September 15, 2018
According to the Washington Post, Donald Trump thinks he is winning his trade war with China because of the decline in its stock market. Its stock market has declined 23 percent this year. If Trump thinks he is hurting China’s economy because of this decline in its stock market he is even more ill-informed than is generally believed.
People often err in thinking that the stock market is a gauge of US economic performance. In principle, it is a measure of the future profits of US corporations. A shift of income from wages to profits, or a cut in corporate taxes (like what the Republicans passed), would be expected to boost the stock market even though this is just a redistribution from the rest of the country to US corporations. In addition, the stock market is highly erratic, as investors can get carried away by irrational exuberance as happened in the 1990s bubble.
The Chinese stock market is even more erratic. For example, it lost almost 50 percent of its value from June of 2015 to February of 2016. This was a period when its economy was growing at almost a 7.0 percent annual rate. While China’s growth data should be viewed with some skepticism, there is little doubt that the country maintained healthy growth through this period.
If Trump is using relative stock market performance as the gauge of his success in the trade war with China, he is even more deluded than usual.
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