Aug 2, 2019

The forever trade war

Illustration: Aïda Amer/Axios

Experts are beginning to worry that the trade war between the U.S. and China won't be over in weeks or even months, but has become a long-term conflict that could last for decades.

Why it matters: Bullish investors have priced a near-term positive outcome into record-high stock prices, but a growing chorus of money managers and economists says the conflict's resolution could take a very long time.

Driving the news: President Trump tweeted on Thursday that the U.S. would put an additional tariff of 10% on $300 billion worth of Chinese goods on Sept. 1, again escalating the conflict that has already weakened U.S. growth and business investment. “This does not include the 250 Billion Dollars already Tariffed at 25%,” Trump said.

What's happening: Even before Trump’s latest tweets, ratings firm S&P Global had revised down its outlook for U.S. GDP growth through 2022, because "the risk of trade protectionism between the U.S. and China will persist for some time."

  • Citing “an intensifying multi-front trade war," chief economist Beth Ann Bovino wrote: "A sharper-than-expected slowdown in China and Europe, and uncertainties stemming from Brexit, add to the downside risk."
  • While headlines have focused on tariffs and trade, the real story is about the economic clash between the world’s 2 largest economies, Bovino tells Axios. “The fight over who’s in charge in the new technological world, that doesn’t seem to have any end in sight.”

What they're saying: Kuniyuki Harai, head of trading at MUFG — the world's fifth largest financial institution — believes the U.S. and China are largely reliving the conflict between Japan and the United States in the 1980s.

  • The 2 countries were able to reach an agreement on semiconductors in 1985, which, together with other events, helped propel U.S. exports to new heights. But the conflict with Japan continued until the mid-1990s.
  • "Is the tension [with China] as high as it was in 1985 [with Japan]? Probably not, but from Trump’s perspective a lot of the countries are bad actors like they were back then," Hirai said.

The trade war is more reminiscent of the cold war between the U.S. and the Soviet Union, Neil Hennessy, chief investment officer at Hennessy Funds, tells Axios. But he sees that as a positive.

  • He notes that increased military spending by President Ronald Reagan — prompted by the conflict — helped the S&P 500 deliver positive returns to investors in all but 1 year between 1982 and the Cold War's end in 1991.
  • There was only 1 other down year until 2000.
  • "We’re looking at a very strong market going forward," Hennessy said.

The bottom line: Tax cuts and increased government spending have given a major boost to stocks, but the trade war has already eaten away at U.S. and global manufacturing. That is being reflected in the bond market, but "the S&P 500 has become increasingly disconnected," Binky Chadha, chief U.S. equity and global strategist at Deutsche Bank, said in a recent note to clients.

  • The disconnect is unlikely to persist, and if Trump continues to escalate the trade war, economists say it's only a matter of time before it drives the U.S. and possibly the rest of the world into recession.

Go deeper: The world can't afford a trade war right now

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