Why Putting Out the U.S.-China Tariff Fire Won’t Work
Here's my skeptical response to a temporary ceasefire in a war that should never have begun.
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If you want to hear the sound of one hand clapping, that’s the sound of the applause Tuesday from Asian markets in response to the U.S.-China trade deal.
We did get fulsome applause on Monday from stocks in Hong Kong in particular, where the Hang Seng bumped 3.1% by the close.
But reality is sinking in Tuesday. Hong Kong stocks are giving back 1.8% on Tuesday as I write just before the close, and the mainland CSI 300 index of the largest stocks in Shanghai and Shenzhen is essentially flat, a scant 0.15% to the positive side.
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Asian Equities Flat
Tokyo stocks are posting the best gains, with the broad-market Topix up 1.1% and the export-heavy Nikkei 225 a bit ahead of that, up 1.4%.
We have a small dip in India, with the Nifty 50 down 1.1% Tuesday. That’s after a 3.7% surge on Monday as Delhi agreed a ceasefire in the Kashmir skirmish with Pakistan.
Stocks are either flat as they are in South Korea Tuesday, or modestly to the good, with Taiwan and Thailand up around 1.0%. Malaysia is an outlier with a 2.2% gain in the main benchmark, but stocks weren’t trading in Kuala Lumpur on Monday due to the Vesak Day holiday.
It appears I am not alone in offering a skeptical response to the outcome of the U.S.-China trade talks in Switzerland over the weekend.
A Pleasant Surprise
I was in fact surprised to see specifics announced Monday resulting in a temporary 90-day lowering of tariffs. I was on the Money Talk podcast on Monday morning Asia time, before we got those details, and I noted that the Sunday announcements amounted to no more than diplomatic pleasantries.
While the White House was, on its Web site, claiming it was announcing a “trade deal in Geneva,” the Chinese side spoke only of a “consultation mechanism” to continue talks, which Beijing says have been “candid, in-depth, constructive.”
So to see Washington lower Chinese tariffs from 145% to 30%, and Beijing respond by lowering their retaliatory tariffs from 125% to 10%, is positive. It allows for U.S.-China trade to resume, after what both sides agreed was an effective embargo, a ban on trade.
But this is not a “trade deal” in the normal sense, one of those free-trade agreements negotiated over months or years that lays out tariff-free or favorable-tariff rates on certain goods in exchange for easier market access in the partner nation. It is simply a suspension of the effective ban on trade, which would have proved ruinous.
Arsonist Putting Out His Own Fire
As economist Paul Krugman notes in an email to his subscribers, this is like an arsonist rushing in to save the day by extinguishing the fire they just lit. Everyone will get very excited, the arsonist can try to claim to be everyone’s savior, but there will still be fire damage, and you’d have been better off if the whole incident didn’t begin.
Investors appear to read this agreement as a full white flag in the trade war. But we are going to go through this whole rigmarole in another 90 days. Meantime, the initial suspension of ruinous tariffs on other nations will expire in early July, bar the U.S. negotiating team striking agreements with the 100-odd nations affected.
And U.S. tariffs were, on average, around 2.2% before the Rose Garden chart unveiling on April 2. Even for countries with a U.S. trade surplus, such as Britain, those tariffs are escalating almost five-fold to 10%. Britain’s trade “deal” agreed a 10% tariff on 100,000 cars, more or less the number of Bentleys and Jaguars shipped stateside last year, and eased access for U.S. and U.K. beef exports, to the tune of £5 billion for U.S. farm goods. Small potatoes.
To see U.S. tariffs escalate worldwide is not a good thing. It is an inflationary higher tax on trade, it introduces inefficiencies into global supply chains, it scuppers the best attempts of multinationals to do any sort of long-term planning, and it will raise prices for U.S. consumers.
Consider Apple AAPL sinking costs into charter flights to rush iPhones to U.S. shores. That money’s gone. Toyota Motor TM became one of the first among what will surely be many manufacturers to cast its profit forecast for the years ahead aside, forecasting profit in the March 2026 fiscal year will fall 20.8% over the prior year.
Bought Time in a Negative Economic Cycle
It has, in the words of Stephen Roach, “bought time for what had been a rapidly deteriorating global business cycle.” Uncertainty and volatility will remain high during the 90-day pause, “crimping business decisionmaking on capex and hiring,” as Roach, now a Yale lecturer and former chief economist at Morgan Stanley, puts it. There’s also downside risks to both the U.S. and Chinese economies, and potential collateral damage, globally.
It is very positive to see China and the United States talking on trade. Don’t get me wrong.
But this is only a positive for a negative economic world state that did not exist as we entered this year. The U.S. economy was in good shape before the tariff tantrum, with low unemployment, inflation just above the desired 2.0% rate, the world’s largest and richest economy ticking along nicely.
Then the arsonist threw gasoline all over it, lit a match, watched the fire burn for a while, then put it out.
At the time of publication, McMillan was long AAPL.
