Tariffs Hurt Everyone, and More Emerging Truths

(Bloomberg) --

As negotiators from the U.S. and China prepare for a new round of trade talks in Shanghai this week, it’s a good time for an economic reality check heading into the meetings that begin Tuesday:

• Everyone loses when the world’s two largest economies slap tariffs on each other. The slump to 2.1% growth in second-quarter U.S. GDP unveiled Friday was attributable largely to stalling business investment due to trade war-fueled uncertainty. And in China, where growth has slowed to 6.2%, a similar pattern has emerged.
• The fallout is more chronic than acute. In sports terms, the injury is more like a concussion than a blown-out knee. Tariffs sting. But the bigger blows are hits to investment, confidence and growth.
• Washington and Beijing have safety nets in fiscal and monetary policy that will limit both the damage and the incentives for a quick deal. That will be illustrated this week when the Federal Reserve is expected to cut its policy rate. The Fed is simply delivering on its mandate. Yet there is an element of moral hazard at play. Safety nets can be bandages over bad policy decisions. But they also can encourage officials to double-down on them.
• Currencies look like the next battlefield. The biggest economic news to emerge from the White House on Friday were signals that the administration, favoring a weaker dollar, was considering intervening in currency markets and that a chaotic internal debate is underway. Already uncertain financial markets just got a little more confused.
• The frame of reference is shifting as we normalize the pain. China’s state media announced Sunday it had bought “millions” of metric tons of American soybeans since June. Bloomberg reported last week that Chinese buyers are eyeing short-term purchases of 2-3 million tons. Yet that number needs context. Purchases in the first six months of this year were the lowest since at least 2004. In the first half of 2017, China imported soybeans at a rate of 3.2 million tons a month.
• Costs are still rising. The biggest tariff barrage — the U.S. hike of tariffs on some $200 billion in Chinese imports from 10% to 25% — didn’t really take hold until June. So while the initial pain has been inflicted, the swelling is just beginning.

Charting the Trade War

U.S. soybean supplies to China slumped in the first half of 2019 to the lowest level in more than a decade as little progress was made on ending a trade war between the two countries.

Today’s Must Reads

• Nearing bottom | Asia’s export slump may be bottoming out as long as the dispute between Beijing and Washington doesn’t escalate, according to Goldman Sachs.
• Somber Singapore | The city-state’s economy has taken a turn for the worse recently after showing relative resilience earlier this year. Now confidence is dented further.
• Paris digs in | France is sticking with its plan to tax big multinational tech companies, defying U.S. President Donald Trump’s suggestion he might impose tariffs on French wine.
• Trade tribunal | If Trump follows through on threats, the World Trade Organization will effectively cede its function as the referee over violations of international law.
• Nigeria eyes FTA | Africa’s most populous nation has approved the creation of a committee to oversee the country’s involvement in the African Free Trade Agreement.

Economic Analysis

• China primer | It’s hard to see the U.S. rolling back existing tariffs on China, given the prospects for a deal.
• Brexit fallout | Moving to WTO tariffs for food products from Europe would raise the cost of U.K. imports.

Coming Up

• July 30-31: U.S.-China trade talks in Shanghai
• Aug. 1: South Korean exports

To contact the editor responsible for this story: Brendan Murray at brmurray@bloomberg.net, Zoe Schneeweiss

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