If there was any lingering doubt that Donald Trump’s trade war with China is exerting a considerable cost on the American economy, it was erased on Tuesday, when a closely watched statistic indicated that factory output dropped in August. The news confirmed other recent suggestions that the manufacturing sector has entered a recession.
That doesn’t mean the over-all economy is slumping—not yet, anyway. These days, manufacturing is dwarfed by the giant service sector, which includes industries like health care, finance, and retailing. But it’s still a key part of the economy, and it plays an outsized role in Trump country, particularly the Midwest.
During the 2016 campaign, Trump promised to restore manufacturing to its former glory, and during the first two years of his Presidency he boasted frequently about how well it was going. On Tuesday, he didn’t comment on the new report, which coincided with another drop on Wall Street. Last week, stock prices rose as traders seized upon hopeful statements from U.S. and Chinese officials about restarting the stalled trade talks. Now the reality of the situation has set in.
This past Sunday, a raft of new tariffs on Chinese goods entering the United States went into effect. So did some new duties on American goods entering China, which Beijing imposed as a retaliatory move. Unlike the initial Trump tariffs, which were levied mainly on “intermediate products” made in China, such as parts for computers and autos, the new levies, of fifteen per cent, apply to many consumer goods, including clothes and sports equipment. That means their effects—higher prices—will be more visible to ordinary Americans.
As recently as March, Trump claimed that “trade wars are good, and easy to win.” That statement ignored history and the business environment facing American manufacturing companies. Many U.S. businesses, facing a steep price hike for the Chinese-made components they rely on to assemble finished goods, were forced to try to source from other countries. Meanwhile, the entire manufacturing sector was faced with rising uncertainty about when, or whether, the trade war would be resolved. With Trump issuing dire threats one moment and making nice with Xi Jinping the next, it was hard for anyone to figure out how things would play out.
The net results of all of this were cuts in production and postponements to capital investments. Back in April, just one month after Trump issued his idle boast, the manufacturing index maintained by the Institute for Supply Management, a nonprofit trade group, started to drop. Tuesday’s announcement confirmed that the index, which is based on a survey of purchasing managers at large and small firms, slid again in August. That means it has fallen for five months in a row, and the chain of causation isn’t in dispute. For the respondents to the monthly I.S.M. survey, when it comes to lost manufacturing power, “trade remains the most significant issue,” Timothy Fiore, who compiles the index, told National Public Radio on Tuesday.
In spite of Trump’s bluster, he is looking more and more boxed in. All along, his thinking has been that export-dependent China simply couldn’t withstand a lengthy trade war with its largest trading partner. But the government in Beijing has held firm, despite a sharp slowdown in the Chinese economy. Rather than acceding to Trump’s demands for extensive changes in how it organizes its economy and treats American firms, China has responded to each of his escalations with retaliatory measures. On Sunday, the Chinese government filed a complaint over Trump’s latest tariffs with the World Trade Organization, the intergovernmental ruling body that it joined in 2001. In a statement, the Chinese Ministry of Commerce said that China would “firmly safeguard its legitimate rights and interests” and “firmly defend the multilateral trading system and international trade order in accordance with relevant WTO rules.”
With the Communist Party of China gearing up for a big celebration at the start of next month, marking the seventieth anniversary of the establishment of the People’s Republic, it seems unlikely that Chinese trade negotiators will make any big concessions during the next few weeks. Will Trump? Unlike Xi and other Chinese leaders, he has an election to worry about. The conflicting signals he sent during August—escalating his tariff threats and then talking up the possibility of a resolution after the Dow dived—demonstrated that he is at least intermittently aware of the political constraints he faces.
As part of his strategy of escalation, he has threatened to further expand his tariffs on October 1st and December 15th. If these changes went into effect, virtually all imports from China would be facing some sort of a levy, and the average rate would be 24.3 per cent, according to Chad Bown, of the Peterson Institute for International Economics. China would retaliate again, and, entering an election year, Trump would be in an all-out trade war. It can only be guessed how the stock market would react to this prospect. Despite the prospect of more interest-rate cuts from the Federal Reserve, it may be ugly.
The alternative could be for Trump to accept some sort of a face-saving deal, in which China agreed to increase its imports of American goods, particularly agricultural goods, and the United States agreed to roll back some of its tariffs and ease the restrictions it has imposed on Huawei, the Chinese technology company. Such a deal would involve the Trump Administration setting aside, at least for now, its demands for structural changes to China’s model of state-led capitalism. But it might calm the nerves of investors and help prevent the troubles of the manufacturing sector from spreading into the broader economy. (Over-all spending by consumers has held up pretty well so far, but a report, released on Friday, showed consumer confidence taking a dive in August.)
On Tuesday, Tariff Man was back in Twitter-attack mode, warning China not to try and wait out his Administration, saying that the terms of a deal in his second term would be “MUCH TOUGHER.” China’s supply chain, Trump said, would “crumble” in the meantime. Words are cheap. Over the next few weeks, his actions will be the thing to watch.