Guest post by John Manzella*, U.S.-China trade war damage could last decades

When it comes to international trade, China hasn’t always played by the rules. So the question begs: How do you change that behavior? Engaging in a trade war by imposing tariffs isn’t ideal. To save face, Chinese President Xi Jinping must appear strong and that means responding to U.S. tariff increases with Chinese tariff increases. This tit for tat strategy, which escalated again on September 1, is increasing volatility and uncertainty, while hurting economic growth. But it gets worse.

As America’s exports to China get shut out, our allies and trading partners are filling the gap. For example, as U.S. soybean exports to China have dropped due to retaliatory tariffs, Brazilian soybean exports there have surged. Canada, Mexico, Australia, Japan and others also have benefited. These new trading relationships are unlikely to be temporary.

Reported in Xinhua, China’s official news agency, Han Jun, China’s vice-minister of agriculture and rural affairs, recently said: “Many countries have the will and ability to replace the U.S. presence in the Chinese agricultural market. If other countries become reliable suppliers to China, it will be difficult for the United States to regain the position.”

President Trump’s unpredictable actions may be textbook negotiating tactics. But they have Chinese customers questioning whether they can rely on American suppliers, which they increasingly view as unreliable partners due to the volatility in the commercial relationship, says the US-China Business Council (USCBC), an organization of approximately 200 American companies doing business in China. And the damage is mounting.

While 49% of respondents of a recent USCBC survey said they lost sales in China due to retaliatory tariffs, 37% said they lost sales due to their Chinese partners’ concerns about doing business with American companies, a seven-fold increase over 2018. Even if the trade war ended tomorrow, Chinese concerns moving forward likely will call for strategies to play it safe by reducing dependence on U.S. companies.

Trump’s go-it-alone tariff approach is proving very worrisome at best. And his statement, “trade wars are good, and easy to win,” couldn’t be further from the truth.

When faced with Trump’s tariffs, virtually all America’s allies and trading partners have responded in kind, often targeting U.S. agricultural exports. Peter Navarro, Trump’s trade advisor, grossly miscalculated what would follow when in 2018 he said, “I don’t believe there’s any country in the world that will retaliate for the simple reason that we are the biggest and most lucrative market in the world.”

What is a better strategy to deal with the Chinese? Working closely with our European, Asian, and other friends around the world to establish a united front against China would likely prove more effective. And for the most part, we have similar interests with regard to curtailing Chinese bad behavior.

But establishing a united front at this point would be difficult since Trump has either threatened many of our friends with protectionist measures or weakened the relationships. Nevertheless, this option may still be the best way forward.

The administration’s desire to persuade China to stop subsidizing its state-owned enterprises, enforce intellectual property protection, eliminate trade restrictions on U.S. firms, and stop demanding U.S. companies hand over technology in exchange for Chinese market access are important goals. But implementing the wrong strategy is severely hurting those it is intended to help.

American farmers and exporters have spent decades developing the Chinese market. Losing those markets is costly and difficult to bear. But trying to win them back may be extremely challenging, if not impossible at least in the foreseeable future. It’s time for the administration to take a different approach.

*John Manzella, founder of the ManzellaReport.com, is a speaker, author and nationally syndicated columnist on global business and economic trends. Contact him at JohnManzella.com.

Economics is Dismal But Is It a Science?

On September 3^rd, Joseph Epstein’s article was published in the Wall Street Journal – Economics is Dismal, But Is It a science?*

Epstein’s worry about economics is common but misplaced because most of us do not know what a science is. Epstein is worried that an economist makes an analysis or a forecast based on something that might not always be right. He underscores the idea that because politicians abuse economics, then it must be the fault of the economics. It is more true that economics is fine. It is the politicians and the journalists who are the problem.

I am glad that Epstein didn’t write about shovels. Shovels are perfectly good tools to move dirt from point A to point B. But if Donald Trump and Nancy Pelosi were in one room and each held a shovel – he might worry that those dang shovels are just way too political. Hmmm.

This opening allows me to pontificate about economics and science. When I was in graduate school at Chapel Hill I was fortunate to take a course in what was called economic methodology. It would have been better named economic philosophy or the philosophy of science. You didn’t learn much micro or macro economics in that course but rather we learned what it means to seek and find truth. That sounds hoity toity but it is a way to describe what we do as people every day.

