Let’s recall some elements of context, starting with the economic situation in the United States. What’s the situation right now?

Since the first quarter of 2022, U.S. consumers have clearly been under pressure. The gradual deterioration of macroeconomic indicators can now be seen in the real economy. Regarding the consumption of goods, the retail sales figures for May came out below what economists estimated: the gross figure, which includes the rise in prices, came out slightly negative, which means that in real terms - subtracting inflation - the evolution of sales is sinking even further into negative territory. The warnings of companies like Target and Walmart go in this direction, they have a lot of trouble to sell the stocks built up in the post-Covid era because the dynamism of demand is not what was anticipated. At the same time, manufacturing activity contracted, particularly in the New York, Philadelphia, Dallas and Richmond areas. Finally, the real estate market is naturally suffering from the aggressive movement of rising rates: mortgage rates have soared, stocks of existing homes are exploding and if we look at the weekly price listings, you can see that prices are starting to come down significantly. Add to this the worrisome comments from companies in the sector: all guidance is disappointing.

There is a lot of pressure on the American consumer. Recently, the government supported growth with support packages, especially in 2020 and 2021, but in 2022 this is no longer the case. It is even the opposite because public spending is supposed to contribute negatively to GDP. At the same time, monetary policy decisions also act as a brake on growth. In the best-case scenario, growth will stagnate in the second quarter, but it threatens to decline. 

We will know the verdict on July 28, when the first growth estimates for the second quarter are published. Even a slightly negative figure would indicate that the world's most powerful economy has entered a technical recession (two consecutive quarters in which the real GDP growth rate is below zero). This would force officials, especially the advisors to the Biden administration, to revise their rhetoric, which I find far too optimistic about the evolution of economic dynamics.

At the same time, inflation, which rose sharply in May (8.6% annualized), will, in my opinion, remain very high this summer. This is weighing on expectations, both for consumers and businesses. In fact, the University of Michigan's confidence index is at an all-time low.

The only positive point in the short term is the resilience of the service sector and in particular the hospitality sector: occupancy rates are rising in the United States and elsewhere and prices paid are high. The risk is that once the summer is over, there will be a normalization on this side and that the pressures will be felt on services as strongly as on goods today.

 

In China, the situation is not quite the same. Recently, you shared your optimism about its dynamism in the coming quarter. Can you tell us a little more about this? 

The first figures for June show two things: China’s manufacturing index has risen above the 50-point threshold, which indicates an acceleration of activity and confirms the end of a long period of contraction, and the services index is also clearly on the rise. Among the immediate phenomena that explain this renewed dynamism is the relaxation of the restrictive measures of the zero-Covid policy, which follows the slowdown in the number of cases recorded in the major metropolises. Beyond that, there is a real political will from the authorities to trigger a significant rebound in growth in Q3, which will likely erase a contraction in Q2. April and May were extremely bad months in China, all high frequency indicators were down, typically, air traffic was down 80% y/y in early April. I think authorities expect a negative growth rate for Q2, so they wanted to restart the activity as soon as possible. 

To do this, the government is reintroducing a very large public spending program, with 33 measures that were detailed in May. These include a 2.64Tn Yuan program of tax cuts. Authorities have also pushed all local governments to issue bonds more quickly in order to increase public investment.  Usually, when this type of directive is given, the process takes about ten months, but this time it was asked to issue almost all the bonds before the end of June and then spend the money. It seems to me that official instructions are to spend the proceeds of these loans by the end of August. So, I wouldn't be surprised if Chinese figures are very good in July and August, provided there are no problems with a new epidemic wave. As for consumption, it should follow with a slight delay since restrictions remain on certain areas and specific activities such as transportation or movie theaters.

 

How are trade relations between the two nations? Has the arrival of Joe Biden in office changed anything?

Joe Biden was actually one of the first people to advocate for restrictive measures on China at the end of Obama's last term. He took the first texts on this subject to the World Trade Organization. Under the Trump administration, things took a worse turn with the implementation of a good number of tariffs on Chinese products, and the dialogue has deteriorated significantly, impacting the opinion of American citizens towards China.

