Kimberly Ann Elliott
It didn’t take long for the U.S.-China trade war to get worse. Even though negotiators have agreed to meet in Washington next month, they are unlikely to see a breakthrough. If things continue on their current course, they will keep getting worse from now until the end of the year, when there will be tariffs of 15 to 30 percent on almost everything the United States imports from China. In part because of the trade war, Chinese economic growth is now expected to fall below 6 percent later this year. Slowing global trade is also hitting the export-driven German economy, which may be slipping into a recession—perhaps to be followed by other parts of Europe and the United Kingdom with the chaos of Brexit.
Despite what President Donald Trump seems to believe, the U.S. economy is not immune to what happens in the rest of the world. And his protectionist trade policies are making things worse, both abroad and in the United States. The latest round of tit-for-tat tariffs came after Trump announced at the end of July that he would impose additional 10 percent tariffs on Sept. 1 on most of the $300 billion in Chinese exports that had previously been spared. The administration subsequently announced that tariffs on around $160 billion in imports of toys, smartphones and other electronics would be delayed to Dec. 15, the first time that Trump has conceded that the tariffs are hurting American consumers, not just Chinese producers.
A couple of weeks later, China retaliated, announcing new tariffs of 5 to 10 percent on $75 billion in U.S. exports. While the Chinese reaction was wholly predictable, Trump responded with outrage and another round of escalation. He tweeted that the 10 percent tariffs on $110 billion in Chinese exports scheduled for Sept. 1 would in fact rise to 15 percent, as would the tariffs planned for December. The 25 percent tariffs on $250 billion in mostly industrial goods imports from China will also rise by 5 percentage points on Oct. 1.
The first round of tariffs went into effect as planned last week, and if the others do as well, the average tariff on U.S. and Chinese exports to one another will rise to around 25 percent—up from 3 percent and 8 percent, respectively, at the beginning of 2018. Making things even worse for American exporters, China has lowered its tariffs for other countries over this same period of time. So far, China has not responded in kind to Trump’s latest escalation and has called for an agreement that benefits both parties. But with Trump having breached what previously appeared to be an implicit ceiling on tariffs of 25 percent, there is now no obvious limit on how far the escalatory spiral might go.
In delaying some tariffs to mid-December to mitigate the impact on the Christmas shopping season, Trump finally had to admit that the tariffs are in fact a tax on Americans. Indeed, according to some estimates, the effects of the tariffs may wipe out the benefits of last year’s tax cut for most households. The stock market is also increasingly volatile and, just a few days before the latest tariffs went into effect, the interest rate on the 30-year U.S. Treasury bond briefly dropped to its lowest level ever and its yield curve inverted, a phenomenon that often signals a recession is coming.
In delaying some tariffs to mid-December to mitigate the impact on the Christmas shopping season, Trump finally had to admit that the tariffs are in fact a tax on Americans.
Despite low interest rates, uncertainty generated by the trade war is holding back new business investment, while U.S. manufacturing shrank in August for the first time in three years. With this fall’s tariffs hitting products that households regularly purchase, there are also some signs that consumers—the principal remaining source of growth in the American economy—may be losing confidence as well.
The latest round in the trade war will be more tangible and potentially more serious in its immediate effects because of the co-dependent relationship between American consumers and Chinese exporters. China accounts for about a third of U.S. clothing imports and around half of total imports of footwear, household textiles—such as bed linens, towels and curtains—and furniture. Toys and games were among the products delayed to December because China accounts for an astounding 80 percent of such imports.
Given the degree of dependence on Chinese suppliers in so many sectors, Trump’s “order” last month to American companies to leave China—had it been serious or within his authority as president, which it arguably wasn’t—would have been hugely disruptive and costly for firms in both countries. It is true that even before Trump took office, many of the retailers and other buyers at the top of China-centric supply chains were looking for alternatives because wages and other costs in China are rising. But for the most part, they are not returning to the United States. Rather, other Southeast Asian countries, for example Vietnam, are becoming major suppliers of clothing and other consumer products. The trade war is no doubt accelerating these efforts, but it takes time and resources to find and develop relationships with other suppliers.
Trump thinks signs of economic weakness in China, and the reshuffling of global supply chains, give him leverage in the trade negotiations with Beijing. But weaker economic growth in China and in the rest of the world is also bad for American exporters, which is another blow to aggregate demand at home. And if American consumers start to pull back, the U.S. economy could be in big trouble.
Beijing believes it has the tools to cope with an economic slowdown, which some experts doubt has much to do with the trade war anyway. Moreover, the Chinese leadership simply doesn’t trust Trump to stick to any deal he makes, so they prefer to wait him out. After all, they are not the ones who have to face voters next year.
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