The China - US Trade War (I)

Written by Alfonso Elizondo

 

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The huge economies of the United States and China are very intertwined, which makes it very difficult for this current war to last a long time. The Chinese middle class is the growth engine for Boeing, Apple, Nike and other US brands. And China is expected to follow the old American taste for cheap goods that has created a huge employment factory for millions of Chinese workers.

In 2018 alone there were almost $700 billion in goods traded between China and the United States. With $1.1 trillion in Treasury bonds, China is the largest creditor of the United States. So they both need each other. The current tariff war seriously threatens one of the vital economic relationships in the world today. But instead of looking for a trade agreement, the opposite is happening.

On Monday, the Dow Jones fell 617 points, or 2.4% after China retaliated against tariffs announced by Trump. So Beijing promised to impose taxes on US products to the tune of more than 60 billion dollars - from cotton and aircraft parts to machinery.

Tariffs are the preferred weapons as both nations try to improve their bargaining power, leaving consumers and companies trapped. UBS lowered its GDP outlook for China in 2019 from 6.4% to 6.2%. According to David Kotok, Chairman and Director of Cumberland Advisors, the interconnection between China and the United States has stemmed from the millions of Chinese who have come out of poverty.

Chinese customers are using their new wealth to buy cars, iPhones and shoes of all kinds, which represents a great growth opportunity for General Motors, Apple and Nike. In addition, Chinese consumers fly more, which makes Boeing an important export market, although it is feared that Boeing will be used as a bargaining chip in the trade war.

In 2018, the US sent $120.3 billion to China, making it the third largest market in the country, after only Canada and Mexico, according to the US Census Bureau.

On the other hand, the US energy boom could be an excellent option for solving China’s huge pollution problem, using natural liquefied gas (LNG) that would help to put an end to the use of coal. But China's LNG purchases have fallen and that trend will keep growing. The reason for this is that China raised the tax on LNG from 10% to 25% and has gone down an unexpected path set by the Commune of the ruling Communist Party.

Addendum: In the second part of this article we will look at the Trade War from a broader geopolitical perspective that encompasses the world's major economies, as well as the profound global change in economic, financial and monetary policy.