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The Trade War With China – Who is Winning?

09/12/2019

CNBC Morning Squawk on September 9th presented data from official sources in China indicating the country reported a trade surplus of $35 billion in August compared to $45 billion in July. Exports to the U.S. were 16 percent lower year-on-year in August but up from a 6.5 percent decline in July.  Imports from the U.S. to China were 22.4 percent lower in August 2019 compared to August 2018, reflecting the impact of the ban on agricultural products effective on August 4th together with previous high retaliatory tariffs.  Overall exports to China declined by 5.6 percent in August 2019 compared to the corresponding month in 2018 reflecting a drop in domestic consumption.

 

A principal of objective of the trade action taken against China, initiated in 2017 was to reduce the negative balance of trade.  For the first eight months of 2019 the difference between imports and exports favored China by $196 billion with the August deficit attaining $27 billion.

 

On Friday September 6th the Central Bank of China cut reserve requirements for banks for the seventh time since the beginning of 2018 to allow institutions to extend more loans to companies.  Additional support measures are anticipated to prevent an economic slowdown according to CNBC. Zhang Yi an economist at a financial management company stated, “Exports are still weak even the face of substantial Yuan currency depreciation, indicating that sluggish external demand is the most important factor affecting exports this year.”

 

Larry Kudlow, White House Economic Advisor also stated on Friday September 6th that the U.S. anticipates “near term” results from bilateral talks scheduled for October.  He indicated that the trade conflict could take years to resolve.  This is a retraction from the earlier Administration claim that “trade wars were easy to win and of short duration”.  Prospects of even a limited near-term resumption of agricultural imports are unlikely unless both nations make concessions with regard to recently announced additional tariffs. Resolution of the trade dispute is critical for the financial wellbeing of the agricultural sector as the 2019 harvest approaches

 

 The more basic conflicts relating to structural issues including intellectual property and coercive trade practices that were the justification for initiating the trade conflict by the U.S. in 2017 are unlikely to be resolved in October if at all. These practices are critical to achieving the “Made in China 2025” initiative essential for continued growth in GDP. We will never conclude a Grand Agreement over a dinner regardless of the deal making skills of the Negotiator-in-Chief. We could make steady but slow progress through diplomacy, application of tactical economic pressure and cooperation with our allies with whom we have converging interests with respect to China.