Bank of America: Trump stocks tweets anticipate future of China trade war

President Donald Trump is a respected Twitter user who prefers to tweet about the United States stock market, especially when it is moving greater.

He also doesn't mind tweeting about his presidential approval ranking.

Trump also does not mind voicing his concerns about worldwide trade, especially when he feels the playing field isn't level for United States exporters.

Given the 3 topics discussed above-- stock levels, approval rankings, and trade-- economic experts at Bank of America Merrill Lynch have actually a developed a theory as to whether trade stress between China and the United States will increase or reduce.

Much depends on whether the trade conflict starts to drag out stocks or Trump's approval rating ahead of US midterm elections in November.

"The United States is most likely to continue to take measures versus its trading partners up until the equity markets respond or there is a dip in the president's approval rating," the BAML economists Aditya Bhave, Ethan Harris, and Helen Qiao said.

With United States stocks at or returning towards the record highs struck earlier this year, Trump stated late recently that he was prepared to slap all Chinese items going into the United States with brand-new tariffs.

"I'm prepared to go to 500," Trump told CNBC, referring to the dollar worth of United States imports from China last year.

"I'm not doing this for politics-- I'm doing this to do the right thing for our country. We have been swindled by China for a very long time."

Ought to Trump look to slap tariffs on all Chinese products going into the US, a high increase on the $250 billion worth of Chinese goods that currently have actually been struck with or are under factor to consider for tariffs, it would produce something of a challenge for Chinese policymakers provided the value of US exports entering China in 2015 was close to one-fourth those entering the other direction.

"China's reply to the most recent proposed measures-- proposed tariffs on $US200 billion worth of Chinese imports-- has actually been hesitant," Bhave, Harris, and Qiao stated.

"Chinese officials have actually pledged to retaliate, but the precise nature of the retaliation has actually not been announced. One issue is that China imports only about $US130 billion worth of products from the US.

"Given that it has currently imposed or guaranteed higher tariffs on over $US50 billion of United States products, it has actually restricted room to raise tariffs further."

Exactly what to do when you do not have the ability to react in a real tit-for-tat manner?

Bhave, Harris, and Qiao believe China has 3 options need to the US introduce tariffs on all Chinese products: slap bigger tariffs on US imports, capitulate to United States demands, or begin a war of attrition.

The 3 think increasing tariffs to match the total US charges on a much smaller variety of products is unlikely, acknowledging this would indicate "reordering of supply chains which would impose additional expenses on the Chinese economy" and "adversely affect China's image as an economy that is opening up and reforming."

BAML likewise sees China as unlikely to roll over to US demands, specifically when there's popular assistance for a tough reaction to the US trade tariffs.

Bhave, Harris, and Qiao believe the most likely circumstance is a war of attrition developing between the two sides.

They described:

"China will probably adopt a 'middle course' of engaging the United States in a war of attrition. We expect some retaliatory tariffs, however in smaller sized quantities than the United States procedures. Greater constraints and guidelines on US business running in China are also likely. In addition, policymakers may end up being more tolerant to renminbi depreciation, although they are not likely to weaponize the currency.

"Together with the 'stick' of retaliation, China may likewise provide the 'carrot' of modest concessions. Of the compromises listed above, greater imports from the US and copyright protection measures are likely on the table, not least since China was leaning to these reforms even before trade stress began to escalate.

"With its carrot-and-stick trade policy and domestic easing steps in place, we think China will go into wait-and-see mode. In our view, Chinese policymakers think they can outlast the United States, holding out until the United States equity market corrects or the 'sticker shock' impact of the tariffs begins to affect public opinion in the US."

While this may seem like a palatable outcome for financial markets, the 3 BAML financial experts believe it will not lack risk.

"In a war of attrition, there is scope for mistake," the 3 said. "Our game-theoretic analysis of trade negotiations recommends that visible discomfort is the motivator for de-escalation and compromise."

BAML included that a miscalculation from either side would be expensive for consumers and services alike, stating financiers ought to "buckle up" must such a policy bad move occur.

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President Donald Trump. Jae C. Hong/AP Images