You are using an older browser version. Please use a supported version for the best MSN experience.

Trump faces crucial decision on China as both economies strain

The Washington Post logo The Washington Post 10/6/2019 David Lynch

Nathan Jeppson, the chief executive of Northwest Hardwoods, this summer canceled a $1.8 million order for forklifts. He shuttered a pair of sawmills in Virginia and Washington and laid off 130 workers, all because of fallout from President Trump’s trade war with China.

The company’s sales to China cratered after Beijing last year imposed tariffs on American red oak and other hardwoods in retaliation for the president’s import taxes on Chinese products. As lumber that would have gone into Chinese furniture or homes stayed in the United States, the resulting glut drove domestic prices into a double-digit decline, further battering the company’s bottom line.

“Roughly 25 to 30 percent of our revenues have disappeared,” Jeppson said. “It’s been devastating.”

In Washington this week, U.S. and Chinese negotiators are scheduled to resume stalled trade talks as each economy shows significant signs of strain. Whether the mounting casualties will hasten a deal is unclear, but for millions of workers, the damage is already done.

The plight of Northwest Hardwoods reflects the economic toll of more than a year of open confrontation. For months, Trump has crowed about the damage his tariffs were inflicting on the slowing Chinese economy even as the United States powered into the 11th year of a record-setting expansion.

“China is getting killed,” Trump told reporters Friday. “The tariffs are killing China.”

Fresh data last week, however, showed that American factories are operating at their lowest rate in 10 years, matching Chinese plants, which posted their own worst-in-a-decade results in July.

While the president’s rhetoric remains cheery — he said last week “we have the hottest economy in the world” — the reality of the manufacturing recession and anemic growth he will probably carry into the 2020 campaign shows the trade war has pinched business on both sides of the Pacific. That shifting economic landscape is making a settlement more urgent, according to groups such as the U.S. Chamber of Commerce.

“We’ve reached the point where both countries are in the same boat,” said Ethan Harris, head of global economics for Bank of America Merrill Lynch. “In the absence of the trade war, both the U.S. and China would be doing quite well. There would be no slowdown.”

As the trade war began last year, the United States was enjoying the economic amphetamine of the 2017 tax cut, which helped offset any drag caused by higher import penalties. China, meanwhile, was trying to wean itself from an unhealthy dependence upon debt to power its growth. The chilling effect of U.S. tariffs only compounded Beijing’s challenge.

More than a year later, the United States boasts the lowest unemployment rate since 1969 and rising wages. The Federal Reserve Bank of New York puts the chance of a recession in the next 12 months at a little more than 1-in-3.

Yet the tax-cut buzz has worn off. Business spending on warehouses, factories and machines — which the president promised would soar if taxes were reduced — declined in the second quarter, its worst performance since late 2015. Weakness appears to be spreading from manufacturing into the larger services sector.

China continues to struggle with its debt-reduction efforts but has dulled the trade war pain by loosening borrowing limits for local governments and pressing bankers to lend more freely.

“It’s an exaggeration to say they’re in terrible shape,” said David Dollar of the Brookings Institution, who was a Treasury Department official in the U.S. Embassy in Beijing from 2009 to 2013.

After growing at an annual rate of 3.1 percent earlier this year, the U.S. economy is now advancing at about 1.5 percent, according to JPMorgan Chase. Harris, from Bank of America, projected that the U.S. economy will only grow at about a 1 percent rate over the next six months, a painfully slow clip. China’s economy is also expected to weaken in the next six months, he said, as its official growth rate heads to 5.7 percent next year, the first reading below 6 percent since 1990.

Trump claims that the trade war has cost China 3 million factory jobs, an estimate that economist Nicholas Lardy of the Peterson Institute for International Economics calls “delusional.”

Chinese manufacturing employment began falling several years ago, as workers grew more productive and the fast-growing services industry demanded more labor. The shrinkage in total factory employment has actually slowed since the trade war started, according to Lardy.

Robert E. Lighthizer, the president’s chief trade negotiator, has acknowledged that confronting China over its trade practices is causing economic pain. But he told Congress earlier this year that short-term suffering will ultimately prove worthwhile because it will prevent China from cheating and stealing its way into global technological dominance.

Lighthizer has led negotiations with the Chinese for more than a year, aiming to secure a comprehensive deal that would shrink the chronic imbalance between the amount of goods the U.S. imports and exports with China. The administration also wants China to abandon core elements of its state-directed economic model.

The next 10 weeks offer many moments when the trade war’s flames could intensify or be extinguished. On Oct. 15, a few days after the next round of talks ends, the United States is scheduled to raise its 25 percent tariff on $250 billion in Chinese goods to 30 percent.

