Trump's Economic Hand Grenades Will Do Even More Damage to the US
President Trump labeled China a currency manipulator and announced new 10 percent tariffs on $300 billion worth of Chinese goods scheduled to begin September 1. China countered in short order, allowing the yuan to fall below the 7.0 line—an 11-year low—and asking its state-owned companies to halt imports of US agricultural products. On Tuesday, the president backed off some of the tariffs, not wanting to see empty shelves and rising prices during the Christmas shopping season.
The worst part is that the administration's "name and shame" was predicated on bad analysis. The Treasury Department concluded that the People's Bank of China did not intervene to support the yuan and therefore engaged in currency manipulation. But it was market forces driving down the yuan thanks to the threat of new tariffs. Practically all economists agree—market forces, not currency manipulation. For example, Eswar Prasad, former head of the International Monetary Fund's China division, stated that the decision to label China a currency manipulator was plain wrong. In fact, most economists join the International Monetary Fund's assessment that China's currency is fairly valued.
Whatever the justification, the Trump administration's decisions to brand China a currency manipulator and to hurl economic grenades lobbed eastward are causing real havoc for the American economy.
On this course, an economic slowdown is probable, and a recession is possible. That would be most unwelcome for American companies and consumers heading into the 2020 elections.
Trump's tariffs steal a good portion of the stimulus created by the Tax Cut and Jobs Act of 2017. Goldman Sachs believes that Trump's trade war has already cost the United States 0.6 percent of GDP growth. That's a hit exceeding $100 billion on an annual basis. The hit comes on top of a slowing global economy and the possibility that rising consumer prices will put an end to Fed interest rate cuts.
Not surprisingly, the Dow Jones Industrial Average and the S&P 500 index have been on a roller-coaster ride. After plummeting 760 points on August 5—its worst decline of 2019—trade concerns brought the Dow industrials down nearly 400 points on Monday. Tuesday brought a modest reprieve after Trump backed off a part of his September 1 tariff threats, but stocks were sinking again on Wednesday.
American farmers have paid a heavy price for the president's trade war with China. In 2017, China imported $19.5 billion of American farm goods. That number dropped more than half to just $9.1 billion in 2018 because of tariffs. In the first half of 2019, Chinese imports are down another 20 percent from the first half of 2018. This includes an American dairy sector whose exports to China have dropped 54 percent this year.
All told, tariffs are expected to cost the agricultural sectors 59,000 to 71,000 jobs over the next two years. Moreover, the loss of the China market has pressured US farm prices on exports worldwide—a double whammy.
Farmers aren't the only casualty of the administration's stumbles on trade policy. Manufacturers, including giants like Boeing and Caterpillar, have seen higher costs as tariffs increased on steel and aluminum. And consumer prices are suddenly on the rise, about 0.3 percent per month. At this pace, the Fed will soon be worrying about too much inflation, not too little.
When it comes to the energy sector, China has countered US economic aggression with 10 percent retaliatory tariffs on Liquefied Natural Gas (LNG), a figure that will soon jump to 25 percent. This threatens a massive market for booming US energy supplies, as China is poised to overtake Japan as the No. 1 importer of LNG. In fact, damage has already occurred. In 2017, 25 LNG cargo ships went from the United States to China, a number that dropped to just six in 2018 as tensions between Washington and Beijing mounted.
Analysts are now predicting that the latest escalation could dampen the US oil market, as China is expected to avoid US crude oil.
On the technology side, a prolonged trade war risks Chinese retaliation against the American tech industry. Apple and Microsoft both do significant business in China. That's one reason Apple shares initially dropped over 5 percent on the tariff news; Apple since rebounded on Tuesday following the news that tariffs on laptops and cellphones would be delayed until December 15. The reality is that tech firms need access to markets worldwide to cover their huge R&D costs. The Chinese market is critical to their global success.
Among major retailers instantly affected by the latest round of tariffs, Office Depot shares fell 5.6 percent while Nordstrom dropped 2.35 percent. Higher consumer prices aren't good news for retail sales volumes.
Trump often boasts about tariff revenue collected on imports from China, estimated at $63 billion through June according to US Treasury data. But serious analysis shows that nearly all this tax is paid by American firms and consumers, not Chinese exporters. The damage to the US economy far exceeds the Treasury's new tariff revenue.
This recent Wall Street roller coaster isn't an aberration, but a predictable response to what many investors fear could be a protracted and costly trade war with a valued economic partner. On Tuesday, the stock market rallied after Trump postponed tariff hikes on consumer electronics. But if the president doesn't reverse course to a much greater extent and take a more cooperative approach to address legitimate grievances with China, the news will get worse after the Christmas season, if not before.