Why Economist Gary Shilling Says the U.S. Will Win the Trade War

Many investors fear that the U.S.-China trade war will inflict long-lasting damage on the U.S., but economist A. Gary Shilling, president of economic consulting and forecasting firm A. Gary Shilling & Co., disagrees. "People say nobody wins trade wars. Yeah, in the short-run you don't, but in the long-run...the U.S. will be better off," Dr. Shilling asserted in an interview with Business Insider published this week.

"When you've got plenty of supply in the world, and I think you do...it's the buyer that has the upper hand not the seller. The buyer has the ultimate power and who's the buyer? U.S. is the buyer, China is the seller..If we weren't buying all those consumer goods from China...where would China sell them? They have no other place to sell them, and in the meanwhile, China's growth is slowing," Shilling added.

His comments come as other observers see growing problems for the economy and the markets that are likely to be worsened by protracted trade conflict, as summarized in the table below.

Red Flags for the Economy and the Markets

  • U.S.-China trade war could cut global GDP by $600 billion, OECD warns
  • U.S. companies are slowing capital spending due to trade uncertainties
  • U.S. consumer spending likely to slow due to tariff-induced price hikes
  • Corporate earnings growth is clouded by uncertainties
  • Recessionary risk in next 12 months may be 60%, per the bond market

Sources: Business Insider, The Wall Street Journal, Morgan Stanley, Barron's

Significance for Investors

Shilling is well-known as an economic and financial commentator with a contrarian bent, as a columnist for Forbes (since 1983) and Bloomberg, a frequent interviewee on CNBC and Bloomberg TV, and as the author of, or contributor to, several books. Among his most notable forecasts: in the late 1970s, contrary to a widespread belief that the high inflation would persist for many years, making tangible assets the best investment options, Shilling anticipated that policymakers would bring inflation under control, making stocks and bonds better alternatives.

Shilling notes that China engages in "underhanded" trade practices that should be challenged. "They [China] basically have not fulfilled their promises, they have not opened up their technology, they're not opening up to our investments, they steal our technology, they demand tech transfers for companies that want to operate in China and so on," he said.

Shilling's Key Contentions On The U.S.-China Tariff War

  • Despite short-term pain, the U.S. will be better off in the long run
  • China has reneged on promises to open its markets
  • China engages in rampant theft of U.S. technology
  • To change China's behavior, economic pressure must be applied
  • China will give ground since the U.S. market is so vital to them

Source: Business Insider

The bottom line, Shilling said, is that the U.S. has ample leverage to gain long-overdue concessions from China. "They [President Xi of China and President Trump] could go to the mat and you could get a really nasty, all-out trade war and a serious global recession. I'm not predicting that. I think they probably will settle and China will begrudgingly give ground. They'll import more U.S. goods, they'll ease up on required tech transfers, steal less of it. They're not going to change their views entirely, but I think under pressure, they probably will give way and we'll end up winning the trade war," he predicts.

Ed Yardeni, president of investment strategy consulting firm Yardeni Research, is an economist with a similar outlook. "This trade escalation is probably going to be more of a negative for China than for it is for the United States. They desperately need a deal much more than we do," Dr. Yardeni told CNBC recently. "I'm convinced that our side is pushing for fairer trade with fewer trade barriers, not higher tariffs, which Trump is using as a tactical negotiating tool," he wrote in column for MarketWatch in Sept. 2018.

Looking Ahead

While Shilling is sanguine about a positive resolution of the U.S.-China trade war, at least from the U.S. perspective, there may be other clouds on the horizon. Both Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets, and Vincent Deluard, head of global macro research and strategy at INTL FCStone, are among those observers warning that the market may be headed for a nasty fall, as detailed in a previous report.

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