Trade War with China

Farmers and businesses across the United States have begun to feel the pain, as its major trading partners, including China, Canada, Mexico and the European Union (EU), retaliate against a wide range of American products, in response to Washington's ill-advised tariffs.

Under the "America First" protectionist policies, the Trump administration has slapped high tariffs on imported steel and aluminum, as well as 34 billion U.S. dollars of Chinese products, escalating trade tensions with its major trading partners.

For the United States, "that's not a good strategy. There'll be enough pushback from U.S. manufacturers, who will actually be harmed by these strategies," said Dennis Chookaszian, an adjunct professor at the University of Chicago Booth School of Business.

It's not clear how these trade disputes will end, but American farmers and businesses are going to pay a very high price. Here are several American products being affected by retaliatory measures from those trading partners.

DAIRY

The U.S. dairy industry, which has been increasingly dependent on foreign markets after years of shrinking domestic consumption, has been stung by the trade disputes provoked by Washington.

The Trump administration's new tariffs on many countries, including Mexico, Canada and China, which are major destinations for U.S. milk products, have prompted retaliatory actions.

According to the U.S. Chamber of Commerce, the Mexican tariffs could affect as much as 578 million dollars' U.S. dairy goods and China's tariffs could influence 408 million dollars' cheese, whey and other products.

"We are calculating that farmers may be losing between 1-2 billion dollars just in the next few months," Jaime Castaneda, senior vice president of the U.S. Dairy Export Council, told Xinhua.

"At this very moment, I don't think we're going to lose a lot of exports, but what we are going to lose are a lot of farmers," he said.

SOYBEANS

Don Lutz is getting more and more nervous after spraying soybean at his farm in Scandinavia, Wisconsin, as U.S. soybean futures have already fallen by nearly 20 percent since April.

"Things have escalated into different and broader areas ... It doesn't look like we're going to get these tariff issues resolved by the time you go to harvest," Lutz told Xinhua during a recent trip to Washington to voice his concern before lawmakers.

"To make things worse, most farms are heavily in debt," said Brad Kremer, a soybean farmer in Pittville, Wisconsin with about 3 million dollars worth of idle equipment. "I'm already looking at a loss this year."

"If somebody were to lose 20 percent of their income, that hurts," said Ryan Findlay, chief executive officer of the American Soybean Association (ASA).

"Farmers see that pain right now. They see that in the prices. That is the immediate impact," he said.

China is the top importer for U.S. soybeans, accounting for almost 14 billion dollars in sales, or nearly a third of total U.S. soybean production and two thirds of total U.S. exports, according to the ASA.

John Heisdorffer, president of the ASA and a soybean farmer in the state of Iowa, said last week that the U.S. threat to impose additional tariffs on China was "a move in the opposite direction."

"Our message to the administration and lawmakers remains the same: these tariffs needlessly hurt soy growers and rural communities," he said.

"I don't favor protectionism or tariffs as a way to negotiate a 'better trade deal'," Lutz echoed.

"From my perspective, tariffs on steel and aluminum and counter tariffs on agricultural commodities, is a lose-lose relationship for not only American agriculture, but both countries' overall economies," he said.

PECANS

On average, a third of all pecans grown in the United States are sold in China. For Randy Hudson, a farmer in the leading pecan producing state of Georgia, the amount is much more: practically all of his crop goes across the Pacific.

"I can tell you this, 99 percent of our production goes to China," said Hudson, who has gradually expanded his pecan farm acreage from a few hundred to 2,500 to meet the growing demand of pecans in China.

"I've just begun a project to expand my storage room and pecan processing power three-fold last year," Hudson told Xinhua.

However, China's retaliatory tariffs on U.S. pecans make Hudson's business vulnerable, as the 10-million-dollar project was financed by loans and is dependent on stable sales revenues.

Hudson estimated that 30-40 percent of his sales will evaporate, registering a loss of 6-8 million dollars, significantly higher than his profit margin. In addition, imported parts that are crucial to farming may also become more costly, further squeezing Hudson's margin.

"We're the collateral damage of a much bigger fight," Hudson said. "Mr. Trump understands the art of deal in North America... but I'm not sure he understands the art of deal in Asia and our good friends in China."

LOBSTERS

Tom Adams, owner of Maine Coast Company, sees a huge market potential for Maine lobsters in China, especially when its second-tier cities started to show a great appetite for seafood.

He is expanding the company's facilities and hoping to ship more to the world's fastest expanding lobster market. But the Trump administration's tariff scheme against China may well ruin his plan.

With China's retaliatory tariffs, the U.S. lobster industry will further lose its edge over its archrivals, such as Canada, Annie Tselikis, executive director of the Maine Lobster Dealers' Association, told Xinhua.

"That's frustrating for us because competing in a disadvantaged market will be challenging," she said.

China's tariff on Canadian lobsters dropped to 7 percent at the beginning of this month, while the tariff on U.S. lobsters has risen to 40 percent.

"The tariffs will impact almost everybody in Maine as people in the state are more or less involved in the industry," Tselikis said, noting that China accounts for 15-20 percent of the export value of U.S. lobsters.

The congressional delegation in Maine has warned that the trade conflict with China would jeopardize the state's lobster industry.

"To save our state's economy from further hardship and uncertainty, I urge the administration to pursue a more coherent and methodical trade strategy and to weigh the potential repercussions carefully before taking further action," said Congresswoman Chellie Pingree.

WHISKEY

To meet the booming demand for American whiskey, particularly from Europe and Asia, distilleries that make Bourbon have mushroomed in recent years.

