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Trump’s Trade War: Impulsive Or Well Thought Out?

Rick Newman, Trump Trade War, Trumponomics

With Rick Newman, Senior Columnist at Yahoo Finance

The highly unorthodox style of President Trump’s trade war has people scratching their heads on both sides of the aisle.  Pundits and politicians are having a hard time understanding whether Trump is making knee-jerk decisions or whether there is a strategy behind all his rhetoric and tweets.

To make sense of the seeming chaos in DC, Steve speaks with Rick Newman, Senior Columnist at Yahoo Finance.

Trump Tariffs May Reveal Underlying Strategy

The administration has been fighting Trump’s trade war on multiple fronts.  Most generals will tell you that that’s a really bad idea.  You spread your forces thin, and you dilute your power.

But that’s exactly what Trump appears to have been doing—picking fights with everyone at the same time.  He has attacked Mexico and Canada, the European Union, and now China.

Rick’s guess is that this is not the way Trump planned it all along.  His entire effort now appears to have consolidated into a big trade battle with China.

New Trade Deal With Mexico And Canada

Trump thought we had trade issues with Canada and Mexico.  Yet, most economists will tell you that’s not the case.  Moreover, Trump’s new trade deal with Mexico and Canada is really not very different from the old NAFTA.

With that settled, Trump’s trade war is now focusing almost entirely on China.

Aligning With The EU To Fight China

In parallel, Trump imposed steel and aluminum tariffs on several countries, including Europe. In return, Europe imposed tariffs on a like amount of U.S. exports, including U.S made Harley-Davidsons that are exported to Europe.

But the U.S. and EU countries have the same gripes with China.  These include the theft of intellectual property and difficulty in entering the Chinese market.

So now, Trump is coming around to the idea of setting up a free trade deal with the European Union and collaborating on tariffs against China.

Ironically, the Trans-Pacific Partnership (TPP)—which Trump famously exited—did just that.  It united the U.S., Canada, Mexico, and Asia-Pacific countries as a powerful trading block.  This gave TPP countries collective leverage against China, more than any single nation would have on its own.

Trump thought the TPP was one of the worst deals ever.  Yet, many of the terms in Trump’s new trade deal with Canada and Mexico came right out of the TPP.

Strong American Economy Benefits Trump

As Steve notes, a strong U.S. economy gives Trump an upper hand in negotiations.  The U.S. economy is not hurting much from Trump’s trade war with China and stocks are up modestly in the U.S.  But the Chinese economy is hurting, and stocks there are down about 20% for the year.

Elections In November Would Weaken Trump

On the flip side, Trump’s free rein could end if the Democrats win one or both Houses of Congress this November.  China’s President Xi Jinping faces no such threat and can wait until November before making any major moves.

China experts believe China cannot suffer an embarrassing defeat.  So any agreement would have to give China leeway to say it did not cave to U.S. pressure.

With elections around the corner, Trump’s trade war hangs in the balance for now.  He realizes that a Democratic win in November would seriously weaken his position domestically and abroad.  So, over the next four weeks, he’s fully focused on making sure his party retains control of both houses.

Disclosure: The opinions expressed are those of the interviewee and not necessarily United Capital.  Interviewee is not a representative of United Capital. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions.  Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances.  The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by United Capital.

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Steve Pomeranz: With all that hot rhetoric in Washington and the unorthodox style of our President Trump, it’s difficult to see at times if there is actually any planning or forethought into some of the actions that the administration takes, specifically with regards to tariffs and negotiating with other countries.

Well, that all may have changed as the dust has begun to clear about a possible strategy behind all of these tariffs and the renegotiated intercountry agreements that we’ve seen recently. To explore this further, I’ve invited Rick Newman, he’s the Senior Columnist at Yahoo Finance and he joins me right now.

Welcome back, Rick.

Rick Newman: Thanks, Steve, happy to be with you.

Steve Pomeranz: So, to begin with, it seems the administration has been fighting a trade war on multiple fronts. And I think most generals would tell you, that’s probably a really bad idea. I think generals told Hitler that as well when he went into Russia.

You spread your forces thin, you lose some of your power, and that’s what this strategy has looked like. He’s been attacking Mexico and Canada and the European Union and now China and so on. What does that look like to you?

Rick Newman: Well, it looked very chaotic earlier in the year when Trump was basically, as you said, picking fights with everybody.

But what’s happening now is you’re seeing kind of a consolidation of Trump’s trade policy. And my best guess at what’s going on here is this is not the way Trump planned it all along.

Steve Pomeranz: Mm-hm.

Rick Newman: But that as he has sort of led his trade team in the direction he wants to go, the whole effort has really kind of consolidated around this idea that the biggest battle here really is China, and the biggest problem really is China.

Trump has his issues with Canada and Mexico but most economists will tell you, we don’t have a problem with Canada and Mexico on trade.

Steve Pomeranz: Yeah.

Rick Newman: We may have deficits of certain types with those countries, but that’s not nearly a bad thing, there’s nothing really wrong with that.

And, in fact, this new trade deal that Trump has now got in place with Mexico and Canada is really not very different from the old deal which was NAFTA. So Trump has kind of settled that dispute and it looks as if he’s basically marshaling his forces to put most or all of the focus on China.

Steve Pomeranz: Okay, I want to get into some of that in a minute. Are you starting to think that there’s a strategy here because the way the speed in which they wrapped up the NAFTA deal?

Rick Newman: Not exactly, because there were some other reasons to get that NAFTA deal done.

And they mainly involved the change of administrations in Mexico. So we have a new President coming into power in Mexico, I think he takes office on December 1st. And the Trump administration did not want to get into a situation where they negotiated a deal with the outgoing administration that the new administration may not support.

