Unlike the president of China, Donald Trump is not president for life. This and the political realities of facing reelection in the 2020 presidential election will likely force Trump into eventually making a deal with China.
The recent escalation in the trade war between the U.S. and China has investors, companies and Americans on edge, and for good reason.
· President Trump placed tariffs on an additional $200 billion of Chinese goods on May 5;
· China retaliated with additional tariffs on U.S. goods;
· the U.S. blacklisted exports to Huawei Technologies, Co. followed by temporary exceptions and on and on it goes.
However, just as investors were overly optimistic that the U.S. and China would avoid the May 5 tariffs, they now seem overly pessimistic viewing the trade war as having no end in sight.
With the passing of the deadline for forestalling additional U.S. tariffs on Chinese goods, there has been much speculation surrounding Trump’s thinking.
What we do know, and what is most important, is one simple but powerful fact: Unlike China’s President Xi Jinping, President Trump is not president for life, and he has an election coming up soon.
To put it into business parlance, the Chinese president is like Warren Buffett while President Trump is like the CEO of a publicly traded company.
In March 2018, China removed term limits on its president. This is the equivalent in the world of business of not having to worry about quarterly results and instead having the mandate to prioritize long-term results over short-term gains. Think of Buffett, who possesses the power of a financial autocrat.
Because of the authoritarian nature of China’s political system, even if there is political discontent resulting from the negative economic and equity market impacts of a heightened trade war, the Chinese president can weather it.
He can even use a trade war to his advantage, fanning the flames of nationalism by deftly portraying himself as standing up to the American president. This would shrewdly tie into strongly held feelings there that it is time for China to be seen and treated as an equal, not in a subservient manner.
Conversely, President Trump is more akin to the CEO of a publicly traded company that ignores the next quarter’s results at his or her peril. For President Trump, the key results are monthly employment numbers, the direction of equity markets and quarterly GDP growth.
Adding to the pressure is the nearness of the 2020 presidential election. It is much more difficult for an incumbent president to win reelection during a recession. It is also difficult for a president to win reelection in an environment of malaise. Just ask former President Carter.
Volatile and declining stock markets along with slowing economic and job growth would be untenable for President Trump leading up to the U.S. presidential election. Trump’s political advisers will be aware of this.
Additionally, the president has previously taken credit for the performance of the stock market and the economy. Declining equity markets and a significant slowing in economic growth would take away that argument in his reelection bid.
In the end, it is likely that President Trump is forced to acquiesce, negotiate some high-profile but relatively modest “wins,” and claim victory.
There is precedent for this with the U.S.-Mexico-Canada Agreement. President Trump levied tariffs on goods from Mexico, Mexico retaliated, and then they made a deal that was more sizzle than substance.
That is the best-case scenario. Trump is playing a dangerous game, a game that could easily lead to a miscalculation of the economic effects resulting in lost votes in 2020.
There is a saying that when you sow the wind, you reap the whirlwind. Let’s hope President Trump stops sowing the seeds of a growing trade war with China sooner rather than later.
That will depend on whether the president calculates he needs continuing economic growth more than muffling coverage of the Mueller report and his tax returns.
In the end, this will likely be a missed opportunity to even up the trade score with China. Tariffs can be effective, but they are ineffective when they are sudden and severe — as in the present case. Yes, you may get some token concessions that make good headlines, but real gains happen over time.
Companies need time to change supply chains. Sudden tariffs don’t allow for that. Severe or punitive measures are very different from reciprocal tariffs.