For months, President Trump’s economic advisers have cheered Chinese economic suffering, celebrating every sign of weakness — in stock markets, manufacturing, retail sales, investment — since it surely means China is on the verge of a humiliating capitulation to Trump’s demands.
Including, perhaps, the United States.
There are multiple avenues through which the U.S.-China trade war has already harmed the United States, of course, many of which I discussed here at the American Economic Association’s annual meetings.
First are the tariffs that the president has placed on hundreds of billions of dollars’ worth of Chinese products. Which sounds like it would only hurt China, except that most Chinese imports targeted by Trump are inputs that U.S. firms need to manufacture their own products.
Some of those Chinese goods have no alternative sourcing, noted Syracuse University economics professor Mary E. Lovely; even when workarounds from other countries are available, they are often not perfect substitutes and lead to higher pricing for U.S. companies (and ultimately U.S. consumers).
Then there are the tit-for-tat tariffs that China has placed on American products. These retaliatory duties have foreclosed new market opportunities and destroyed relationships cultivated over decades by U.S. farmers, manufacturers and other entrepreneurs.
Soybeans are a prime example. For decades, U.S. industry groups nurtured relationships in China, making it the top buyer of U.S. soybean exports. But the trade war (coupled with fiercer competition from other countries, such as Brazil) has put all that at risk. From Sept. 1 through mid-December, the United States exported just 341,000 metric tons of soybeans to China, compared with 18 million the same period the year before.
Then there’s the continued uncertainty surrounding the future of our trading relationship with China. This has complicated investment and hiring decisions, not to mention firms’ access to equity-based financing.
While Trump blames the Federal Reserve and Democrats for stock market volatility, the damage his trade wars has wrought is large and quantifiable. Trade policy news has triggered major daily jumps in U.S. stock prices — swings of at least 2.5 percent — four times since March. For context, that happened only seven times before, total, over the previous 118 years , according to University of Chicago professor Steven J. Davis.
In a forthcoming paper with Scott R. Baker, Nicholas Bloom and Kyle Kost, Davis has constructed a new equity market volatility index, based on keywords in news stories about stock market movements. The index finds that trade-policy uncertainty was flagged in 26 percent of articles related to equity market volatility since March 2018, compared with just 2.7 percent between 1985 and 2015. “Trade policy went from a non-factor in U.S. equity market volatility in recent decades to one of the leading sources in recent months,” Davis said.
Finally, there’s the issue of the Chinese economy itself.
Depending on whom you ask, China may have been overdue for a sharp slowdown, or even a recession, long before the trade war began, given its structural problems. But the trade war could tip the balance. It might lead investors to suddenly reevaluate China’s long-term growth prospects, Cornell University professor Eswar Prasad told me.
The global fallout from a Chinese recession would be devastating. It would harm many of our closest allies in East Asia — including South Korea and Japan — which count China as one of their most important export markets.
And, of course, there is the fallout for U.S. firms that do business in China. Last week, Apple slashed its revenue forecast, noting that falling sales in China were responsible for more than 100 percent of its global revenue decline. Not because Apple had been directly hit by tariffs but because the Chinese economy was slowing.
“It’s not going to be just Apple,” White House Council of Economic Advisers chairman Kevin Hassett said the following day. “I think that there are a heck of a lot of U.S. companies that have a lot of sales in China that are basically going to be watching their earnings be downgraded next year until we get a deal with China.”
Markets, as expected, plummeted. This was a dunderheaded thing to say out loud, but Hassett was right: Apple isn’t the only U.S. company at risk in a China slowdown. Ford and General Motors, for instance, have also seen their Chinese sales plummet.
Maybe, as Hassett and others argue, the prospect of a Chinese recession would be so unbearable to Beijing that its leaders have no choice but to give Trump everything he wants. I remain skeptical, in part because Trump can’t decide what he wants.
In the meantime, Team Trump should be careful what it wishes for.