.
“Some of the currency fall I think is just money leaving China because it’s a lousy investment, and if that continues that will really damage the Chinese economy”, Kudlow said of the yuan’s rapid depreciation against the dollar. “If money leaves China — and the currency could be a leading indicator — they’re going to be in a heap of trouble”, he continued, before driving the point home by contending that Beijing is “in a weak economic position that’s not a good place for them to be vis-a-vis the trade negotiations.”
All of that is propaganda – full stop. The U.S. economy is indeed doing well, but that’s likely a sugar high (so to speak) that’s destined to wear off as the fleeting effects of late-cycle stimulus fade. Even if you give Trump and Kudlow the benefit of the doubt and assume the current rate of expansion is sustainable (i.e., if you assume one can extrapolate something from the quarterly numbers), it’s still not anomalous from a historical perspective, so pitching what we’re currently seeing in the U.S. as some kind of economic renaissance is disingenuous.
Additionally, it’s important to understand why Trump and Kudlow were pounding the table so hard last month. The effects of the trade war are indeed hitting home, figuratively and literally. On July 24, just three days before Trump’s GDP press conference, the government announced a $12 billion rescue package for farmers suffering from the tariffs. That bailout entailed dusting off Depression-era policies to subsidize American agriculture. The absurdity inherent in the effort was readily apparent both to lawmakers and to farmers themselves: Trump instituted trade policies that posed an existential threat to American agriculture and then, facing a severe backlash, decided to bail them out with their own taxpayer dollars. In the final insult, Trump peddled $45 “Make Farmers Great Again” hats on his website and, in a testament to the sad gullibility of the farm belt, they sold out within hours.
On the corporate front, General Motors, Harley-Davidson and Whirlpool all explicitly cited the tariffs on the way to explaining either earnings misses, guidance cuts or in some cases both last month and two Mondays ago, Caterpillar said it will likely be forced to raise prices to compensate for as much as $200 million in tariff-related costs. For its part, Tyson Foods slashed guidance citing “changing global trade policies [at home] and abroad and the uncertainty of any resolution.”
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