Do the Trump Trade Wars = Recession?

The Mortgage Corner

There are already signs President Trump’s trade wars are hurting. Right now, it’s mainly his Midwestern farm constituents that have seen their agricultural exports plummet. But what happens when rising prices from the tariffs are passed on to consumers, as well as the manufacturers with their increased costs from higher-priced imported components that go into manufactured products?
China accounted for 50 percent of all soybean exports before Trump began to raise tariffs. But no longer. Last November, Chinese soybean imports from the U.S. fell to zero, said the LATimes. 

“The share of total U.S. agricultural exports to China in value terms is projected to be 6 percent, down sharply, with China falling from the top market in 2017 to fifth place,” U.S. Department of Agriculture Chief Economist Robert Johansson told the agency’s annual forum in Washington on Thursday, Reuters reported. Johansson explained that the amount of soybeans exported this year compared with the same time last year decreased by 13.5 million metric tons.

“Under the trade dispute, exports to China alone have plummeted by 22 million tons, or over 90 percent,” he added. Overall, farm exports were projected to fall to $141.5 billion in 2019, a decrease of about $1.9 billion.

The result is farm bankruptcies in Wisconsin, Minnesota, Montana and the Dakotas have surged in the last two years, reaching 103 in 2018, according to the Federal Reserve Bank of Minneapolis. That’s the highest level since 2010, during the post-recession hangover.

LATimes

“This trend has not yet seen a peak,” the Minneapolis Fed said in November, per the LATimes’ Michael Hiltzick. “One frustration for farmers and businesses suffering from the tariffs is that Trump appears to have no understanding of how tariffs work. In tweets, he has suggested that they’re paid by the exporting country — i.e., China, in the case of manufactured goods.”

They’re paid either by American importers if they maintain their pre-tariff prices to customers, or by consumers, hit with higher prices for imported goods. Even Trump economic advisor Lawrence Kudlow acknowledged over the weekend that the tariffs are “in effect … a tax increase” on Americans.

“Trump had promised to provide farmers with $15 billion in government relief, on top of the $12 billion he earlier pledged,” said Hiltzick. “But that could mean that American consumers pay twice for what appears to be Trump’s whim of iron on international trade — once in higher prices for foreign-made goods, and again to pay for the bailout for the agricultural sector.”

So manufacturing is another sector that is seeing rising costs. The Commerce Department just reported that both import and export prices are rising. U.S. import prices advanced 0.2 percent in April, after increasing 0.6 percent in March. (It said the April advance was driven by higher fuel prices, which more than offset decreasing prices for nonfuel imports.) But prices for U.S. exports also rose 0.2 percent in April after a 0.6-percent rise in March.

And Economics 101 says rising prices will kill any recovery, if prolonged. The danger of a prolonged trade war Deutsche Bank says in its most recent remarks, means that “aggressive posturing” aimed at getting concessions is often at the core of escalating conflicts such as what we’re seeing between Beijing and Washington.

Deutsche Bank says “The nature of trade wars (like actual wars) is that they foster nationalist sentiment and jingoism. The first shots are fired in the hope of quick victories. And before you know it, both sides are stuck in the trenches, with no obvious and politically feasible way out.”

I seriously doubt that President Trump will go that far in his need to feel like a winner, rather than be perceived as a loser.  But who knows, really, and that’s the problem. 

Harlan Green © 2019

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Beware the Shrinking US Dollar!

Popular Economics Weekly

Wolfstreet.com

Barron’s Magazine reported that the Fed is shrinking credit too quickly, and it will slow not only U.S. economic growth, but growth in the rest of the world as well. Why? Because the U.S. Dollar is the world’s main reserve currency that covers more than 60 percent of world trade.

And since the Fed is taking circulating $$ out of the economy by selling some of those $4 trillion in securities it has been holding since Fed Chair Ben Bernanke’s term--$50 billion per month—it is reducing the amount of dollars in circulation, leaving fewer dollars to pay for transactions via the world’s banks and clearing houses.

Over the four-week period from October 3 through October 31, reports Wolf Street, the Federal Reserve shed $35 billion in assets, according to the Fed’s weekly balance sheet released last Thursday afternoon. This brought the balance sheet to $4,140 billion, the lowest since February 12, 2014. Since October 2017, when the Fed began its QE unwind, or “balance sheet normalization,” it has now shed $321 billion:

wolfstreet.com

And that could mean that China’s Yuan (Renminbi) and the euro would begin to replace it as reserve currencies, meaning that fewer transactions would flow through US banks and economy. This also means the US then has less control over trade rules, and yes, sanctions it wants to impose on other countries, like Iran. This is because other countries don’t like economic bullying that isn’t in their best interests, and will seek to use other currencies, such as the euro in place of the dollar.

The dollar leads all other currencies in supplying the functions of money for international transactions. It is still the most important unit of account (or unit of invoicing) for international trade. It is the main medium of exchange for settling international transactions. It is also the principal store of value for the world’s central banks, said a recent Bank of England Quarterly Bulletin.

But what can happen next, as worldwide growth slows, which is sure to happen as dollar reserves and credit shrink?? Trump’s trade war is happening at a very bad time. Economist and Project Syndicate columnist Jeffery Sachs has outlined the possibilities of trade policies that harm, rather than help economic growth.

“The most consequential and ill-conceived of Trump’s international economic policies are the growing trade war with China and the re-imposition of sanctions vis-à-vis Iran. The trade war is a ham-fisted and nearly incoherent attempt by the Trump administration to stall China’s economic ascent by trying to stifle the country’s exports and access to Western technology. But while U.S. tariffs and non-tariff trade barriers may dent China’s growth in the short term, they will not decisively change its long-term upward trajectory.

“More likely, they will bolster China’s determination to escape from its continued partial dependency on U.S. finances and trade, and lead the Chinese authorities to double down on a military build-up, heavy investments in cutting-edge technologies, and the creation of a yuan-based global payments system as an alternative to the dollar system.”

This is hardly making US safer, in a world that has outgrown dependence on US economic and geopolitical power. The US currently produces around 22 percent of world output measured at market prices, and around 15 percent in purchasing-power-parity terms (i.e., actual volume). Yet the dollar accounts for half or more of cross-border invoicing, reserves, settlements, liquidity, and funding.

We could be punching above our weight, as the saying goes, if we continue to bully our economic allies, as well as our adversaries. There are now other Heavyweights in the ring.  

Harlan Green © 2018

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen