China is already beginning to feel the pinch of tariffs as the economy and the manufacturing sector, in particular, have begun to slow. China, however, might just be beginning to feel the pain. Apparently, President Donald Trump is considering raising tariffs to 25 percent, and many of his advisors are urging him to do just that. If so, a global trade war could erupt in full.
China’s manufacturing sector has been showing some signs of weakness. Exports actually continue to do well despite the tariffs, but investment in manufacturing has begun to decline. Meanwhile, the Purchaser’s Management Index (PMI), one of the most widely watched indicators for factory activity, contracted from 51.5 to 51.2. In and of itself, that drop is pretty minor, but some fear that it could be a sign of worse things to come.
China’s exports have remained strong because the Chinese government slashed the value of the yuan. The cheaper currency makes it cheaper for foreigners to buy Chinese-made goods. In other words, a weaker currency makes exporting more attractive even as tariffs take their bite. However, a weak currency could hurt spending power at home. Indeed, the contraction in the PMI seems largely due to a drop in domestic demand.
Meanwhile, China has some dangerous debt issues that are going to be harder to fight with a weak economy and dropping yuan. China’s economy has grown at a strong clip over the past several years. However, much of this growth has been due to loose monetary policy and high government lending/borrowing. The Chinese government is taking efforts to curb lending, but this could result in growth slowing further.
China is finding itself between a rock and a hard place, and if Trump raises tariffs again, they’ll find themselves under a hammer as well.
Trade War Likely to Get Worse Before It Gets Better
So far, China has shown little willingness to back down or make serious concessions. I don’t want to dig too deeply into who’s right and who’s wrong, as I don’t know enough about the situation. However, unless China or the United States takes its foot off the gas pedal, the global trade war could get much worse before it gets better.
Global trade policies are immensely complex. If 25 percent tariffs were put in place, American consumers would feel it quickly at the shopping mall as imported goods from China would roughly rise in line with the tariffs. Clearly, this would be detrimental to American consumers in the short run.
(Credit: Facebook/BizLaunch, Arlington’s Small Business Assistance Network)
However, there’s an argument that protective tariffs would allow industries in other countries to grow as production shifted to them. It’s possible that some of the production would shift to the United States, spurring more local manufacturing. With Mexico and other low-cost countries still open for business, however, it’s possible that production would shift there instead.
Of course, Trump could always slap higher tariffs on Mexico and other countries. However, much of the rhetoric espoused by the Trump administration hints at another intention: freer trade. The recent negotiations between the EU and USA hint that both could move to reduce tariffs, making trade between the two theoretically more fair.
For now, however, the spotlight will remain on China. If the USA and China do continue to escalate, the economy could suffer. Perhaps suffering now will pave the way to a more prosperous future, but the risks are real, and many middle-class Americans will feel the impacts of any trade war.
