US President Donald Trump. Picture: REUTERS
US President Donald Trump. Picture: REUTERS

Most Americans are probably unaware that it is just passed a year since their president, Donald Trump, started his trade war with China. It is even debatable if most voters will recall what it was all about. But they, along with other economies, including ours, should be counting the costs.

In keeping with Trump’s world view of everything being a zero-sum game — if you win, I lose — he started the conflict to ostensibly close the US’s massive trade deficit with China, which the Guardian newspaper put at $419.5bn (R6.5-trillion) in 2018.

There are also the longstanding accusations of China, now the world’s second-biggest economy after the US, stealing intellectual property. But the biggest win from the US would involve China buying more of its goods, most notably agricultural products, in order to close that gap.

On that score, Trump doesn’t seem to be winning. The latest data shows that the US goods deficit with its adversary reached a five-month high in June as the value of its exports to China dropped more than that of its imports.

This may well be a sign that US consumers are struggling to find alternatives to Chinese goods and may be getting punished by the tariffs, which are essentially an extra tax paid either by consumers or companies, or both.

US exports to China were down 18.1% in the first half of 2019 compared to the same period in 2018, according to data from Bloomberg. On the other hand, US imports had declined by 12.2%.

It was only five months ago that Trump boasted, that trade wars are “good, and easy to win”. The market reaction to each statement of bravado would seem to indicate otherwise, also supported by the general uptick when there is progress.

For a while, it seemed the latter emotion was winning, but then Trump upended things again on August 1, when he said the US would put 10% tariffs on another $300bn worth of Chinese goods, starting September 1.

That move came as a shock to the market, seeing that at the time the two sides had re-started talks in Shanghai that week, in interactions that the US had described as “constructive”. There was no reason given why the ceasefire was unilaterally ended, showing the difficulty of dealing with the erratic president.

After gaining 5% in the two months to the end of July, the S&P 500 has since declined some 3%, mainly as a result of Trump’s August 1 announcement of the latest tariffs.

In another sign of investor unease, US Treasuries have gained, with the yield on 10-year notes dropping to less than 2%. Investors tend to buy the debt as a safe haven in times of economic uncertainty, when induced by actions in the US. 

China immediately promised to retaliate and angered Trump more when it decided to allow the yuan to weaken against the dollar, prompting accusations of currency manipulations from the American government. 

On the face of it, devaluing the yuan seemed a rational reaction that would imply even with the new tariffs, the impact on the end-user, and therefore volumes of Chinese exports, would be minimal. On the other hand, that gave investors something else to be worried about, the prospect of a full-blown currency war, with consequences that are still to become clear. What is obvious is that they are not expecting anything good to come out of it.

One of the biggest ironies about the Trump trade war is that it has intensified his disagreements with Federal Reserve chair Jay Powell, who is likely to come under even more pressure to add to the interest-rate cut he delivered in July.

That cut came despite the US economy being in rude health and the unemployment rate being near record lows.

One of the main risks to the economy identified by the Fed when it cut rates in July was the potential for weak global growth and trade tensions, which Powell said already caused a weakening of investment and manufacturing.

That’s the last thing a president facing a re-election contest in the next year needs.

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