“Trade Wars Are Easy to Win”
…or Are They?
Guggenheim Partners
October 4, 2019
Scott Minerd
Global Chief Investment Officer
For financial professional use only. Do not distribute to the public.
History of the U.S.-China Trade War
Tariffs on Washing Machines Were the First Shot Fired in the Trade War
Source: Guggenheim Investments, Bureau of Labor Statistics. Data as of August 2019.
CPI - Laundry Equipment (3-month % change)
3Please See Important Disclosures and Legal Notice at End of Document.
-8%
-4%
0%
4%
8%
12%
16%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
20% tariffs levied on
imported washing
machines
U.S. and Chinese Import Tariffs Have Risen Dramatically
Source: Guggenheim Investments, Peterson Institute for International Economics. Data as of September 2019.
Average Tariff Rates for the U.S. and China
4
0%
5%
10%
15%
20%
25%
30%
Jan
Feb
Ma
r
Apr
Ma
y
Jun
Jul
Aug
Sep
Oct
No
v
De
c
Jan
Feb
Ma
r
Apr
Ma
y
Jun
Jul
Aug
Sep
Oct
No
v
De
c
Chinese Tariffs on U.S. Exports U.S. Tariffs on Chinese Exports
Planned Tariff
Hikes
2018 2019
Please See Important Disclosures and Legal Notice at End of Document.
Trade Uncertainty Surges After 20 Years of Stability
Source: Guggenheim Investments, Ahir, Bloom and Furceri, "The World Uncertainty Index“ (based on the number of times “uncertainty” is mentioned in EIU reports in proximity to a word related to trade). Data as of June 2019.
World Trade Uncertainty Index
5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
1997 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
World Trade Uncertainty Index (equally weighted average)
Please See Important Disclosures and Legal Notice at End of Document.
“Trade Wars Are Good, and Easy to Win.”
- President Donald Trump
On Balance, Tariffs Harm U.S. Growth
Source: Guggenheim Investments.
Tree Diagram of Channels Through Which Trade Tensions Affect the U.S. Economy
7
Growth Impact
Financial Conditions
Stock Prices
Dollar
Spreads
Interest Rates
Inflation
Consumption
Profits
Uncertainty
Capex Plans
Consumption
Trade
Trade Balance
Supply Chain
Global Growth
Please See Important Disclosures and Legal Notice at End of Document.
U.S.’s Overall Trade Deficit Continues to Widen Despite Tariffs
Source: Guggenheim Investments, Haver Analytics. Data as of June 2019.
U.S. Goods Deficit with China and the World, % of GDP
8
-4.20%
-4.10%
-4.00%
-3.90%
-3.80%
-2.05%
-2.00%
-1.95%
-1.90%
-1.85%
-1.80%
-1.75%
2017 2018 2019
Goods Trade Balance with China (LHS) Goods Trade Balance with World (RHS)
Please See Important Disclosures and Legal Notice at End of Document.
Tariffs Drive U.S. Price Levels Higher, Hurting Consumption
Source: Guggenheim Investments, Haver Analytics. Data as of August 2019.
U.S. Consumer Price Levels on Selected Tariffed Goods & Core Goods (Index, January 2017 = 100)
9
97
98
99
100
101
102
103
104
105
2014 2015 2016 2017 2018 2019
Selected Tariffed Goods Core Goods PCE
Recreational vehicles,
household supplies, and
parts, furniture,
appliances.
Please See Important Disclosures and Legal Notice at End of Document.
For China, the Direct Hit of Tariffs May Be Less than Meets the Eye
Source: Guggenheim Investments, Haver Analytics, China National Bureau of Statistics. Data as of August 2019.
10
China’s Exports to and Imports from the U.S.Trailing 12-Month Change in Exports to and Imports from the U.S. (% of GDP)
-0.3%
-0.2%
-0.1%
0.0%
0.1%
0.2%
0.3%
0.4%
0.5%
2015 2016 2017 2018 2019
Imports from U.S. Exports to U.S.
Chinese exports to the
U.S. have fallen, but so
have imports from the U.S.
Please See Important Disclosures and Legal Notice at End of Document.
Tariffs Have a Disproportionate Impact on Foreign Firms in China
Source: Guggenheim Investments, Haver Analytics, China National Bureau of Statistics. Data as of August 2019.
Industrial Production by Type of Ownership (YoY%, 3-month moving average)
11
0%
4%
8%
12%
16%
20%
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Total Foreign Owned Firms
Trade War begins
Exports account for 18% of production but more than 40% of
China’s exports come from foreign-owned firms or joint ventures
Please See Important Disclosures and Legal Notice at End of Document.
China’s Economy Is Undoubtedly Slowing, but Mainly Due to Financial De-risking
Source: Guggenheim Investments, Haver Analytics. Data as of August 2019.
