Some Perspective on Trump’s Trade Tweeting

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President Trump, continuing his battle against the media, spoiled financial reporters’ Cinco de Mayo festivities Sunday by tweeting the following 554 characters:

For 10 Months, China has been paying Tariffs to the USA of 25% on 50 Billion Dollars of High Tech, and 10% on 200 Billion Dollars of other goods. These payments are partially responsible for our great economic results. The 10% will go up to 25% on Friday. 325 Billions Dollars….

….of additional goods sent to us by China remain untaxed, but will be shortly, at a rate of 25%. The Tariffs paid to the USA have had little impact on product cost, mostly borne by China. The Trade Deal with China continues, but too slowly, as they attempt to renegotiate. No!^[i]

With this, financial reporters ditched the margaritas and a fun Sunday hammering out articles arguing the alleged positive force of trade-deal progress is set to unwind—and stocks will pay for it. After all, they claim, the rebound from Q4’s correction hinged at least partly on the increasing likelihood of a trade deal.^[ii] Now, they argue, tariff tensions are back, with many venturing into speculation over how China may respond. But, in our view, this is just the latest overreaction to small tariffs that pretty clearly amount to little more than a negotiation tool. Whether or not Trump’s tweets become reality, stocks shouldn’t be fazed for long.

To begin with, neither we nor anyone beyond perhaps the president himself can be sure this tweet will lead to higher tariffs. Trump often uses incendiary rhetoric as both a negotiating ploy and a distraction for his political opponents. Twitter is pretty frequently his medium of choice. We have long suggested talk and tweets are very cheap—actions are far more meaningful. Consider: This isn’t the first time Trump has threatened to jack up rates to 25%. He already delayed two previous implementation dates. Further, with 2020 election talk already swirling, Trump could be issuing these statements ahead of a completed deal. Then he can present them as evidence his tough stance drove results—likely a positive position in the eyes of his base.

Outside China, there is further evidence Trump’s tweets Sunday are just part of his politicking and negotiating style. After decrying the “unfair” North American Free Trade Agreement on the campaign trail, he inked a replacement deal last year with few changes. He is now championing its passage in Congress. Just last month, his administration unveiled a list of $11.2 billion worth of EU products it would target for tariffs should US-EU trade talks remain bogged down.^[iii] He has occasionally taken to critiquing prescription drug pricing and vaguely threatening government action, yet nothing has actually happened. In our view, this all speaks to why overreacting to Trump’s tweets is very likely an error.

Moreover, even if the threats do materialize, as we have written on these pages for over a year, we think Trump’s tariffs are simply too small to render material harm to the global, US or Chinese economies. Upending growth likely requires a negative worth trillions of dollars. We are nowhere near that—even assuming the extreme interpretation of Trump’s tweets. The 25% on $200 billion amounts to $50 billion in tariffs. Nominal US GDP finished 2018 at $20.5 trillion.^[iv] China’s 2018 GDP was about $13.6 trillion.^[v] Hence, $50 billion is roughly 0.4% of Chinese GDP. It is 0.1% of US and Chinese GDP combined. Even if we add in 25% tariffs on the other $325 billion Trump alluded to, tariffs would amount to only 0.4% of combined US and Chinese GDP. Moreover, our estimates of tariffs’ impact assume they are paid in full—yet, as we noted months ago and many have subsequently reported, relabeling and shipping through third parties means that isn’t likely.^[vi]

A lot of pundits’ reactions seem tied to the narrative that tariffs are behind China’s economic slowdown. But we think it is more likely China’s crackdown on shadow banking is to blame. The government’s efforts to reduce lending from non-banks—the so-called shadow banking system—hit small- and medium-sized private businesses hard, as banks traditionally lent to larger, state-owned firms. The crackdown seems to have overshot, tightening credit to small firms excessively. This is a point China’s targeted stimulus echoes, considering it pretty directly aims at assisting private small-and-medium sized enterprises through credit and tax cuts.

One thing Trump’s tweets seemingly make clear: Protectionism isn’t his administration’s policy aim. It looks more like a means to an end. Re-read those 554 characters. The stated rationale for enacting higher tariffs is to get China moving faster on a free trade deal. Now, we won’t pretend to try to fact-check him on this—or point out the array of fallacies in his tweets’ claims of tariffs’ economic benefits. We figure pundits will handle that in spades. But those adhering to the notion Trump’s trade policy aim is de-globalization really ought to reconsider this stance now, if they haven’t already.

Ultimately, we think Sunday’s episode is just the latest example of folks fixating far too much on Trump’s Twitter feed. Yes, he is taking a carrot-and-stick approach to trade talks. Markets can swing on big rhetoric in the near term, as they did early Monday morning. But longer term, it is action—and the scope of those actions—that matters more to markets.