Are Tariffs Really Slowing The Chinese Economy?

Originally published on Forbes.com:

Are tariffs against over $30 billion worth of China goods having any meaningful impact on the Chinese economy? If so, investors won’t get the data points to prove it until early in the fourth quarter. For now, the rear view still looks pretty normal for China.

Here are the latest overall economic figures out of China.

China’s GDP year over year is up 6.7%, down slightly from the 6.8% gain in the first, but within consensus estimates. June industrial production declined to 6% versus estimates of 6.5% and May’s 6.8% IP growth rate.

On the consumer side, Chinese shoppers sent retail sales up 9% versus consensus estimates of 8.8% and May’s 8.5% retail sales increase. And June fixed-asset investment was a tad lower at 6% compared with 6.1% in May. The 6% total was the consensus forecast.

The immediate takeaway: China’s growth rate is within investor expectations and is on par to surpass the government’s 6.5% growth rate for the year.

The service sector grew 7.8% in the second quarter versus 7.5% in the first. Chinese manufacturing fell somewhat but is still up 6% from a year ago compared with the first quarter’s 6.3% from the previous year.

“Against the backdrop of an escalating trade war, there is the potential for targeted easing to mitigate those effects,” says Brendan Ahern, chief investment officer for KraneShares in New York, an ETF company heavily invested in China. “The worry for us would be China’s role in global trade. Is the global economy weakening as a trade war escalates? China has been deliberating slowing due to its antipollution campaign and curtailing debt growth. We will have to monitor if there is a global knock-on effect,” he says, regarding the tit-for-tat trade tariffs between the U.S. and China.

China’s mainland equity markets are down 17% year-to-date ending July 15 and over 20% from their highs on the year reached on Jan. 26.

G20 finance ministers meet in Buenos Aires this weekend, with everyone expecting the U.S. to remain at odds with the rest of the G20 over trade policy. There are also EU meetings coming up with China. Beijing will try again to convince Brussels to take their side. So far, Brussels has not done so.

China and the EU account for about a third of the global economy. Europe is China’s largest trading partner, and China is Europe’s second largest.

The U.S. is winning the trade war so far, as measured by the stock market. Investors are unmoved. The S&P 500 Index is back at the high seen in March, and the index is only 2.5% away from its January highs. The Nasdaq is at a record high. Meanwhile, China’s A-shares are in a bear market.

“Assuming that investors are not complacent, the answer must be that investors believe that trade tensions between the U.S., the EU and China will ultimately be resolved,” says Neil MacKinnon, an economist at VTB Capital in London.

The Trump China Doctrine

China has no friends in Washington. Even the opposition Democrats side with Trump on tariffs, with many leaders agreeing that China does not play fair.

For its part, the Chinese government filed a complaint with the World Trade Organization on Monday about Washington’s proposed $200 billion in extra tariffs. Trump’s main trade advisors and negotiators, led by Robert Lighthizer and Peter Navarro, are staunch critics of China trade policies. Navarro co-authored the book Death by China with University of Southern California professor Greg Autry. Their book is considered the bible on the Trump view on China.

While most politicians on the Republican side have used election campaigns to pick on China, Trump has gone the extra mile by doing what few have done before: putting his actions in line with his rhetoric. Most people in the market have grown accustomed to politicians talking negatively about China during election season, only to return to status quo shortly after.

President Obama used trade tariffs as a weapon to pressure China during or before WTO arbitration panels. The Trump doctrine seems to be designed to level the playing field for labor in a number of key industries, including white-collar labor in the pharmaceuticals and chemicals industry. Tariffs, therefore, can be seen as a premium placed on China’s lower-cost labor.

Frank Gaffney, a longtime advocate for Republican Party positions on foreign affairs and CEO of the Center for Security Policy, says he thinks Trump’s long-term strategy is to isolate communism.

“The common denominator for Trump’s foreign and trade policies seems to be a determination to isolate and counter Communist China,’ Gaffney says. “Russia has become a close ally of China. North Korea is Beijing’s puppet. Pakistan, Iran and Venezuela are its clients. The European Union—unlike NATO and many of its members—is hostile to the U.S. and doing deals with the Chinese,” he says. “President Trump is working hard to drive wedges between China and the (rest), weakening its regional proxies, and challenging our allies for harming U.S. interests and rewarding them when they don’t. And he’s taking on China directly with trade, investment and military measures. Here’s hoping this is the Trump Doctrine’and that it works,” Gaffney says. [Emphasis added]