Steve Pomeranz: Yeah.

Rick Newman: So they’re going to get that deal done with the outgoing administration. And then that fight will basically be over for the time being, which leaves more resources to focus on China.

Steve Pomeranz: Yeah, but we still have not come to any kind of an agreement, negotiations with the European Union, what’s going on there?

Rick Newman: Well, the United States does not have a free trade deal with the European Union. And Trump has imposed the steel and aluminum tariffs on many countries including Europe. And in return, Europe has imposed tariffs on a like amount of US exports to the European Union. Now that’s not a lot, famously that involves Harley-Davidson Motorcycles that are made here and sent to Europe.

That’s not a lot, and there have been talks, and Trump has said publicly that he wants a free trade deal with the European Union. Now, that’s not easy. So he’s got these kinds of small bar steel aluminum tariffs and then the retaliatory measures. But there is talk about getting rid of all that and making a bigger deal.

But for the time being, I think it’s fair to say there’s at least a truce in place with regard to Europe.

Steve Pomeranz: Well, Europe’s got big problems too. I mean, they’re trying to negotiate a Brexit at the moment, which is very hard to do. So it would be, I think, I don’t want to say almost impossible, but very difficult to kind of get anywhere with the European Union.

But I think there is some talk that now United States is trying to come together with the European Union to now target China as well. So, to kind of build what was a dispersed strategy of attacking everywhere at once, now starting to get  allies in your camp and concentrating on the true foe.

You think that’s an accurate assessment?

Rick Newman: I think that’s where it’s headed, Trump has sort of gone in that direction reluctantly. And it’s worth keeping in mind that this is exactly what the Trans-Pacific Partnership, the dreaded TPP, that’s exactly what it was supposed to do. Get countries including Canada, Mexico, and others in their own trade deal to form a trading block that would have more leverage in negotiating with China than any single nation would on its own.

And in fact, interestingly, some of the things that ended up being in a trade deal with Canada and Mexico came right out of the TPP that Trump supposedly hates and said was one of the worst deals ever. I mean, it’s very interesting, but I’ve been talking to trade experts through this ordeal.

And from the beginning, they said look, if your real problem is with China and there are some legitimate trade abuses going on in China, the way to approach that is not with tariffs because in order for tariffs to work you have to hurt yourself first in order to hurt the trading partner.

The way to do it is to get all your allies together and mass forces against China because most countries in Europe have exactly the same problems as the United States has with regard to China—the theft of intellectual property, the difficulty in entering the Chinese market. And only now, after kind of a couple of misfires, does Trump seem to be coming around to this idea that trade experts have been saying for some time, which is get everybody together and form an alliance that will have more power confronting China.

Steve Pomeranz: The one strength that the Trump negotiating strategy has though is that the US economy is extremely strong right now.

Rick Newman: Yes, I think, yep.

Steve Pomeranz: And it’s got plenty of gunpowder to fire later.

So, I don’t know whether he’s planned that or whether that’s just become, he’s been around long enough, the economy has grown. Maybe the tax cut, of course, helped some but, don’t you think that that puts the United States in a pretty good position?

Rick Newman: Yes, I think it does.

I think you can look at the performance of the US economy and the Chinese economy, just this year alone. And that’s pretty clear that the US economy is not hurting very much from Trump’s trade war with China. Whereas the Chinese economy is hurting, I mean, you can see it just in the stock market.

US stock market is up modestly this year and the Chinese market is down, the Shanghai Stock Index, for example, down around 20%.

Steve Pomeranz: Yeah.

Rick Newman: Now the stock market in China is not the same as it is here. Everybody doesn’t have their retirement savings invested in the stock market, so it’s less important.

So, yes, the US has had advantage. But I think the US faces a disadvantage as well, which is that we have electoral politics. And Trump’s power could end up diminished in November if he loses one or both Houses of Congress to the Democrats. Not really the case in China, President Xi Jinping is basically President for life.

Steve Pomeranz: Mm-hm.

Rick Newman: He doesn’t have to explain to an electorate why he is imposing policies that might be hurting some of voters, they don’t really even have voters in China. So it’s possible that China can just hold out longer than United States for political reasons rather than economic ones.

Steve Pomeranz: Of course, they’ve got over 1 billion people that they don’t really want to tick off.

Rick Newman: Yeah, that’s true. So President Xi can’t do whatever he wants, he does have to pay attention to restless workers and things like that. But again, China has a more of a state-run economy than the United States, and there are things that the Chinese government can do to just stimulate the economy, prop up the economy.

Many of the banks are controlled by the government, so they can turn lending credit on or off basically as they wish. They have probably more ability to sweep real economic problems under the rug. So that’s the dynamic we face, I mean, President Trump doesn’t seem like he’s going to back down.

And people who understand China say China’s not going to suffer an embarrassing defeat here. If they’re ever going to agree to any kind of deal, there’s going to have to be some face-saving way out for the Chinese to say to their own constituency at home, we got a good deal here.

Steve Pomeranz: So, for the rest of us, I think it makes sense for us to put our sights on China now, our focus on China. And having those that with all of the news out there, it’s nice to have something to focus on. Hopefully, this will help us understand the world situation and what’s going on.

My guest, Rick Newman, Senior Columnist at Yahoo Finance trying to explain stuff to us. And I appreciate the way you did it, Rick, thanks so much.

Rick Newman: Thanks for having me on, Steve. And if you have a question about what we just discussed, ask us. Visit our website, stevepomeranz.com, to join the conversation, to listen or to read all of our segments.

And while you’re there sign up for our weekly update for the important topics we’ve covered straight into your inbox, that’s stevepomeranz.com.