Amir Peay is one of those distillers lured into the industry, investing several millions of dollars to refurbish an evolutionary war-era whiskey brand in Lexington, the state of Kentucky.

However, retaliatory tariffs from the EU and China on American whiskey have pushed up the prices of the signature U.S. liquor and cast a shadow over Peay's promising business.

While the uniqueness of U.S. whiskey has won loyal consumers who are willing to pay the extra money, higher prices could very well "put the brakes" on a promising growth momentum the industry is seeing, Peay told Xinhua.

"Basically the whole world put a 25 percent tariff on our industry, where we are collateral damage in this, it's very disappointing," he said.

Peay said bigger names in the industry can store their inventory for a possibly better time in the future, but his small distillery is more vulnerable in any disruptive trade environment.

Eric Gregory, president of Kentucky Distiller's Association, told Xinhua that he hoped Washington and Beijing would solve their disputes through negotiations, as there are no winners in a trade war.

"We would just like to see everybody sit down. If they need to sit down over a glass of Bourbon and work this out, we'll provide the whiskey," he said.

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vincent said:

Fed's multiple QE's (essentially printing money) caused little to no inflation

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Tam said:

We did see inflation rises on QE I and QE II, but not on QE III, though at this point the economic growth and recovery was underway which will absorb the increased money supply.

The risk of inflation is moderated if the QE is not overestimated and just the right amount --- not too much money is thrown in --- and if the economy is growing fast enough to absorb the money supply. If the economy reduces growth ---- like what may happen in a trade war --- inflation control isn't going to happen. The stock market has been voicing inflation fears recently.

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Tam said:

I am not really sure what you are saying. If you are having deflation, QE would ease monetary supply and introduce inflation to counter the deflation. Too low an inflation is not good, and I believe the Fed is aiming like 2% here to achieve recovery from 2007. Going back to 2018, we do have a QT for the year. US inflation rate at January 2018 was around 2.07%, but at May it hit 2.8% and in June its running at 2.87%, which spooked the stock market. That's the opposite situation for doing a QE, and the response should be a QT.

In any case, US Treasury yield rates look to go higher, opposite of what Trump wishes, who has berated the Fed in his tweets for this move.

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The US Fed will remain independent and will do what it thinks its best, and not because of politics here and there. They are not going to play for Trump. The movement that is happening with the Treasuries recently has nothing to do with China at all, but rather with the Bank of Japan, and also in part that Russia has also virtually liquidated all their US Treasury holdings and turning that into buying gold.

Going to other news, China may have won a round in the trade wars last Tuesday according to this analyst.

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US President Donald Trump launched the trade war against China and claimed it would narrow the trade deficit, which is causing unemployment and limiting economic growth, but in fact the tariff policy is largely aimed at China's high-tech industries.

Both the White House report released last month titled "How China’s Economic Aggression Threatens the Technologies and Intellectual Property of the United States and the World", and the export restrictions on American military and civilian dual–use technology products to China, demonstrates the US' vigilance over Chinese technological development, and it wants to indirectly suppress the development of China's science and technology sector, according to Professor Wang Xiaosong from Renmin University of China.

Moreover, two significant American strategy reports issued at the end of 2017 clearly showed that the US treats China as its top rival.

Professor Wang pointed out that by suppressing China's emerging technological development via the trade war, the US can maintain its dominance and leading role in the world.

After provoking the trade war, the US has repeatedly declared itself as a victim, and passed the buck of resolving trade issues with its major trading partners such as China. But in fact, the US has been taking advantage of the international status of the dollar to attract foreign capital to develop its economy for a long time and it has enjoyed cheap goods too.

Wang said that since China and the US have different economic structures and are at different development stages, there cannot be complete equality in trade between the two sides.

The US, as a consumer country with a low savings rate, has a macroeconomic structure that has lead to the creation of a trade deficit for the country. China, on the other hand, has been looking internally to fix issues since the start of the trade friction. And it also keeps opening up even further to the world, easing accession for foreign investment for the benefit of the globalization of trade, Wang said.

Now the US should take responsibility, because trade issues cannot be resolved without them improving their own economic structure and strategic objectives, according to Wang.

As China's exports are a strong alternative to US goods and some are very dependent on that market, it is clear that Trump is very confident about his trade war. However, Dr. Xu Hongcai, a Chinese economist, said that China has ample domestic demand and a huge market, plus the rising cost of industrial raw materials will make US companies - including Tesla which recently announced plans to build a factory in Shanghai - increase their investment in China. So China does have the confidence to deal with the trade war on its end.

Besides, Dr. Xu added that the trade war will eventually increase the cost of US industrial production and consumer spending, risking inflation and other negative impacts on US economy.

Now some American business communities are aware of this and some chambers of commerce and local governments are also beginning to voice disagreements with the trade war.

With a look to the past, US President Herbert Hoover's trade safe-guarding act in 1930 led to the collapse of America's multilateral trading system. History has shown that there has never been a winner in a trade war, and only negotiations and communication can avoid losses on both sides.

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Anlsvrthng said:

Basic market : if there is excess supply of item, but no demand ( due to high interest rate ) then the price decrease.

It means that the treasuries will trade with big discount compared to the nominal value, and it means DEFLATION. Lot of bankruptcy, 1930 US or 1991 CCCP style collapse.

Means in that case the FED has do DECREASE the interest rate, or if it is at 0 then start QE until all excess supply of treasuries moped up, like in 2008.

Your reasoning should works ONLY if the FED taking the interest of the foreign borrowers. But why the FED should do that ?

And generally, this is the issue with the economists, they making fancy models without having the slightest idea about that how the market works.

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