When Trump raised tariffs on 34 billion worth of Chinese products in recent weeks, China responded by raising tariffs on some very targeted American products, including soybeans. The Chinese are big consumers of soybeans and they can't produce it all at home. The difference, until last month, came largely from the United States and, in particular, from that conservative Midwest which will be decisive in 2020 if Trump wants to be re-elected to the White House.
If Trump, after the probable passage of the lower house to the Democrats in November, has in the meantime been subject to impeachment, to appear Mike Pence will be the Republican incumbent in the 2020 presidential elections, who until two years ago was the esteemed governor of Indiana.
Indiana, apart from its northwest corner which is the poor and industrial suburbs of Chicago, is a state of serious and devoted farmers where all are hospitable and kind to each other and to outsiders. The quiet life, the solid and prosperous atmosphere, the German origin of the inhabitants, the order, cleanliness and the public budget in surplus would make one think of Bavaria or Switzerland were it not for that Indiana is perfectly flat. And being flat and well watered it is absolutely perfect for growing wheat and soybeans.
Unfortunately wheat, from 2000 to today, has continued to slowly fall in price, while soybeans are worth half as much as they were five years ago. Farmers are finding it increasingly difficult to service debts incurred with banks to buy seeds, fertilizers and machinery. In recent times there have been numerous bankruptcies and even suicides.
In this context the perfidy of the Chinese decision to penalize soybeans is clear to inflict maximum damage not only economic, but also and above all political, on the Trump-Pence administration. And it is also understandable how the administration, which unlike European governments can give, together with Congress, all the state aid it wants, immediately allocated 12 billion to help soybean producers in the Midwest.
But in this context one can also appreciate how much it was astute for Europe to show up at the White House yesterday with the promise of buying a lot of American soybeans (and lots of gas) if Trump
will suspend the 10 percent additional duty on German cars. By showing up with these olive branches, Merkel, who has taken over the political conduct of the negotiations with the United States from the French hawks of the Brussels technocracy, provides Trump with proof that Europe is ready to seriously discuss the hypothesis of a cut, not an increase in car tariffs. Trump, for his part, after having raised countless questions on the international scene, needs to bring home some successes or, at least, to demonstrate that when he proposed in Quebec to lower all the customs barriers, he was not producing a simple joke.
At this point, before continuing the general discussion, let's conclude the one on soy. The Chinese, as we have seen, will no longer buy it from the United States but from South America. Europeans, for their part, will no longer buy it from South America but from the United States. Eventually there will be some ships that will have to change course, but no one will pay tariffs on soybeans, no consumer will see the price of his tofu rise, international soy trade will remain unchanged and no producer will be penalized. The perfect squaring of the circle. The markets were right to react cautiously to the successful outcome of themeeting between Juncker and Trump. The cold shower that followed the apparent thaw between the United States and China in recent months is still a fresh memory and Trump's humor guarantees that there will be some hiccups.
But even between Trump and Kim Jong Un there was a sharp cooling just before Singapore, but the presence of a strong political will to bring home a result eventually prevailed.
However, the measured reaction of the markets does not detract from the importance of the meeting, which, on the contrary, seems to us to be very significant in two respects. The first is that the door can legitimately be left open to the hope that all the issues raised by Trump will eventually be resolved in a fair trade that does not harm free trade and may even facilitate it.
The second, less encouraging, is that the conflict will increasingly shift to China, which in the mind of Trump (and many American Democrats) is the real strategic adversary of the United States.
The American imperial superpower cannot afford to remain passive in the face of a China that is buying up Asia, Africa, Siberia and parts of Europe and which has ambitions to become a leader in artificial intelligence, space, in robotics and in all industrial sectors which are the precondition for becoming militarily hegemonic on a global scale. The conflict with Europe and the antipathy towards Merkel's mercantilist globalism are absolutely secondary to the Chinese question. Trump may also prefer a Europe of sovereigns in his heart, but a Europe of sovereigns would not change his life. In short, once the money issues have been resolved, we can continue to live with Merkel on condition that she doesn't make too much common front with China.
Today America asks Europe to side with Iran. Tomorrow he will ask you to side with China. Europe will try to keep the doors open to Iran and China but, in the end, it will always gravitate towards the United States more than towards China, especially if the conflict between China and America, as it may well be, escalates. There will therefore be no alliance of free traders (China and Europe) against protectionist America also because, as we are seeing these days, two exporters for one importer are too many and the two exporters will eventually come into conflict with each other.
China, moreover, is preparing for a long conflict with America. The devaluation of the renminbi in the last three months, as noted by Olivier Blanchard, is perfectly calibrated to cancel at a macro level the negative effects not only of the first tranche of US duties (the 34 billion already in place and the 16 imminent) but also the piece from ninety of the 200 billion in preparation for October. The tariffs of 25 percent on the first tranche and those of 10 on the second are worth 35 billion dollars. And how much is the 7 percent devaluation of the renminbi spread on the 250 billion of Chinese exports affected by the tariffs worth? Exactly 35 billion dollars. As in the case of soy, here too we have the perfect squaring of the circle. In
In practice, absolutely nothing will change in the balance of power between Chinese exporters and American importers and no price in dollars will go up.
And so? We can hypothesize various scenarios. America, not being able to buy renminbi on the market (there aren't enough) will have to resign itself to a China that devalues every time America raises tariffs and will therefore have to shift the conflict to other terrains, such as sanctions.
China, for its part, will not be able to easily resort to the atomic bomb of the sale of US government bonds which it holds in its reserves. The risk would be to an international financial crisis from which China itself would not derive any benefit.
Until recently, China had two avenues left, the expansion of the domestic market and the expansion towards the west through the vendor financing operations behind the New Silk Road. The second road, however, is closing fast. The beautiful air-conditioned subways and bowing conductors built by the Chinese in Addis Ababa or Lahore are not free and the countries that have welcomed Chinese infrastructure investments are now in debt and must turn, as the Pakistan of the newly elected Imran Khan, to the International Monetary Fund.
Here then is that China will have to speed up its conversion to domestic consumption and will further increase military-related spending. For investors, the truce between the United States and Europe is good news for American and German equities, but it accelerates the monetary normalization of the Fed to the margins. The ultra-expansionary policy that the German stock market is also favoring, at least in the short term The ECB, as confirmed by Draghi, will maintain in the next 12 months. In Asia, stocks linked to Chinese domestic consumption and the stock market of Japan, a country sheltered from Trump's attacks, will be favoured.
