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President Donald Trump is a prolific Twitter user who likes to tweet on the US stock market, especially when he moves higher.
He is not afraid to tweet about his presidential approval rating either.
Trump sees no problem in sharing his concerns about world trade, especially when he believes that the rules of the game are not up to par for US exporters.
Given the three topics mentioned above – Bank of America Merrill Lynch's stock levels, approval ratings, and trade economists have issued a theory as to whether trade tensions between China and the United States will go up or down.
It all depends on whether the trade dispute begins to weigh on Trump's stock or approval rating before the mid-term US elections in November.
"The United States will likely continue to take action against its trading partners until stock markets react or the president's approval rating drops," say BAML economists Aditya Bhave , Ethan Harris and Helen Qiao.
While US stocks have reached or hit record highs early in the year, Trump said last week that he was ready to slap all Chinese products entering the US with new ones. prices.
"I'm ready to go to 500," said Trump CNBC, referring to the dollar value of US imports from China last year.
"I'm not doing this for politics – I'm doing this to do what we need for our country, we've been ripped off by China for a long time."
If Trump seeks to impose tariffs on all Chinese goods entering the United States, a sharp increase in Chinese goods of $ 250 billion that have already been struck or are under review, this would create a challenge for the Chinese. decision makers, given the value of US exports entering China last year, were close to a quarter of those who were heading in the other direction.
"China's response to the latest proposed measures – proposed tariffs on Chinese imports of 200 billion US dollars – has been hesitant," said Bhave, Harris and Qiao.
"The Chinese authorities have pledged to retaliate, but the exact nature of the retaliation has not been announced. One problem is that China imports only $ 130 billion worth of US products. American. "
"Since it has already imposed or promised higher tariffs on more than 50 billion US dollars of US goods, it has limited room for maneuver to further increase tariffs."
What to do when you do not have the ability to respond in a titling way?
Bhave, Harris, and Qiao believe that China has three options if the US introduces tariffs on all Chinese products: impose higher tariffs on US imports, capitulate to US demands, or trigger a war of war. wear.
The three think that it is unlikely that US penalties will increase US penalties on a much smaller number of goods, recognizing that it would mean "reorganizing the supply chains that would impose additional costs to the Chinese economy "and" negatively affect the image of China as an economy that opens and reforms itself. "
BAML also considers China unlikely to bend to US demands, especially when there is popular support for a tough response to US commercial rates.
As such, Bhave, Harris and Qiao believe that the most likely scenario is a war of attrition between the two parties.
They explained:
"China will probably adopt a" middle way "to engage the United States in a usury war: we expect retaliatory tariffs, but in smaller quantities than US measures. could become more tolerant of the depreciation of the renminbi, although they are not likely to use the currency.
"With the" stick "of retaliation, China could also to offer the "carrot" of modest concessions Among the trade-offs listed above, larger imports from the United States and intellectual property protection measures are likely to be on the table, not least because China is leaning towards these concessions. reforms even before trade tensions begin to intensify.
"With the carrot and stick trade policy and the internal easing measures in place, we believe that the Chin e will put itself in wait-and-see mode: in our opinion, Chinese decision-makers think they can survive the United States, the US stock market corrects itself or the "shock shock" effect of the tariffs begins to influence the public opinion in the United States.
Although this may sound like an acceptable outcome for the financial markets, the three BAML economists think it will not be risk free.
"In a war of wear, there is a margin for miscalculation," said the three men. "Our theoretical analysis of trade negotiations suggests that visible pain is the motivation for de-escalation and compromise."
BAML added that a miscalculation on the part of one or the other party would be costly to consumers and businesses, saying that investors should "hitch" "if such a policy failed.
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