In the USA we drive on the right side of the road. If you drive on the left you soon learn a lesson about safe driving.  You might say we learn by doing. We find similar truths in many ways every day. Sometimes we find truth by merely thinking about things. You do not need to throw a dart in the air above your head to find out it might come down and hit you on the head. Instead, you could sit in a nice chair and think about the law of gravity. You learn that what goes up must come down. So, you might not throw a dart or a bowling ball right above your head. The Theory of Gravity helped you learn that lesson. Of course, repeated trials could teach you the same lesson but that  might be painful. 

So what is a science? A science is basically a way to discover what seems to be true. It usually has two parts to it. The first part is the theory. We use all sorts of theories to make predictions. The theory of electricity tells you not to stick your screwdriver into the electrical socket. The theory of macroeconomics tells you that if governments have too much debt this might raise interest rates and/or inflation.

The second part of a science is to test to see if your theory holds in the real world. Have your worst friend stick a screwdriver into the socket 100 times to see if the theory holds. Or watch to see how large government debts affect interest rates and inflation in various countries at various times.

Epstein worries that economics is not a science. But surely all one has to do is theorize a bit and then put the theories up to testing in the real world and you have a science. Of course some people make distinctions between hard and soft sciences. Chemistry might be a hard science because physical laws are pretty old and tested. Economics is a soft science largely because it is the new kid on the block and has a ways to go before it gets the predictive accuracy of chemistry. It also deals with human behavior which can be less predictable that electrical currents. 

But please Mr Epstein do not confuse this hard/soft idea with politics and manipulation. All one needs to do is think a moment about how hard scientists disagree about such things as a hurricane’s path, the health effects of meatless meat or vaping, the timing of global warming, dangers of biofoods, the origins of black holes, and so on. No science has it all down pat. There are disagreements within all of them. This means we have not yet learned everything about a phenomenon and need to keep trying. But it also gives room whenever there is a policy issue stemming from these disagreements, for politicians and Epstein’s buddies in journalism to turn science into a heated and colorful debate.

In that sense, economics is no different from any other science – hard or soft. No matter what kind of science, when we try to extrapolate what we think we know into the future, we can never be sure we will be accurate. When we are not accurate then we should learn from the mistakes and improve the theory. But Epstein doesn’t care about that – he’d rather blame economics instead of the stupidity of politicians and the press.

* https://www.wsj.com/articles/economics-is-dismal-but-is-it-science-11567551425?mod=searchresults&page=1&pos=1

Nice Weather If You Are a Duck

No, I don't forecast weather. When it is raining we often say that it is nice weather -- but only if you are a duck. In other words -- if you are not a duck -- it is NOT nice weather!

I decided to take a break from moaning this week in order to look at some data. The data is meant to capture the growth of the world economy and its various parts. The International Monetary Fund loves to gather and present data. Normally, we all get to see the data when they present their World Economic Outlook reports in May and November. During the year, however, they often present updates. I found updates to world economic growth as of July 2019. These are presented in the table below.

You might say that the world economy is fine so long as you are not a duck. That doesn't make any sense so we might say the world economy is fine so long as you love being unemployed and/or don't like being hassled by things like customers. In fact, the world economy real stinks.

I took from the IMF dating measuring the real GDP growth of the world and various regions and countries. The first column in the table shows the actual growth rates in 2018. Since we are in the middle of 2019, I ignored that year. The second column shows the IMF projections for 2020 as of about a month ago, in July. As in all forecasts or projections, the future may turn out to differ from the projections today. But it is interesting to see what they are saying about the future today.

Notice that when you average all the countries of the world, the story is not too bad. The IMF expects world economic growth to stay about the same -- though technically we see a decline from 3.6% to 3.5% from 2018 to 2020. When compared to past years, this 3.5% is definitely below the usual outcomes. But on the positive side, while growth is slowing in most places, the IMF is not predicting a contraction in output in any of them. In other words, they are not forecasting a recession.

The US stands out in the table in going from 2.9% to 1.9%. That 1% decline in growth amounts to a 35% reduction in 2020 relative to growth in 2018.

Comparing future US economic growth to the other 17 places places listed in the table, only four countries/areas (Germany, India, Latin America & the Caribbean, and the Middle East, North Africa, etc.) are expected to grow faster in 2020 compared to 2018.

The remaining countries in the table are expected to decline (or stay the same) in terms of real GDP growth in 2020 compared to 2018. That's pretty special and deserves at least one JD toast.

