“Binary” is a word that dates to the 15th century, according to Online Etymology Dictionary, but was revived in the 20th century as a way of describing how computers operate: All programming ultimately breaks down to controlling a bunch of zeros or ones in the machine — turning on myriad electrical nodes in an integrated circuit on, or turning them off, with tiny amounts of voltage.
Now, the term is being revived by economists to describe President Donald Trump’s trade war with China: For the U.S. economy, it’s a one or a zero, deal or no deal, home run or a strikeout. Trump wins, or Trump loses, and everyone else minds the fallout.
The truly interesting part, according to a growing number of investors and economists, is that the details of any deal may not matter that much. Trump could just announce that his trade war is over, or that he’s engaging in fruitful talks with his counterpart, Chinese President Xi Jinping.
In the binary system, that would be a one: The current economic expansion, already a decade old and one of the longest in U.S. history, keeps chugging along.
Or the negotiations over a trade deal could break down, and discord prevails. That’s a zero – things take a turn for the worse.
“Trade is really a binary risk,” Ellen Zentner, chief U.S. economist at the giant Wall Street bank Morgan Stanley, said in an interview. “It can be the greatest downside risk to the outlook, or the greatest upside.”
Investors apparently see Trump’s on-again, off-again trade tariffs as binary events as well — not just with China but with other U.S. trading partners like Europe and Mexico: Just look at how quickly markets faltered after Trump on May 30 threatened to impose 5% tariffs on all goods imported from Mexico over immigration issues, and how quickly they rebounded after Trump announced that an agreement had been reached.
The upshot is that the economy’s fate may lie largely within Trump’s control, since his administration initiated the trade war with China and presumably could end it quickly after obtaining minimal concessions.
That could prove a boon for Trump if the trade war dissipates quickly as the 2020 presidential elections approach. Economists say a resolution to the spat could lead to a renewed era of growth, prompting a rally in financial markets. And when people are sanguine about the economy and their personal financial prospects, they’re typically more inclined to vote for an incumbent.
For now, the trade dispute with China is such a looming threat to growth that some big corporations are questioning whether to invest in new factories, equipment, technology and personnel — or just hold off until it’s over.
“That’s really at the crux of the jitters,” Zentner said.
The Securities Industry and Financial Markets Association, an industry association for brokerage firms firms like Morgan Stanley, JPMorgan Chase (JPM) , Citigroup (C) and Goldman Sachs (GS) , released a survey Wednesday showing that Wall Street forecasters expect the economy to grow by 2.2% this year, slowing dramatically from last year’s 2.9% pace.
“When asked to rank the factors they believe have the greatest impact on U.S. economic growth, i.e. why estimates have been taken down, (unsurprisingly) U.S. trade policy was on the top of the list,” according to a report summarizing the results.
Standard & Poor’s, the bond-rating company, said Wednesday in a separate report that the risks to growth — largely from the “intensifying trade tensions with China” — have grown so worrisome that the Federal Reserve may need to cut official interest rates “soon” — possibly by September — to stave off a deeper downturn. Previously, S&P’s economists hadn’t expected a rate cut until 2020 at the earliest.
“The outlook for the U.S. economy has worsened since January, with signs that more businesses have closed their wallets and investor skittishness feeding into financial market unrest,” according to S&P.
If the projected slowdown materializes, it would be the second year in a row the Trump administration has fallen short of its pledge of 3% annual growth — pitched by the president and Treasury Secretary Steven Mnuchin as a near-certainty when they were pushing for their $1.5 trillion tax-cut law in late 2017.
Yet when it comes to the negotiations with China, Trump may have ample leeway: Not even Wall Street’s top economists agree on what a “good outcome” would be from the trade war.
“You can put 15 economists in the room and get 17 different opinions on what, quote-unquote, a good outcome is, and it’s the same with investors,” Zentner said.
In Zentner’s opinion, there are legitimate and thorny concerns over China’s habit of forcing U.S. companies to turn over technology or intellectual property as a condition of doing business in the country. Those need to be addressed, she said.
Beyond that, it might just be enough for Trump to announce that his relationship with China’s Xi is going swimmingly — or even that the two sides are continuing to engage in healthy dialogue after the G-20 summit on financial markets and the economy scheduled for late June in Japan. The two world leaders are expected to meet then.
“That is probably not what you would call a solution and a deal,” Zentner said. “Getting to a deal is a very long-term process. Folks just want to see that they play nicely in the sandbox together. It’s going to take some time.”
Not exactly binary. But from the point of view of economists and investors, that might be how Trump gets to a one.