Total Social Financing and Contributions (YoY%)
-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18 Jul-18 Sep-18 Nov-18 Jan-19 Mar-19 May-19 Jul-19
Shadow Banking Corporate Bonds Equity Other Bank Loans Total Social Financing (YoY%)
Financial conditions started to tighten as authorities undertook
a sweeping financial de-risking campaign in 2017
12Please See Important Disclosures and Legal Notice at End of Document.
Trade War Disrupts U.S.-China Capital Flows
Direct Investment Flows Between the U.S. and China Have Fallen
Source: Guggenheim Investments, Rhodium Group. Data as of August 2019. *Annualized based on YTD data.
Annual Value of FDI Transactions Between the U.S. and China ($bn)
14
$0
$5
$10
$15
$20
$25
$30
$35
$40
$45
$50
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019*
Chinese FDI in US US FDI in China
Capital flight after a failed
attempt to liberalize the
exchange rate
Please See Important Disclosures and Legal Notice at End of Document.
Will Capital Inflows Taper off as the Trade War Heats Up?
Source: Guggenheim Investments, Haver Analytics, China State Administration of Foreign Exchange. Data as of Q1 2019.
15
Non-resident Purchases of Chinese Stocks & Bonds ($bn) Resident Purchases of Offshore Stocks & Bonds ($bn)
-$40
-$30
-$20
-$10
$0
$10
$20
$30
$40
$50
$60
$70
2014 2015 2016 2017 2018 2019
Thousands
Equity Debt
Ou
tflow
s
-$40
-$30
-$20
-$10
$0
$10
$20
$30
$40
$50
$60
$70
2014 2015 2016 2017 2018 2019
Thousands
Equity Debt
Ou
tflow
s
…while residents have
added to foreign holdings
in an effort to diversify
Foreign holdings of
Chinese securities have
risen…
Please See Important Disclosures and Legal Notice at End of Document.
Accessing the Collateral Damage
Global Manufacturing Is Bearing the Brunt of the Downturn in Trade
Source: Haver Analytics, Guggenheim Investments. Data as of August 2019.
JP Morgan Global Composite Manufacturing & Services PMIs
17
48
49
50
51
52
53
54
55
56
2012 2013 2014 2015 2016 2017 2018 2019
Global Manufacturing PMI
Global Services PMI
Falling new export
orders weighing
on manufacturing
Please See Important Disclosures and Legal Notice at End of Document.
Tariffs Disrupt Global Supply Chains
Source: Guggenheim Investments, Haver Analytics, OECD. Merchandise trade only. Data as of 2018. Countries are selected based on their contribution of value-added to U.S.-China trade.
18
Origins of Value-Added (VA) Embodied in US-China Trade Taiwan, Korea, Australia, and Japan Are Most Vulnerable
China
Korea
Taiwan
Malaysia
Singapore
Australia
Saudi Arabia
Japan
Russia
U.S.
Germany
Canada
Mexico
Japan
Germany
U.K.
Korea
Saudi Arabia
France
India
Italy
U.S.
Tariffs
Non-Chinese value added
accounts for 20% of
Chinese exports to the U.S.
Non-U.S. value added
accounts for 10% of U.S.
exports to China
Major origins of
non-Chinese VA
embodied in
China’s exports
to the U.S.
Major origins of
non-U.S. VA
embodied in
U.S. exports to
China
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
Taiw
an
Kore
a
Austra
lia
Japan
Mala
ysia
Saudi A
rabia
Canada
Russia
India
Sin
gapore
Mexic
o
U.K
.
Germ
any
Fra
nce
Italy
Value-Added Embodied in U.S. Exports to China (% of exports)
Value-Added Embodied in China's Exports to U.S. (% of exports)
Please See Important Disclosures and Legal Notice at End of Document.
Japan Has Been Caught in the Crossfire …
Source: Haver Analytics, Guggenheim Investments. Data as of June 2019.
Japanese Real GDP Growth & Contributions to Real GDP Growth (YoY%)
19
-2%
-1%
0%
1%
2%
3%
2014 2015 2016 2017 2018 2019
Consumption Investment Net Exports Real GDP
Please See Important Disclosures and Legal Notice at End of Document.
… As Exports to Asia Have Fallen …
Source: Haver Analytics, Guggenheim Investments. Data as of June 2019.
20
Japanese Exports By Geography (YoY%, 6-month moving average)
-10%
-5%
0%
5%
10%
15%
2016 2017 2018 2019
Oceania
Asia
Midde East & Africa
Europe
Americas
Exports YoY%, 6m m.a.
U.S. strength not
enough to offset
weakness in Asia.
Please See Important Disclosures and Legal Notice at End of Document.
… And Consumption Is About To Be Tested by the October Tax Hike
Source: Haver Analytics, Guggenheim Investments. Data as of June 2019.
Japanese Household Consumption (YoY%)
21
-
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
Domestic Household Consumption, YoY%
April 1997
consumption
tax rate hike
from 3% to 5%
April 2014
consumption
tax rate hike
from 5% to 8%
Please See Important Disclosures and Legal Notice at End of Document.
Disclosures and Legal Notice
Disclosures and Legal Notice
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