RAYMOND DA SILVA ROSA: China could emerge the biggest winner in Donald Trump’s trade war

In 2020, at the end of his first term as president, Donald Trump boasted about how much the stock market had risen under his watch. It was impressive.

So $100 invested in the Standard and Poor’s 500 — the stock market index tracking the performance of the 500 leading public companies — at the start of his administration would have grown to $156, a compound annual rate of 12.1 per cent over four years.

As it happens, CNN Business reports that “Sleepy Joe” Biden and Bill Clinton did better with compound returns of 14.1 per cent and 16.5 per cent respectively.

More recently, after negative investor reaction to his tariff policies, President Trump has changed his tune, saying: “Look, what I have to do is build a strong country. You can’t really watch the stock market”.

Is a rising stock market a measure of good economic management?

No. Stock market returns are a reliable measure only of how well shareholders have done. They are not indicative of a strong economy or even of future economic growth.

For instance, financial economist Jay Ritter reports that over the 110-year period from 1900 to 2011, there was a negative correlation between per capita GDP growth and share market return in 19 mostly developed countries.

More startlingly, between 1993 and 2011 when China recorded 9.4 per cent real GDP per capita annual growth, the compound annual return to its stock market was -5.5 per cent.

There’s no mystery to how an economy can grow yet have an under-performing share market. It depends on competition and the number of new entrants.

For example, the shareholders of an airline will do well if it’s the only one allowed to operate. Allowing competing airlines to enter the market drives down industry profits but customers benefit from lower fares and improved service.

So, Mr Trump is right. The stock market can rise or fall independent of overall economic performance. The fabled 1987 stock market crash didn’t cause a US recession or even a banking crisis.

That does not imply that imposing tariffs is good policy. American productivity is at record highs but, as The Economist noted, it is in the unsexy services sector, rather than in what many consider to be “real” work such as manufacturing.

Americans who favour tariffs are like well-paid productive office workers who believe they could be contenders as tennis professionals if only they were given a permanent wild card entry to tournaments. Never mind talk of meritocracy and the unfairness of quotas.

The US ship building industry shows what happens when a sector is propped up by subsidies. Relatively high labour costs and low productivity have made US ship building uncompetitive for well over 100 years.

Subsidies helped spur manufacturing to meet urgent demand for ships in the two world wars but the industry never became globally competitive and was practically killed off when president Ronald Reagan stopped a major subsidy program in 1982.

China and some other Asian countries are said to compete unfairly by using tariffs and subsidies to establish a comparative advantage in manufacturing. What this criticism overlooks is that domestic competition in targeted industries is brutal and often results in very low profits.

Further, by distorting their economy to favour export of manufactured goods at relatively cheap prices, China’s leaders have put a low ceiling on its citizens’ standard of living via an under-developed services sector and become dependent on overseas markets. As the saying goes, “never a good deed goes unpunished”.

The great irony of the US imposing tariffs is that it is likely to substantially reduce its comparative advantage in services while spurring China, its ostensible global adversary, to address a glaring imbalance in its economic profile by growing its services sector and reducing its reliance on exports to drive the economy.

Perhaps President Xi Jinping could send President Trump a panda as a token of appreciation?

Winthrop Professor Raymond Da Silva Rosa is an expert in finance from The University of Western Australia’s Business School