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Coronavirus, Trade War Expose US Overreliance on China

By:
James Hyerczyk
Updated: Mar 1, 2020, 22:57 UTC

Now, nearly two months after the trade deal was signed, it looks as if it may never get fulfilled. In the meantime, the coronavirus has done a lot more damage to China’s economy and geopolitical aspirations than Trump’s trade war.

Coronavirus, Trade War Expose US Overreliance on China

Throughout the prolonged trade war with China, many debated whether the US needs China more than China needs the US. The economic data isn’t in yet for February, but the rout in the U.S. stock market may have answered the question, at least in the eyes of investors. And given the release of China’s extremely weak PMI data on Saturday, it looks as if investors will continue to answer the question on Monday.

China is an export-led economy, and the American consumer is its largest customer. For decades, China relied on exports to support its economy, but recent data shows that increased support from domestic demand is helping to rebalance their economy. This was probably one of the reasons China was able to withstand the pressure of President Trump’s tariffs during the trade war.

The U.S. also depends heavily on China to provide low-cost goods to Americans to help them balance their household budgets. Furthermore, the U.S. also depends on China to provide funding for its huge budget deficits. Both China and Japan have been running neck and neck as to who will hold the title of largest foreign holder of U.S. Treasury securities.

Supply Chains Too Dependent on China

The Harvard Business Review says “Reports on how the Covid-19 outbreak is affecting supply chains and disrupting manufacturing operations around the world are increasing daily. But the worst is yet to come. We predict that the peak of the impact of Covid-19 on global supply chains will occur in mid-March, forcing thousands of companies to throttle down or temporarily shut assembly and manufacturing plants in the U.S. and Europe. The most vulnerable companies are those which rely heavily or solely on factories in China for parts and materials. The activity of Chinese manufacturing plants has fallen in the past month and is expected to remain depressed for months.”

On February 17, Apple announced it expected its quarterly earnings to be lower than previously expected. In issuing the warning, Apple cited two challenges, a constrained global supply of iPhones and significant drop in demand in Chinese markets.

On February 26, Microsoft said the company doesn’t expect to meet the quarterly revenue guidance it previously provided for the segment that includes Windows.

The Coronavirus May Be Succeeding Where Trump Failed

Throughout his first presidential campaign and presidency, Donald Trump has preached “Make America Great”. This mantra was based on “de-Americanizing” the global economy. If he was going to succeed, he had to weaken China’s amazing power in the global economy. He also had to make moves that would encourage U.S. multinationals to repatriate their overseas activities.

In attempting to break the U.S. dependence on China, Trump started a trade war, increased tariffs, withdrew from multilateral trade pacts and attacked institutions like the World Trade Organization.

After months of trying to break China’s economy, Trump finally settled on a Phase One Trade Agreement, which fell well short of his initial objectives and the other hawks in his administration. In the meantime, China’s economy bent, but it didn’t break and the U.S. economy was damaged when consumers and businesses were forced to eat the costs of the higher tariffs.

Now, nearly two months after the trade deal was signed, it looks as if it may never get fulfilled. In the meantime, the coronavirus has done a lot more damage to China’s economy and geopolitical aspirations than Trump’s trade war. Furthermore, it also has become a major threat to the U.S. economy.

Trump’s Re-Election May Hinge on China’s Containment of Coronavirus

If China can contain the virus and get back work then its impact will be mild. The U.S. economy will take a hit, but it will recover. However, China’s hopes of attracting foreign investment and becoming the world’s largest economy will be dashed. This scenario will likely help Trump win the election.

If the virus continues to spread outside of China, then the U.S. economy is likely to weaken even further if it starts to lose major traffic from Asia and Europe. In this case, Trump’s re-election will be threatened.

So while the coronavirus may succeed in weakening China’s global economic power, and accomplish what Trump tried to do during the trade war, it’s not going to help him get re-elected if it also takes down the China-dependent U.S. economy.

About the Author

James is a Florida-based technical analyst, market researcher, educator and trader with 35+ years of experience. He is an expert in the area of patterns, price and time analysis as it applies to futures, Forex, and stocks.

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