In 1902, British novelist W.W. Jacobs published a short story describing the grim experiences of a working-class family that acquires a charmed relic, a mummified monkey’s paw, with the power to grant whatever its owner wants. The wishes the mother and father make are all fulfilled, but at a price neither anticipated.
If it were one of Aesop’s fables, the moral might have been, “Be careful what you wish for.”
That’s a caution that economists are urging upon stock investors who want the Federal Reserve to lower interest rates as a salve to the economic pain of President Trump’s trade wars.
While such a move would buoy the U.S. economy, the central bank would also be taking pressure off the Trump administration to end disputes that corporate executives and even some GOP lawmakers say are undermining the benefits of GOP-led tax cuts in 2017 and tainting one of the president’s most significant accomplishments as he seeks reelection in 2020.
“There’s a bit of concern that there’s a feedback loop where the Fed protects the economy, and that means the trade war continues to escalate because there’s no market or economic pain from the trade war,” said Ethan Harris, head of global economics at Charlotte, North Carolina-based Bank of America.
Fed action aside, the trade wars are unlikely to end anytime soon despite a truce agreed to by Trump and Chinese President Xi Jinping at the G-20 summit in Osaka, Japan.
One reason is that the trade imbalances Trump is seeking to wipe out are seldom corrected by tariffs, which may prompt American companies to move overseas manufacturing to duty-free nations other than the U.S., where labor costs are higher, Harris said.
That might prompt rolling tariffs, he added, rather than an end to them. Already, the Trump administration has placed levies on steel, aluminum, washing machines, and solar panels in addition to 25% duties on $250 billion of Chinese imports.
Trump has also threatened assessments on the remaining $300 billion-plus in goods from China, though these tariffs have been delayed indefinitely under the latest G-20 agreement.
“Tariff,” the president has said, is “a beautiful word” and a useful tool in negotiations.
That outlook, along with the collapse of talks following a pact at an earlier G-20 gathering in Buenos Aires last fall, has tempered any buoyancy following the Osaka pact, the terms of which were vague.
“We find it difficult to get very optimistic,” said Aditya Bhave, senior global economist at Bank of America. “Remember that the previous truce didn’t last very long, and we did get another round of tariffs against China in May after the previous G-20 meeting.”
Those duties raised the total tariff on $200 billion in Chinese goods from 10% to 25%, prompting a furious backlash from small and large businesses alike. A swoon in U.S. financial markets was reversed only when the Fed began hinting that it was ready to reduce short-term interest rates, if necessary, from the level of 2.25% to 2.5%.
“Our view is, ‘No pain, no deal,'” Bhave said. “In order to get a deal, both sides need to be motivated by signs of pain in the market, in the economy, and politically. With the strength of the market and the economy, and the Fed’s very accommodative policy, we don’t think there is enough motivation.”
Trump himself conceded the possibility that the latest negotiations will end without an agreement.
“This doesn’t mean there will be a deal,” he told reporters shortly after his talks with Xi on June 29. “But they would like to make a deal, I can tell you that.”
The U.S. Chamber of Commerce and the National Association of Manufacturers would like that, too. Not only have manufacturers suffered from China’s exploitation of earlier trade arrangements and its intellectual property theft, “the effects of tariffs and retaliatory tariffs are further weighing on our confidence and our ability to hire and grow,” Jay Timmons, president of the latter group, said June 29. “Manufacturers need certainty now.”
Such certainty is precisely what’s lacking from the Osaka talks, said DWS, the wealth management business spun off from Deutsche Bank.
“Even if the tone between the two countries has improved since the temporary low point at the beginning of May, it should be clear to all participants, especially global companies, that most likely there will be no return to 2016 for global trade,” the firm warned in a report. “It remains unclear where the trade-dispute journey will eventually take us.”
The lack of a joint statement from the U.S. and China, once standard practice in diplomatic negotiations, only worsens the confusion, DWS noted.
While Trump said that tariffs were to be postponed indefinitely and that China would increase purchases of U.S. crops, Beijing merely said it had agreed to resume talks “on the basis of equality and mutual respect” and was working to reduce the trade deficit.
“We’re very much in the eye of the storm in terms of this trade war,” said Bank of America’s Harris. “This is going to be the big story of the next year, just as it was the big story of the past year.”