While the 34.5% decline in the USA is impressive, Japan's growth is expected to shrink by about 50%. Economic growth in Russia, Spain, the Euro Area, Emerging Europe, France, and Italy are all expected to shrink by double-digit percentage changes. Smaller but still negative declines are expected for China, Mexico, and the Group of ASEAN countries.

Projections like these can be important to expectations, the least of which today result in low inflation and interest rates. As we go through the remaining months of 2019, it will be very interesting to see how this global picture changes.

	Actual	Projection	Diff	Diff %
	2018	2020		Change
World	3.6	3.5	-0.1	-2.8
US	2.9	1.9	-1.0	-34.5
Euro Area	1.9	1.6	-0.3	-15.8
Germany	1.4	1.7	0.3	21.4
France	1.7	1.4	-0.3	-17.6
Italy	0.9	0.8	-0.1	-11.1
Spain	2.6	1.9	-0.7	-26.9
Japan	0.8	0.4	-0.4	-50.0
UK	1.4	1.4	0.0	0.0
Canada	1.9	1.9	0.0	0.0
Russia	2.3	1.9	-0.4	-17.4
China	6.6	6.0	-0.6	-9.1
India	6.8	7.2	0.4	5.9
ASEAN	5.2	5.1	-0.1	-1.9
Emerging Europe	2.6	2.3	-0.3	-11.5
Latin Am & Caribb	1.0	2.3	1.3	130.0
Middle East, N. Africa, etc	1.6	3.0	1.4	87.5
Mexico	2.0	1.9	-0.1	-5.0
https://www.imf.org/ en/Publications/WEO/Issues/2019/07/18/WEOupdateJuly2019

Sticks and Stones Monetary Policy

I was having one of those weeks when it seemed like there wasn’t anything to say in the macrosphere. And then Fed Vice Chair William Dudley piped off enough to warrant an article about him in the WSJ (8/28/19) titled “The Federal Reserve Resistance.” Thanks Mr. Dudley. You made my day.

When I was a kid in the olden days our parents didn’t want us to get into fist fights. If someone said something nasty to us, we were told to say – “Sticks and stones will break my bones but words will never hurt me.” If anything, we should have learned this about Donald Trump. He says and tweets a lot of words. And often the words have no real meaning. He blurts and blurts. Most of us have learned to just ignore all that blather. Your grandma wears combat boots. Your Dad has a long nose. Your butt is bigger than Mt Everest. Most of us ignore stupidity.

That’s what is so surprising about Mr. Dudley. I am sure he has a PhD but I refuse to call him Dr. until he acts like one. He is acting like a school child and that’s okay for him – but he is ruining our understanding of the Fed’s role and in so doing proposing ridiculous policies.

The Fed is independent of the President and mostly from Congress. The President can nominate people to the Fed’s governing board when openings arise as in the Supreme Court. Congress can approve or disapprove of these nominees – and Congress always can write a new banking law that changes the operating rules at the Fed. But these options do not give the President or Congress the right to tell the Fed what to do insofar as ongoing monetary policy concerns.

As such, the Fed does what it wants to do. Trump or Pelosi or whoever can make speeches and write articles criticizing the Fed, but it doesn’t change a thing at the Fed. The Fed is usually smart enough to wear blinders or earplugs – but not Mr. Dudley. He makes up a fiction that the President is overstepping his duties. We all know Donald Trump. He runs his mouth a lot. Most of us ignore most of it. Why doesn’t Mr. Dudley do the same? 

Trump can talk all he wants but the Fed is independent. Trump can pressure the Fed to lower interest rates and previous Presidents have done similarly, but that doesn’t mean the Fed has to comply. I can remember many speeches by Arthur Burns wherein he basically turned the tables and told the President that if he did a better job at fiscal policy he wouldn’t need to pressure the Fed.

Instead Mr. Dudley wants to overthrow the President in the coming election. Really? Is that an independent Fed? Mr. Dudley even said the Fed could bring this about by not following Trump’s orders – and thereby pushing the economy into a recession. Mr. Dudley implied that recession might influence voters to get rid of President Trump. Wow. Crazy stuff. The Fed is just making things worse with this war of words.

If you read this blog you know I agree with the idea that the Fed should not lower interest rates. So it appears that I agree with Mr. Dudley about the direction of Fed policy. But when he gets too political and he says the Fed should induce a recession for political purposes -- he crosses the line. Instead Mr. Dudley could try to educate people about Fed independence and he could explain why a good Fed policy probably would NOT cause a recession...even if it means raising interest rates a tad.