The U.S. economy has taken a hit from the ongoing trade tensions with China. But the real impact is still to be felt as the battle of wills between President Trump and the Chinese government escalates from a trade tiff to an all-out trade war.
Read more about the most recent back-and-forth tariff increases between the two countries in the article "U.S. and China Trade War Escalates."
The latest blows in the ongoing contest – tit-for-tat tariffs on billions of goods on both sides – are putting an already nervous economy on an even more shaky footing. A market report by Business Insider indicates economists are now expecting consumer prices to rise further than expected and U.S. growth to dip lower.
Goldman Sachs is estimating core consumer prices to rise by 0.05% to 0.10% by mid-2020. Most of the price escalation related to tariffs on Chinese products will be felt in goods such as apparel, footwear and electronics. Further tariffs on European cars will go into effect in mid-December.
While larger whole goods, such as heavy equipment, will not fall under the tariffs, the effect on the economy will still be widespread. Goldman Sachs believes GDP growth could dip by as much as 0.7% by the end of 2019, and may not recover until mid-2021 due to uncertainty over the conflict’s impacts. The bank has also nudged down growth forecasts by 0.1% through Q1 2020, with expected growth of 2.0%, 1.7% and 2.2% over the next three quarters.
China Holds the “Power of the Purse”
Nelson Dong, a senior partner at the international law firm Dorsey & Whitney, and head of its national security group and co-head of its Asia group, does not see an easy fix, particularly given the recent actions on the part of countries’ governments.
"From the outside, it is difficult to see how these rapid volleys of tariffs and counter-tariffs can help the two teams of government negotiators to reach any kind of ‘deal’ that would be acceptable to both President Trump and President Xi,” he states, “or can avoid the spreading collateral consequences for many thousands of suppliers and customers on both sides of the Pacific or the knock-on effects in many other national economies.
“Tariffs are and always have been taxes paid by an importer in order to gain customs clearance and entry into the importing country,” he continues, “and the cost of tariffs will thus be factored into the price of such imported goods, which are then passed down the supply chain to the ultimate user or customer at the end of that chain.”
Tariffs imposed at the scale proposed will result in consumers and end users bearing the cost in the form of higher prices, further limiting their overall purchasing power. “Many parties along the supply chain will either experience lower profits or more lost sales (or some combination of the two),” says Dong. “The resulting damage to consumers, producers and intermediaries can only combine to erode investor and consumer confidence, stall many needed investments, and increase the risks of negative local, regional or even global consequences."
At this stage, China appears to hold most of the cards. As a state-owned enterprise, it has the ability to influence private enterprises to decrease imports of U.S. goods – a power President Trump tried to use, so far to little effect.
China has already used its power to sharply cut purchases of U.S.-produced agricultural imports such as soybeans and other farm commodities, with many competitor countries eagerly waiting in the wings to pick up the slack.
“There are multiple competitor countries who would eagerly replace American suppliers that have invested years or even decades in establishing their sales channels into China,” Dong comments. “The longer these tariff wars go on, the more China can be expected to use this ‘power of the purse’ to regulate and influence where China buys such commodities and the greater the danger that such displacements of American suppliers will last beyond the financial endurance of individual farmers or their creditors.
“In short, Beijing is likely to have far more ability to tell China’s enterprises not to buy certain things than Washington, DC can tell America’s farmers to stay in business even if they suffer crippling losses of markets and income,” he continues. “Moreover, given the massive demands already being made on the federal budget and the ballooning federal deficit from recent tax cuts, it is hard to imagine the U.S. government could afford to continue to hold up and support the many thousands of adversely affected farmers and their communities in such a multi-year struggle.”
A No-win Situation
Up to this point, no credible solutions to the problem have been presented that have any chance of being acceptable to both sides. Even the energies needed to disengage from the trade war appear overwhelming.
“Just in terms of the tariffs and counter-tariffs that have now been erected in both countries, a great deal of time and energy of the negotiators will now have to be diverted just to timing and sequencing the withdrawal of such tariffs to avoid the domestic political cost of being seen publicly as the side that ‘blinked first,’” says Dong.
The question is when, and whether, one of them will blink in time. "Because of their mutual interdependence and the sizes of their economies, China and the U.S. undoubtedly each has the capacity to inflict considerable economic damage on the other country and, conversely, to endure a great deal of economic pain through this struggle,” Dong states. “The question remains whether the two countries also have the capacity and will to escape some kind of ‘economic death spiral’ where they are each so locked into positions from which they cannot easily back away to allow a political resolution.”
If talks between Beijing and Washington tentatively scheduled for September move forward and generate some type of progress, it would be a “hopeful sign,” says Dong. But should anything derail those talks, “both the U.S. and international economic pictures could become quite murky and ominous."