There’ll be no swift resolution to this trade war

As Donald Trump threatens to put tariffs on all imports from China and Beijing tells its state-owned organisations to stop importing US agricultural products, the trade war looks set to drag on.

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  1. Garry White

At the end of last week’s trade talks between the US and China, there were no signs of a breakthrough. Beijing made a commitment to buy more US farm products – but so what? They’ve made this commitment before and failed to deliver. It appears that market hopes for a swift return to ‘business as usual’ have now been dashed – with Beijing seeking to cause as much pain to Donald Trump’s farming base as it can before the 2020 presidential race. This can only ratchet-up Trump’s rhetoric.

2020 looms

Last week, Dave Dodson, a former Republican Senate candidate and now a lecturer at the Stanford Graduate School of Business, said the trade war risked losing the election for the Grand Old Party in November next year. “The 2020 Republican electoral map looks a lot like a map of the nation’s soya bean production. Donald Trump now has a net negative rating in Iowa and Ohio, two of the top ten soya bean-producing states that he won in 2016,” Mr Dodson noted. “If America’s farmers vote [with] their pocketbook, Donald Trump may have a hard time reaching 270 electoral votes in 2020.” In North Dakota and Nebraska, which were also red states in the 2016 election, the president’s net approval rating has dropped 17 and 22 points respectively since 2016.

Comments from President Trump last week highlighted the dwindling chances of a deal. “I think the biggest problem to a trade deal is China would love to wait and just hope,” he said just as Treasury Secretary Steve Mnuchin and Trade Representative Robert Lighthizer were sitting down to talk to their Chinese peers. “They would just love if I got defeated so they could deal with somebody like Elizabeth Warren or Sleepy Joe Biden or any of these people, because then they’d be allowed and able to continue to rip off our country like they’ve been doing for the last 30 years.”

Although the US economy grew at a better-than-expected 2.1% rate in the second quarter, as consumer spending remained robust, there was the first drop in business investment since 2015. Exports also fell. If these trends continue they are likely hit global growth.

Agricultural products slump

US soya bean exports to China slumped in the first half to the lowest level in more than a decade. This is despite Chinese commitment at the last two G20 meetings to buy more Midwestern soya beans. At the same time China was making empty promises, it has been sourcing agricultural products from elsewhere. Supply chains for electronic devices are complex and hard to reconstruct, but a Russian or Brazilian soya bean is easy to substitute for US products. Beijing has started a process of import substitution with a vengeance and this is unlikely to fully reverse.   

Last year, Russian imports of the animal feedstock represented just 0.9% of China's total soya bean imports during the year and the country does not produce enough to fully substitute US supply. However, soya bean imports from Brazil rose by 46.8% in the first four months of the year at the same time as US imports fell 70.6%. Of course China hasn’t completely stopped taking in supply from the US, but even if the trade war is halted soon, this supply diversification is likely to continue.

Nevertheless, Mr Dodson believes that the US will regain much of the lost soya bean volume once the trade war is over. However, he argues that the expanded worldwide infrastructure will almost certainly reduce long-term prices for soya beans, as lower-cost producers such as Russia and Kazakhstan begin to sell their product into China. So, even if volumes recover, pressure on US farmers will continue in the form of lower prices.

So with the 2020 election now an apparent factor in Beijing’s trade strategy, what does this mean for investors? The trade tariffs in themselves are unlikely to drag the global economy into recession. However, the slowdown in business investment is a worry. According to Bank of America Merrill Lynch, of the 45 companies in the materials and industrials that mentioned trends in China in their second-quarter earnings calls, almost 50% were negative comments, compared to just 28% in the first quarter. Manufacturing data from Europe released this week has also been particularly downbeat and this slow grind looks set to continue. Unfortunately, investors will simply have to get used to it.

A version of this article appeared in Friday’s Daily Telegraph.

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