Has the trade war with China come to an end? Has the media’s war on Donald Trump’s trade policies come to a similar anti-climactic conclusion?
Trump declared victory on one of these fronts earlier this morning:
OUR DEAL WITH CHINA IS DONE, SUBJECT TO FINAL APPROVAL WITH PRESIDENT XI AND ME. FULL MAGNETS, AND ANY NECESSARY RARE EARTHS, WILL BE SUPPLIED, UP FRONT, BY CHINA. LIKEWISE, WE WILL PROVIDE TO CHINA WHAT WAS AGREED TO, INCLUDING CHINESE STUDENTS USING OUR COLLEGES AND UNIVERSITIES (WHICH HAS ALWAYS BEEN GOOD WITH ME!). WE ARE GETTING A TOTAL OF 55% TARIFFS, CHINA IS GETTING 10%. RELATIONSHIP IS EXCELLENT! THANK YOU FOR YOUR ATTENTION TO THIS MATTER!
Is this a final and comprehensive trade deal, or is this a reset of the earlier temporary truce that got derailed a couple of weeks ago? Trump uses the word “final” in his statement, but that relates to the approval rather than the deal itself. The inclusion of student visas in the agreement makes it sound like the deal may be more comprehensive, but if so, it came very quickly. Yesterday, the word was that the two sides had just agreed on the framework for negotiations:
Late Tuesday, American and Chinese negotiators said they had agreed a framework to get trade talks back on track, essentially restoring last month’s pact in which both countries lowered tariffs.
President Trump said China had agreed to supply rare earths and magnets, while the U.S. would fulfil commitments such as permitting Chinese students to study in America. He said the deal was done, pending approval by him and by Chinese leader Xi Jinping.
If this is the final form of a deal, it raises some questions about why Xi would assent to it. A 55/10 tariff imbalance on trade is provocative, to say the least, and will likely be high enough to force relocation of supply chains for American businesses. For instance, Trump publicly scolded Apple’s Tim Cook for saying that iPhones sold in America would be built in India rather than China, and threatened to apply a 25% tariff to such imports. If a 55% tariff applied to those sourced in China, it still would make sense for Apple to shift manufacturing and assembly to India, especially since the infrastructure may not exist in the US yet to fully rehome that supply chain. Xi will lose some of his manufacturing income in this structure, and even attempts to use neighboring countries as pass-thrus won’t recoup those losses.
The part about student visas seems interesting in this context. If Xi is willing to be on the losing side of a 55/10 tariff imbalance just to get Chinese students access to American universities, that proves what an impressive amount of leverage we have with China on that point. But that also raises the question of why it is soooo important to Xi to keep those student visas available. Chinese students could study in other parts of the globe, and Academia screamed about the lost potential for America in the move to cut off China from American universities. Now it seems the reality is that China really needs access specifically to US higher-ed institutions — and we should be asking why, and what Xi uses that access to accomplish. Xi is paying a high price for that access, if Trump’s claims are accurate, and relate to final terms rather than transitional policy.
There is even better news this morning to go along with it. Despite two months of doom-casting by the media over the tariffs, inflation continues to decline. Today’s Consumer Price Index came in at an “unexpectedly” moderate level of 2.4% annualized inflation, and only ticked up 0.1% in May. The real driver for inflation last month wasn’t even in retail prices, but shelter (rents and mortgages):
The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.1 percent on a seasonally adjusted basis in May, after rising 0.2 percent in April, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 2.4 percent before seasonal adjustment.
The index for shelter rose 0.3 percent in May and was the primary factor in the all items monthly increase. The food index increased 0.3 percent as both of its major components, the index for food at home and the index for food away from home also rose 0.3 percent in May. In contrast, the energy index declined 1.0 percent in May as the gasoline index fell over the month.
The index for all items less food and energy rose 0.1 percent in May, following a 0.2-percent increase in April. Indexes that increased over the month include medical care, motor vehicle insurance, household furnishings and operations, personal care, and education. The indexes for airline fares, used cars and trucks, new vehicles, and apparel were among the major indexes that decreased in May.
To get a sense of the way these numbers relate to April 2’s “Liberation Day,” here’s the BLS chart on inflation over the past year. Note the lack of an explosion:
CNN sounds almost disappointed:
Inflation rose less than expected in May, a month when the effects of higher tariffs were starting to become more widespread.
Consumer prices rose 0.1% last month, while the annual inflation rate increased to 2.4% from a four-year-low notched in April, according to the latest Consumer Price Index data released Wednesday by the Bureau of Labor Statistics.
Trump critics will pull out the TACO argument, claiming that the lack of inflation is because Trump backed down on tariffs. However, that’s not entirely true; he suspended tariffs with some countries for negotiations, but not on China, where most of our cheap goods originate. After a series of escalations put the tariff rates into triple digits, the two sides agreed to lower tariffs while negotiations continued, but they were still applied. Those tariffs on the cheap goods out of China were supposed to have the most impact on consumers and on retail inflation. Instead, for two months, it doesn’t appear to have had much impact at all.
The tariffs may still have some inflationary impact down the road; the eventual final form of the deal with China may look different. These will be ongoing stories, not a finale. For now, though, Trump’s tariff strategy seems to be forcing trading partners into real concessions, and thus far at a minimal cost to American consumers overall. We can afford to let this play out longer and see what Trump can accomplish, and then decide whether the juice was worth the squeeze — rather than play Protection Racket Media Freak-Out.
