Trade War Consequences
The oft-repeated refrain on the Presidential stump circuit threatening 60% tariffs on Chinese products caused some head-scratching among economists. By some measures, the Chinese economy is in failing health. Foreign direct investment has fallen off a cliff, from $350 billion in 2022 to less than $50 billion last year, to something close to zero this year. The official numbers say that China’s gross domestic product was 5% or so in the last 12 months, which, given the government’s habit of (shall we say) optimistic counting, is probably either zero or negative. Domestic consumer demand is AWOL, millions of young workers can’t find jobs and several large real estate developers have declared insolvency.
Meanwhile, China has become almost totally dependent on exports, with a trade surplus that will approach $1 trillion this year, even after the Biden Administration kept the Trump tariffs in place. An escalating trade war would hit China’s weak economy like a body blow.
The Chinese government is reportedly preparing its counterpunch, should a new round of tariffs emerge. The first, and most familiar measure would be to ramp up tariffs on American agricultural imports—which, last time around, wreaked havoc on the American farming sector. Meanwhile, China is already turning to other agricultural exporting countries to fulfill its need for soybeans and corn.
Another measure would involve export controls, which could cripple companies that depend on global supply chains, and on manufacturers who depend on China’s near-monopoly on rare earth metals like gallium and germanium—important components of semiconductors and solar panels. And, of course, the inevitable rise in the inflation rate would inflict a certain amount of pain on its own.
Ironically, the trade sanctions might also benefit the Chinese government’s long-term goal to become more self-sufficient economically, and disengage from its historical dependency on exports. And the threat from China’s largest trading partner gives Chinese leader Xi Jinping an excuse to tighten his control over the country’s political levers. Wars—including trade wars—can sometimes have unexpected, unwanted consequences.
How the Election Might Impact the Markets
It’s hard to think of an event that is more likely to trigger emotional investment reactions than a national election. Depending on where you come from, each election means the economy is on the verge of a great boom or the world is coming to an end.
The traditional message that financial advisors send to their clients after a Presidential election is to reassure them that the markets have not (at least since the New Deal) been much affected by who occupies the White House—one way or the other. There is tons of research to back this up; people who are giddy about an election shouldn’t assume that the markets will feel the same way, and the same goes for voters who are depressed.
This election may be more complicated, for a variety of reasons. It’s hard to know if some of the proposals that seem to have been thrown out off-the-cuff during campaign speeches are actually part of the incoming Presidential agenda. No rational economist will tell you that imposing tariffs at historically high rates will benefit the U.S. economy, and using tariffs to pay off the national debt is not possible for a variety of reasons. (One of the simplest is that Treasury bonds are not callable.)
On the other hand, an agenda of cutting regulations could give some industries a (probably temporary) sugar high, and tax cuts could do something similar to consumer spending.
On another hand (do you have three?) a combination of tax cuts and tariffs would likely raise the inflation rate, and there’s a possibility that dramatic tax cuts would explode the national debt. High tariffs would negatively impact companies which have complex global supply chains (like computer manufacturers and the auto industry) while leaving others untouched.
Add in the prospect of mass deportations of the workers that our agriculture industry has come to depend on, and you have an added layer of uncertainty.
But the truth is, we don’t know much about the economic policy agenda for the next four years—which, in itself, is a bit unusual. And, of course, there are a variety of other unknowables about the future of the economy and how geopolitical events will unfold around the world. The recent Presidential election has added one more variable to our never-ending uncertainty about the future, which generally means our best approach is to sit tight and see how events unfold.
Inflation in Perspective
Inflation is down, but still too high, and interest rates should be lowered as well, right? In the U.S., we’re enduring hardship as a result of higher prices and high borrowing costs; after all, the national average mortgage rate is now 6.91%.
Before you complain too loudly, you might consider what the citizens of some other countries are currently enduring. Turkish consumers are dealing with an annual inflation rate of 49.38%—down from 71.6% in June. Argentina saw consumer prices rise 237% in the year ending September 30.
Buying a home in Russia has become more interesting since Russia’s largest mortgage lender, Sberbank, raised its mortgage rates to 28%. That’s actually topped by the 35% interest rates assessed in Zimbabwe and 40% in Argentina. Venezuelan would-be home owners are facing a 59.26% interest rate environment.
Other countries with healthier economies are still giving their citizens high interest rate environments. In Brazil, mortgage rates stand at 9.46%. Poland’s banks are assessing a 7.16% rate; in Australia, mortgages cost 7.58% a year.
But we can still envy some other nations with cheaper credit. German homebuyers pay 3.71%; in France, the average rate is 3.43%, and in Switzerland, it’s down around 2%. We envy some, we look down on others.
Sources:
https://www.advisorperspectives.com/articles/2024/11/15/china-trade-war-one-trump-doesnt-fight
https://www.washingtonpost.com/world/2024/11/15/china-economy-donald-trump-tariffs/
https://www.bankrate.com/mortgages/mortgage-rates/
https://www.forbes.com/advisor/au/personal-finance/countries-with-highest-interest-inflation-rates/
https://www.pravda.com.ua/eng/news/2024/11/15/7484679/
https://www.theglobaleconomy.com/rankings/mortgage_interest_rate/
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