Boiling the Frog

“The era of economic surrender is over.” — President Donald J. Trump

Trump is turning up the heat on China. He says that he will impose 10% tariffs on the remaining $300 billion of imports from China starting September 1st. Last December he slapped 10% tariffs on $250 billion of imports from China ... then raised them to 25% in May when China reneged on a deal that had been almost fully negotiated. If China does not make the huge agricultural buys that it has committed to (but already reneged on once), I fully expect that this second tranche of tariffs will go to 25% sometime next year. Trump is slowly boiling the frog ... or, should I say, dragon.

As I have often predicted, China is obviously hoping against hope that Trump will lose the election next year and that he will be replaced by an Obama clone (maybe even Michelle) in order to be restored to the old status quo. Obviously, the tariffs that Trump has so far imposed have slowed down capital investment by US companies ... which has, in turn, slowed our economy by about one percentage point. If and when higher tariffs go into effect, economic growth may slow further which would reduce Trump’s chances of getting re-elected ... which is also likely part of China’s strategy. However, if this gambit does not work, China will end up with a worse deal in 2021 (as Trump has warned.)

The other predicted bugaboo is the threat of US domestic inflation. This has been anticipated from our previous tariff impositions ... but, so far, nada ... a good sign that China is mostly paying these tariffs with lower prices and a devalued currency. Also US companies are beginning to move manufacturing out of China ... a trend that may well accelerate this Fall if China continues to be recalcitrant. This cannot be a trend that China relishes. But will it blink first and jump out of the boiling pot? As Trump often says, “We’ll see what happens.”