14 August 2019   Leave a comment

Stock markets around the world fell today as evidence mounts that global economic growth seems to be slowing. In China, industrial production fell 4.8 percent in July, the lowest level since 2002, and Germany experienced negative growth for the second time in the last three quarters. In the US, the bond market became “inverted” with short term rates higher than long term rates–a sign that bond investors believe that economic growth in the future will decline. An inverted bond market often signals the onset of an economic recession.

The stock market in the US was higher yesterday as US President Trump decided not to impose new tariffs on Chinese products on 1 September as he had threatened. Instead, a decision will be made at the end of the year. The tactical change revealed a number of important issues. First, the delay was justified by President Trump because he did not want prices of such goods as toys and electronics to rise before the Christmas buying season:

Q.  Would you consider moving the tariffs, even?  Delaying them even further, past December 15?

THE PRESIDENT:  No, we’re doing this for Christmas season, just in case some of the tariffs would have an impact on U.S. customers, which, so far, they’ve had virtually none.

Note that the statement contradicts President Trump’s earlier position that the Chinese are paying for the higher tariffs, as noted by Tory Newmyer in The Washington Post: ” The president’s claim that the impact of existing tariffs on American shoppers has been ‘virtually none’ is provably false. Yet the acknowledgment that consumers would be on the hook for tariffs broke new ground for Trump, who has insisted for months, against a consensus among economists and a raft of data, that the Chinese are footing the bill for his trade war.”

Second, the US received nothing in return from China from the delay. Last week, China announced that it would stop buying US agricultural products because of the threat of the new tariffs. But after Trump announced that he was delaying the tariffs, the Chinese did not say that they would return to buying US agricultural products. Backing down without any reciprocation is capitulation, which is not necessarily a bad tactic unless one is engaged in extended negotiations. Capitulation in an early stage of a negotiation weakens a bargaining position since it indicates a reluctance to endure the economic or political position to force concessions.

Third, there are two keys to winning a negotiation. First, one needs to figure out a way for both sides to benefit from the outcome of the negotiation. There is precious little evidence that either Trump or Xi are pursuing a win-win strategy at this point. Second, each side needs to persuade the other that it is willing to endure the pain of loss in order to achieve a victory. President Trump has always said that China will suffer more than the US from a trade war. But his statement today suggests that he is worried about the effects of a trade war on his re-election chances. If that is true, and China is certainly aware of that concern, then there is a real time limit on how much pain Trump is willing to suffer. The Chinese may simply decide that they should wait until election pressures force Trump to capitulate again.

Posted August 14, 2019 by vferraro1971 in World Politics

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