For several years, including the introduction of the "Made in China 2025" plan, The US has watched China gain ground in several markets, including high-tech products. This phenomenon has challenged Trump, who has adopted a very protectionist policy. Some strategic acquisitions have been blocked, which has subsequently resulted in a sharp slowdown in financial flows from China to the United States.

Since Biden, no new barriers have been erected to try to slow down the Chinese ascent on the American territory, but the new occupant of the White House has not, or very little, softened things up. However, at the diplomatic level, the form is much less aggressive than during the Trump era.

 

How would lowering US tariffs on Chinese products benefit both sides?

Today there is indeed a real interest in easing the barriers inherited from the Trump administration. And if I think it can be done, it's because both sides can come out winners from such an agreement. In its post-Covid recovery phase, China needs to rely on external demand. Of course, the Chinese government would be delighted to see tariffs on certain products disappear, and it regularly requests this. In reality, the ball is clearly in the court of the United States. Lowering tariffs would allow inflation to fall on a large number of imported products. This is one of the last ammunition the country has to curb the generalized rise in prices, especially now that we know that the nuclear talks with Iran have stalled. Lowering tariffs on entry to the US would be a win-win for both sides in the short term, but the US could add to its terms a lowering of tariffs on the reverse journey since China also imports a lot of US goods.

 

Will the Biden's administration still be willing to ease relations with China once inflation is under control?

The lowering of customs duties would be more of a transitional phenomenon and targeted at basic necessities, and we can't really know if efforts to improve commercial and diplomatic relations will last.  But what leads me to believe that these efforts from the US government will only be temporary is the existence of very clear and marked frictions on a whole range of related subjects. Tensions that will not disappear overnight. When the United States discussed strengthening the economic cooperation pact with Taiwan, this offended Chinese authorities. So, this creates a difficult context which suggests that even if a reduction in tariffs takes place, the issues of economic hegemony will not change: the US/China rivalry will continue to exist and the geopolitical frictions in Ukraine, Russia and Taiwan will not go away overnight.

 

Which products may benefit from relaxed tariffs? Will it have an immediate impact on Chinese growth and on price trends in the United States?

Tariffs are very specific. If we take the example of electronic components: within the same category of goods, there is a great disparity in taxes, and those that American people need the most are generally the least taxed. That's why I was talking earlier about a targeted program for certain products. No doubt on some goods the magnitude of the tariffs will simply be reduced, while on others there will probably be full exemptions. Initially, tariffs should be relaxed on basic necessities, with the idea that inflation will affect low-income households much more. As to how long it will take for the effects of the measures to materialize in the real economy, it is very hard to quantify, but some of the regional federal banks must be trying to model it as we speak.

What concerns me is the time spent upstream, i.e. the dialogue with the lobbies, the time spent before the decision is made and the time lag between the announcement and its implementation. I still think that if the decision is made in July, we could start to see the effects just before the mid-term elections (November 8).

 

Joe Biden and Xi Jinping are preparing for major political events in their respective countries, how can these compromise the outcome of talks?

The world is cut in two, with China and Russia on one side, the United States and Europe on the other. There are many differences between the two largest powers and what might appear trivial from an economic point of view isn’t. 

On the political side, the lowering of tariffs on Chinese products should not be seen as an admission of weakness by Joe Biden with the mid-term elections. This is a relatively complex situation for American officials, the ball is in their court, but such a decision could have important repercussions on public opinion. Obviously, the country will benefit in the short term, but some American industrialists/lobbies will express their disagreement. After that, let's be honest, there are not that many tools to bring down inflation. There was potentially the Iranian nuclear deal, but the outcome of the negotiations is negative. Tariff barriers are the only leverage being discussed at the moment, the last ammunition in a way. And even if it's risky from a political point of view, making a decision now is strategic: it's possible that the effects on prices will be visible before the elections.