China – US: the battle is just beginning

Donald Trump’s threats to world trade are a desperate attempt from the US to maintain the country’s world economic leadership. The most dramatic shift over the past 20 years has taken place in China, as the country has displayed stellar growth and now accounts for an increasingly large percentage of the world economy.

China has been one of the big winners from globalization, as citizens have enjoyed an impressive surge in income to the detriment of the middle and lower classes in developed markets, as shown by Branko Milanovic’s famous elephant chart. This chart also goes a long way to explaining recent political events in western countries: the middle classes across the board have ended up in a more unstable situation than 10 or 20 years ago, and this has major consequences for the way they vote.

The industrial momentum that very swiftly pushes up income is now the preserve of Asia, and China in particular. Industrial output across the US, Japan and Europe – the three major areas that drove world growth after the Second World War – has stagnated over the past ten years, while figures in Asia (excluding Japan) have doubled. The “Made in China 2015” plan seeks to further accelerate this shift.

This contrasting industrial momentum now comes firmly down on the side of Asia and acts as the focus for Trump’s trade measures against China. Output is no longer increasing in western countries, but rather in Asia, driving the region’s catch-up trend and reducing developed countries’ headway. The US is seeing its leadership diminish, while at the same time the situation also raises major challenges for Europe, although it has not taken the same aggressive course of action as the White House. Furthermore, the industrial revival in developed countries often referred to as “Industry 4.0” only seems to involve the substitution of existing production, rather than a true jump in production volumes. For the moment, this so-called revival is not sufficient to point to a reversal in the aforementioned trend towards the location of production in Asian countries. Continue reading

An explanation of the steel and aluminum tariff war in 16 points

The US imposed steel (25%) and aluminum (10%) duties on Europe, Canada and Mexico on May 31, reflecting Trump’s obsession to bring business back to the US and contain the country’s external deficit. He had already presented this idea right from his inaugural address (in French) at the White House, with his view of the world economy as a zero-sum game, meaning each country has to fight tooth-and-nail to get its hands on the biggest slice of the pie. This view is admittedly not helpful in understanding economic and growth momentum, but it is the view we are dealing with here.

Based on steel and aluminum exports to the US, the cost for Canada is very high at around 2 billion, as well as for Mexico (600 million) and the European Union at around 1.7 billion, including close to 400 million for Germany and 150 million for France. These are substantial figures, so they can have an impact on trade with the US.

So in the end, who will come out the winner from this tariff jostling? It is probably a no-win situation. A trade war is a bit like going 15 rounds in heavyweight boxing match…the two fighters make it through, but they are both a mess by the end and run the serious risk of some long-lasting after-effects.

We can raise a number of points:

1 – Announcements made at the start of March and on Thursday May 31 pushed steel prices up, as shown very clearly by the chart below. Continue reading

Where is the US economic policy?

Donald Trump thought that it was an easy task to replace Obamacare by Trumpcare. It was a mistake and Obamacare will remain the framework for millions of americans. He also said in his campaign that the US trade was a source of concern due to unfair trade agreements. He is currently understanding that it is more complex than expected and we can expect that probably nothing important will change.
There was a risk of trade war with Mexico or with China. It’s no longer the case. The press release of the Trump-Xi Jingping in Florida  doesn’t show the revival of a trade war. It’s just a discussion with concessions made by China to the US. It’s not the beginning of a conflict and the very large Chinese surplus with the US will not disappear in a foreseeable future.
In one word, Trump’s campaign as candidate was based on the repeal of the Obamacare and on the possibility of trade war. Both strategies have already failed in less than 100 days. What will happened then? What could be the credibility of the White House? Who will care? The next 4 years may be very long…

The failure of Trump’s strategy is clearly explained by Paul Krugman in a NY Times op-ed published earlier this month.
During the campaign, Donald Trump talked loudly and often about how he was going to renegotiate America’s “horrible trade deals,” bringing back millions of good jobs. So far, however, nothing has happened. Not only is Trumpist trade policy — Trumptrade? — nowhere to be seen in practice; there isn’t even any indication of what it will involve.”
Continue reading here