Stocks Rattled on Trade Talks: Full-Blown Trade War Becomes Base Case

Once again the trade war with China is the headline story of the day. What's the base case?

The Wall Street Journal reports U.S. Stocks, Bond Yields Fall Amid Trade Tensions.

The latest rhetoric from Chinese officials sent stocks tumbling after Ministry of Commerce spokesperson Gao Fengtold CNBC that the U.S. should “adjust its wrong actions” if it would like to continue negotiations. Investors worry the U.S. and China are moving further apart on trade, potentially exposing U.S. companies and the economy to further retaliation.

Debate Over Baseline Case

Bloomberg reports Full-Blown Trade War Is Quickly Shifting From Risk to ‘Baseline’.

Goldman Sachs Group Inc., Nomura Holdings Inc. and JPMorgan Chase and Co. are among those that have rewritten their forecasts as U.S. President Donald Trump threatens to impose a 25% tariffs on around $300 billion of additional Chinese imports.

Analysts at Nomura have made that hike in duties -- which would mean practically all of China’s exports to the U.S. are hit by tariff hikes -- their baseline forecast. They see it as a 65% probability before year-end, and most likely to come in the third quarter.

Goldman Sachs economists warned that without signs of progress over coming weeks, implementation of the further tariffs could easily become their base case. “While we still think an agreement is more likely than not, it has become a close call,” they wrote.

St Louis Fed Calls on China to Cave In

St. Louis Federal Reserve President James Bullard says ‘Blue Skies Ahead’ for China if it Accepts All US Demands.

St. Louis Federal Reserve President James Bullard expressed optimism that the United States and China will reach a deal to end their trade war, despite recent negotiating setbacks.

My base case continues to be that we’ll get an agreement on trade,” Bullard, a voting member on the central bank’s policymaking Federal Open Market Committee this year, said Wednesday in an address at the Foreign Correspondents’ Club in Hong Kong.

“I think it’s good for both China and the U.S.,” he added.

Bullard also said that China should accept U.S. demands in the trade talks in order to attract more foreign capital, saying the country would stand to reap enormous benefits.

“They will establish credibility on trade inside China and will reassure foreign investors that they can invest in China and be treated appropriately,” he said in response to questions from the audience.

Bullard's Fantasy

For starters, China will not accept all of Trump's demands.

If anything, Bullard will harden up Trump and the China hawks.

Even if China did accept Trump's demands, why should China believe Trump would not come back and ask for more?

Bottom Line

It's easy to blame both sides here, but the bottom line remains the same:

  • Trump has not closed a single trade deal with his bullying
  • Tariffs are a tax on consumers
  • Trump's trade war case is full of holes


Trump can likely inflict more pain on China than vice versa, at least from a GDP standout.

But China has no elections coming up. Trump does. This talk about Trump winning the trade war is nonsense.

For discussion and other views, please see Who Will Win the Trade War? Some Say China, Others Say Trump.

Mike "Mish" Shedlock

Comments (50)
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Nothing can rattle the "markets", they are now fully protected, and the players in the "market" know it.


So the solution is to bend over and let the chi-coms reams us out???


Without full blown OVERT QE ,the federal gov't will NOT be able to make the 600 billion interest payment this year which means.......technical default!!!!


How could the Chinese possibly trust the US?

The Iranians signed the JCPOA in 2015 - Iran destroyed its stockpiles of low enriched uranium up to 19.75%, mothballed its heavy water nuclear generator, gave up all but 6000 centrifuges and accepted extensive and intrusive UN inspections– it not only got nothing in return but actually had more severe sanctions placed on it, when Trump reneged on the deal!


The best way to explain how trade wars work is to look at a simplified economy. Imagine a very small village, with three people. One is a farmer. A second is a seamstress. The third is the blacksmith. At first they trade, and all have clothes, food, and tools. They all feel the others are taking advantage of them, so a trade war erupts, and they stop trading. The smith has to grow his own food, and make his own clothes. He isn't that good at either, so his clothes are poorly made, and he barely has enough food to eat. The seamstress has to grow her own food, and make her own tools. She's not very good at either, so she has barely enough to eat, and her tools are low quality. The farmer has to make his own tools and clothes, and he's not good at either, so both are low quality. There is no trade at all, so obviously there is no unfair trade, yet all of them are now worse off than before. It turned out that trade benefited all three of them.

In the situation with China, we can stop importing goods from China, and make them here. They will be either lower quality, or more expensive, or will generate toxic pollution (if it weren't for one of these reason, we would be making them here already). Thus, everything will become more expensive. We will have jobs, but a lower standard of living. Meanwhile, China will have no one to sell to. They will have to do more farming, and less manufacturing, again resulting in a lower standard of living. Again, no one wins.

