Shilling: We're Already in a Trade War with China

Fri, Feb 24, 2017 - 3:40pm

Gary Shilling, editor of A. Gary Shilling’s Insight and author of The Age of Deleveraging, told Financial Sense Newshour that the US has the upper hand in a trade war with China that was already underway before Trump's election.

Here's some of what Shilling had to say on our podcast (see Gary Shilling: US Holds Upper Hand in Trade Environment for the full audio).

Trade War Conditions

One of the big concerns about President Trump’s recent rhetoric has been the possibility of protectionist actions sparking a trade war. For Shilling, however, this was already happening, even before the election.

“I think we’re already in a trade war,” he said. “Of course, in any war, it’s the other side that’s always the bad guys...but I think any reasonable person looking at it objectively would say that China’s been running very much a mercantilist policy.”

The Chinese strategy has been to build up their assets, focus on exports, to limit imports, and to demand technological transfers from anybody who wants to be in China, he noted.

However, the reality is, the US still has the advantage in this dynamic. We’re in a situation where there are global surpluses of almost everything, Shilling stated. We have plenty of labor and productive capacity around the world to meet demand.

“When you have that situation, who has the upper hand?” he asked. “It’s the buyer, it’s not the seller. And we’re the buyer. China and other developing countries are the sellers. I think Trump instinctively understands that, as do the Chinese leaders.”

The US Is Insulated, and May Come Out on Top

While the US has some economic issues, the reality is that our economy is less exposed to export risk. For example, if President Trump supports policies that shrink the US trade deficit, this would likely have strong implications for foreign countries, and especially China.

“China is the second largest economy, but they’re large because they have a lot of people,” Shilling said. “Just about all the manufacturing that could be shipped out of North America and Europe to China and other developing countries has been. That game is pretty much over.”

China could have big problems internally, he said, but he’s not sure a Chinese hard landing domestically would be cataclysmic for the world economy.

However, if we dramatically reduce our trade and current account deficits, Shilling argued, the rest of the world would be in deep trouble. The US has relatively low exposure to foreign trade and would end up on top, though this wouldn’t be an attractive situation for the rest of the world.

This gives President Trump a lot of leverage.

“In trade negotiations, we’re the buyer, and (others) are the seller,” Shilling said. “We’ve got the advantage.”

Listen to this full interview with Gary Shilling, renowned economist and author of The Age of Deleveraging, on our website here or on iTunes here. Want to listen to the BEST financial podcast on the web? Click here and subscribe today!

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