U.S.-China Trade War: Who Is Winning?

U.S.-China monthly trade deficit in goods

The Shrinking Trade Deficit

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China

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For Trump there's only one metric that shows whether the U.S. is winning or losing the economic scrum with China: the bilateral trade balance. The number still shows he's behind by a large margin, but the trade deficit with China has indeed narrowed in recent months. While economists debate who deserves credit for the recent shifts and whether trade balances are a useful metric at all, the U.S. gap with China was the narrowest in three years in March. Score one for the U.S.

Source: U.S. Census Bureau

Increasing Prices

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China

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Critics say Trump's tariffs will drive up prices for American consumers, but so far it's not happening broadly. Still, signs of trade-war inflation are emerging in the world's largest economy. The price of items on U.S. store shelves in seven tariff-hit categories increased 1.6% through April following the first round of tariffs in July. For China, its higher tariffs on U.S. imports don't have a direct effect on the prices Chinese consumers pay because many of those are industrial inputs, not end-use products. The top seven tariffed imports from the U.S. are soybeans, gold, copper waste, paper waste, liquefied natural gas, cotton and liquefied propane. As Americans feel more of the sting of import taxes, score a point to China.

U.S. consumer price index

Seven tariff-impacted categories

Sources: U.S. Department of Labor, Goldman Sachs, Bloomberg
Other commodities exclude food and energy

Bruised Consumer Confidence

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China

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While U.S. consumer confidence rebounded in April, helped by a tight labor market and higher wages, retail sales growth fell for the second time in three months. It was a similar story in China over the same month when retail sales growth slowed more than expected, denting the economy's biggest source of growth. For now, Americans generally aren't too pessimistic about their prospects in a trade war, but that could change if Trump follows through with his threat to put tariffs on all Chinese imports. Call it a draw at this stage.

Year-on-year China retail sales vs U.S. retail and food services sales

Source: U.S. Census Bureau, National Bureau of Statistics

Currency Wars

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China

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The yuan has weakened about 7.5% against the dollar over the past year. That offers Chinese exporters an important cushion against Trump's tariffs, with further weakness possible. The trick for China is how far to allow the yuan to weaken before it triggers pressure to get money out and in turn forces the government to burn through its reserves. A weaker yuan could have both good and bad outcomes for China's economy, resulting in a draw.

Price of 1 Chinese yuan in U.S. dollars

Source: Bloomberg data

Diverging Equity Markets

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China

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Equity markets in both countries slumped last year by the most in a decade, but China took the bigger beating. A 25% plunge in the Shanghai Composite Index was four times the drop in the S&P 500 in 2018. More recently, the bulls have been unleashed in both nations, yet the question is how long it lasts with trade talks at a stalemate. For those keeping score, Chinese stocks are down almost 14% since the start of 2018, U.S. share prices are up about 6%. Score to Trump.

Percent change in Shanghai Stock Exchange vs S&P 500

Source: Bloomberg data

Slowing Economic Growth

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China

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Both economies are showing signs of weakness in recent weeks but China's appears to be slowing at a faster pace. China reported that industrial output, retail sales and investment all slowed in April by more than economists forecast. In the U.S., along with weaker retail sales, factory production fell for the third time in four months. If tariffs begin to hit growth, Xi has more fiscal and monetary firepower to stoke demand than Trump. High corporate debt is tipping the balance in China toward greater use of fiscal policy, away from the old reliance on ramping bank loans to industrial firms. Trump doesn't have that kind of fiscal firepower. More winning for the U.S.—but worth watching.

Year-on-year GDP growth

Sources: Bureau of Economic Analysis, National Bureau of Statistics

Falling Foreign Direct Investment

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China

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In 2018, U.S. investment in China declined only marginally, while Chinese investment in the U.S. has slumped noticeably. That's according to a new report by the U.S.-China Investment Project, which found a more than 80% drop in Chinese foreign direct investment on American shores to $5 billion last year, from $29 billion in 2017 and $46 billion the previous year. American FDI in China, meanwhile, dropped to $13 billion last year from $14 billion in 2017, the report found. As the U.S. misses out on investment, chalk one up for China.

Combined U.S. and Chinese FDI

Source: The US-China Investment Hub