The escalation in the trade dispute between the world’s two largest economies came as China said it would raise tariffs on US$75 billion worth of American-made goods. US stocks slumped on escalating trade tensions and the market moves have signaled that many investors expect the American economy to slide into recession in the future, with the trade war as a major reason.
Top White House advisers notified President Donald Trump that some internal forecasts showed that the economy could slow markedly over the next year. He has publicly gloated about economic problems in China but those strains appear to be holding back US growth as well, which will complicate his path to re-election in 2020.
The US-China relationship is under considerable strain and Trump’s China strategy is failing. His tough approach has yielded no meaningful Chinese concessions but is increasingly damaging the US economy. Now, as he prepares to run for re-election on the claim that his populist nationalist agenda has been a smashing success, it’s awfully telling that his team has now launched a frantic effort to deny glaring truths about that agenda.
It is not clear why the chances of Trump winning re-election have shifted strongly in his disadvantage over the past few months when the fundamentals don’t seem to have changed much. The US-China trade war fuels recession fears and has already taken many casualties, but will it hurt Trump in 2020?
With Trump consistently polling behind many of the top Democratic candidates, the president’s re-election campaign is holding out hope that the economy continues its expansion and enough swing-state voters continue to support his tough-on-China trade policy. However, the US-China trade talks broke down in Shanghai at the end of July; Trump immediately declared retaliation, saying that the US would impose an additional 10% tariff on Chinese imports worth $300 billion beginning on September 1. And less than half a month later, the Trump administration announced that the additional tariff would be postponed until end of the year. The ban on US exports to Huawei will also be postponed. The outside circle’s explanation is that this time in his confrontation with his Chinese counterpart Xi Jinping, Trump blinked first.
Trump’s strategy not only befuddled China, but also threw the global trade order off balance. More important, for many years, the manufacturing industry has been moving out of the US, and many American consumer goods are no longer produced at home. Trump has repeatedly imposed additional tariffs on imports from China; in last year’s wave, the burden was absorbed by importers and manufacturers, but in this year’s wave, the burden will inevitably be shifted to consumers directly.
Trump endlessly adopts punitive measures; although they do hurt the intended target, the US stock market gyrates, entangling many investors. Now Goldman Sachs analysts report that fears that the trade war will trigger a recession are growing, and as a result American consumers will be harmed badly.
The US will hold a presidential election on November 3 next year; if voters are highly dissatisfied with Trump’s economic policies, the public and enterprises will suffer the consequences, which inevitably will be unfavorable to his re-election bid. This is a reality that Trump cannot but face squarely.
In the past when the global economy has slowed, US performance has been the exception, going strongly. However, recently the US stock markets have suffered plunges, and in recent days, a phenomenon of yield inversion in the bond market has occurred, both affecting investor confidence. Examining this situation, Trump seems to be unable to bear domestic pressure, thus he cannot but postpone the imposition of additional tariffs on consumer goods until after the Christmas shopping season, in order to avoid an early outburst of consumers’ dissatisfaction.
However, what is noteworthy is that currently the yield inversion in the US bond market elicits sharp declines in the Dow Jones indices. Since 1954, in nine out of 10 instances of yield inversion, economic recessions occurred two years later. In other words, after a whirlwind escalation of the US-China trade war, the economic outlook will be bleak. After this, people will see Trump filled with anxiety and agitation, who will make a series of cavalier and brusque moves, causing more unpredictable changes. However egoistic Trump may be, it probably will not be easy for him to walk smoothly on the tightrope between the trade war and his electoral campaign.
While Trump’s tariffs and anti-competitive and abusive trade practices have taken a bite out of China’s economy, they have also hurt some in the US, and his trade war with China is further slamming the US stock market, and is now threatening the economy. As the election gets closer, Trump will be more concerned about stimulating the economy than his trade policy, and at that point he will be desperate to cut any deal to boost the markets.
The strength of the US economy has been the central pillar of his re-election strategy, and avoiding a recession has been a determining factor in whether or not Trump wins a second term.