That said, the Chinese theft of technology can not be accepted. We can't look the other way from that. It does us no good to invent things, only to have them stolen. Therefore, that needs to be addressed, and perhaps a trade war is the only way to accomplish that.


Trump is now offering to include Huawei as part of a trade deal with China. Earlier he talked about intervening in the courts to release the Huawei exec that he had Canada arrest. So apparently Huawei is a major security threat up until the US and China make a trade deal. Then they’re okay. What a joke.


This is not a "Trade War". This is a WAR WAR. China is propping up companies that support their agenda to sell products below cost to destroy industries in other countries and make the world dependent on them for essential products. They are stealing IP and also putting back doors in all of our devices to have the ability to disable them. I do agree Tariffs are silly and only a small part of an overall solution but they grab headlines to focus attention. Going after state own companies like Huawei and dismantling their mercantilist and tech complex espionage is the right approach. The US has the huge upper hand. China is a big pile of bad debts masked by a massively subsidized central planning government. I dont want to hear about their "dollar reserves" because that can be fudged just like everything else there is fudged. In addition, they HAVE to maintain that reserve to keep their currency from skyrocketing due to balance of payments issues arising from deficits. The US holds all of the cards, but it will be painful here, no doubt. But whatever pain is felt here it will be 10x the pain in China.


@DeeMiddy well maybe ; S &P companies do alot of business with the Chinese. there is a growing anti US sentiment within chinese borders. Starbucks gets 20 % of its revenue from china .


The future of our country was done with once and for all, the moment the progressives took over. The Fed, income taxes, prohibitions on anything from alcohol to guns, and the rest of the drivel, is what killed America.

Making Americans even less free, to where they can't even seek a decent deal for the measly slave wage they have left over after the Fed and its sycophants have debased them, the government robbed them, and the legal "system" leeches bled them dry; sure as heck isn't going to bring this wasteland of an undifferentiated, totalitarian idiot state, back to anything resembling a worth vile life.

Anyone who isn't being compensated fairly for the job they do, assuming they do something productive; have only to look at those who have been, and are being compensated by way of asset appreciation, tax money and money spent on lawsuits, insurance and mandates. That's where the working and middle classes' wages went. Not to China. Nor to any other imaginary Hobgoblin the leeches who did stole from him is trying to make him scared of.

For every penny an American sends to China, he gets more than a penny worth of goods back. Otherwise he wouldn't send them a penny in exchange for what they are selling Making America richer. As well as China. That's what freedom does. Always does. No childish "but its diiiiferent thiiiis tiiiime" nonsense, no matter how loudly it is screeched by illiterate morons, can ever change that.

The same is not even remotely true, for every penny that same American is paying in taxes, insurance, above free market mortgage, and indirectly by way of an army of banksters and "asset owning" deadweight leeches, getting handed the means to drive up the cost of stuff he needs, to where he can no longer afford them. Despite him actually working for his money, while they do nothing whatsoever of value, aside from sitting there being handed stolen wealth by the trillion by the Fed and government mandates and regulations. For all that he is forced to spend on all of the above, by the US government, not the Chinese one, he gets a big fat nothing in return. At best. More realistically, he gets less than nothing.

That's why he is now poorer than he was before that last sliver of protection he had from rapacious theft, that of a sorta-kinda tie of the currency he is de facto forced to use to Gold. The Chinese have absolutely noting whatsoever, in any way shape nor form, to do with it.

The money stolen from him, is what made Trump rich, in exchange for creating nothing of value. It made millionaires and billionaires out of utter deadweight idiots, in every one of the FIRE rackets. And ditto the John Edwardses of the world. While making public union tax feeders, if not millionaires, at least pretty close to it. All of them, in exchange for doing nothing at all, of any value. Just feeding at the loot through that the Fed puts out for it's favorite, useless, sycophants.

That's who stole the working American's money. And his lifestyle. And his future. And that of his children. And grandchildren. Not the Chinese. Not the Mexicans. Not any other scary Hobgoblin that he is being told he needs governments, banksters, laws and other drivel to supposedly "protect" him from. He was robbed by his fellow Americans. Pure and simple. Just like those living in the Soviet Union. And in Venezuela. And North Korea. And any other pointless terror state existing for no other reason than to enrich a band of undifferentiated, deadweight leeches, by way of robbing everybody else.

Sadly, judging by the comments both here and elsewhere, that same middle American is by now so dumb, indoctrinated and utterly clueless, that he can't even grasp something which is that plainly obvious, to anyone with half a functional brain.