How is that trade war coming along, Donald?
Allegedly, trade wars are good and easy to win, but if you ask farmers in the US, they would likely disagree. The Farm Bureau, America’s largest farm lobby, recently published its bankruptcy statistics for the year ending in September 2019 and it doesn’t look good. Bankruptcies increased by 24% year-on-year to 580. And while California and the Northwest saw the biggest percentage increase, farms are dropping like flies mostly in the Midwest and the Southeast. This increase in bankruptcies happened despite net income climbing to $88bn, the highest since 2014.
Maybe it has something to do with the fact that by now 40% of that income ($33bn) comes from subsidies and trade war assistance? Here in Europe people complain about the high agricultural subsidies paid in the EU, but US farmers have a higher share of their income from the government than farmers in Europe by now. In the EU, farmers get on average 26% of their income from the government or the EU.
US Farm bankruptcies
Source: Farm Bureau.
Never mind the plight of the farmers, who not only have to increasingly live off government handouts but also face rising debt (now totaling $416bn), Donald Trump keeps on tweeting about the trade war.
Let’s have a look at his latest tirade:
So, Jair Bolsonaro is learning an important lesson now. It doesn’t pay to be on Trump’s good side because he will renege any previous trade deal whenever it pleases him. I am currently working on a project on geopolitics for investors and from a geopolitical perspective, this is about as bad as it gets. If you signal to the world that your deals and promises are worth nothing, then who is going to make a deal with you in the future?
And then came this:
By now, France has threatened to hit back hard, should the US impose these tariffs on French exports.
But in my view, this is just another round in the tariff game that we have witnessed so often for the last two years:
Step 1: Threaten to impose tariffs on some foreign country (preferably China, but any country will do, really).
Step 2: Stock markets freak out and start to decline.
Step 3: Fox Business and other media outlets start freaking out about the consequences of the trade war on stocks.
Step 4: Trump walks back on the tariff threat.
Step 5: Stocks recover and reach new highs.
Step 6: The media starts freaking out about the new highs in the stock market.
Step 7: Trump tweets about the new highs in the stock market and how great his administration is.
Rinse and repeat…
I don’t think we will see a massive deterioration in the trade relationships between the US and the EU in the near future because we are entering the Presidential election campaign. And in this campaign, Trump has to find the right balance between two extremes. On the one hand, he needs to rally his base and the trade war is a great way to do it. On the other hand, he needs the economy and the stock market to do well, so he can’t impose harsh tariffs that would risk retaliatory measures that slow US growth.
The best he can do – and what I think he will do throughout most of 2020 – is to constantly threaten additional tariffs just to retreat and let markets recover again.
But there comes a point in summer or early autumn 2020 when it is best for Trump to end the trade war and declare victory. If he agrees to a deal with China in the months before the election in November, he will get a strong relieve rally in the stock market and can claim a major victory. And the Democrats cannot deny him this victory because he controls the trade measures imposed by his administration. Furthermore, the trade deal, whatever it may look like will not unfold its positive or negative economic consequences until after the election an most likely, there won’t be enough time to truly scrutinize the details of the deal (let alone that he public won’t be interested in the details of the deal anyway at that time). In short, he can proclaim a major victory even if there is no deal at all or we are just going back to the status quo ante.
And there you have it. I don’t like to make forecasts because you only look stupid if you do, but this is my main forecast for US politics and the US stock market in 2020.