U.S. companies pay almost all of those costs, which they often pass along to consumers.

If negotiators make headway in the coming days, Trump and Chinese President Xi Jinping could meet to broker a deal in mid-November at an Asia-Pacific leaders summit in Santiago, Chile. Trump has frequently delayed tariff increases in hopes of persuading the Chinese to cut a deal.

Just days later, on Nov. 18, the temporary license that allows Huawei, the Chinese telecommunications giant, to buy critical U.S. components expires. If Trump opts not to grant an extension, Sino-U.S. relations could go into a deeper freeze.

On Dec. 15, the United States is scheduled to impose a final batch of tariffs, effectively taxing every Chinese product that enters the country.

All this uncertainty is complicating the Federal Reserve’s management of the economy, according to Fed Chair Jerome H. Powell. Last month, Powell told reporters that businesses are complaining that confusion over when and how the trade war will end is paralyzing their investment plans.

At Biotricity of Redwood City, Calif., a maker of remote monitoring devices for chronic illnesses, chief executive Waqaas Al-Siddiq is frustrated by the amount of time and money he’s devoting to his supply chain rather than product development.

After the United States in September imposed tariffs on components he imported from China, Al-Siddiq searched for a made-in-America alternative. He eventually thought he had found a domestic solution, only to discover at the last minute that it also relied upon a Chinese factory for parts.

As his tariff bills mounted, he cut back on capital spending and research and development, he said.

“One hundred thousand dollars we’ve spent on tariffs and that continues to increase,” Al-Siddiq said. “These dollars would be better invested creating American jobs.”

The president’s trade offensives against China and the European Union are not the only restraints on the U.S. economy. American businesses also are feeling the effects of sluggish growth in Europe and the Fed’s eight interest rate increases over the two years that ended in December. The Fed has cut rates twice since the end of July, but Trump complains that it should be moving faster.

The economic sectors that are hurting are those most exposed to the trade winds. That’s largely because China crafted its retaliation for Trump’s tariffs to hurt his political supporters in the industrial Midwest and the farm belt.

Over the past year, Pennsylvania, Wisconsin, Indiana, Minnesota and New Hampshire each have shed thousands of factory jobs. The president won the first three states in 2016 and hopes to capture the last two in next year’s election, the type of domestic politics that Chinese leaders don’t face.

“Politically, there’s no cost to China from this. But there could be a great cost to President Trump if the economy underperforms and it costs him the election,” said David Page, senior economist for Axa Investment Managers in London.

Likewise, export-dependent farmers who backed Trump heavily are struggling. Purdue University’s Ag Economy Barometer released last week found “a relatively large sentiment shift among ag producers as they were noticeably more pessimistic about current conditions on their farms and in the U.S. ag economy.”

“Farmers have been very patient,” said Larry Buss, a farmer in Harrison County, Iowa, who supports Trump. “We don’t like the trade war with China. We worked very hard to build our markets. To see those markets totally go away in a year’s time has been pretty frustrating.”

Though the economy continues growing, there are hints of broader erosion. First-time claims for unemployment benefits have increased for three consecutive weeks, though they remain near half-century lows. Companies announcing layoffs in recent weeks include Hewlett-Packard, Citigroup, Nestle, Bayer and Navistar.

FedEx, a bellwether of the global economy, last month reported that profits fell 11 percent in its most recent quarter. In response, the package delivery company is retiring aircraft, deferring hiring and slashing spending on new equipment — decisions that spread weakness through the rest of the economy.

“I think there is a lot of whistling past the graveyard about the U.S. consumer and the United States economy,” Fred Smith, chief executive of FedEx, told investors on a recent earnings call.

Back in Tacoma, Jeppson wonders whether he will ever regain his Chinese customers, who have started buying hardwoods from Russia, Indonesia and Gabon. For now, he’s keeping a close eye on expenses, hoping to hold things together until Washington and Beijing settle their differences or at least agree to a cease-fire.

“We’re having a hard time budgeting what the next 12 to 18 months are going to look like,” he said. “We’re really struggling.”

david.lynch@washpost.com

Xi Jinping wearing a suit and tie: FILE - In this June 29, 2019, file photo, U.S. President Donald Trump, left, meets with Chinese President Xi Jinping during a meeting on the sidelines of the G-20 summit in Osaka, western Japan.© Susan Walsh/AP FILE - In this June 29, 2019, file photo, U.S. President Donald Trump, left, meets with Chinese President Xi Jinping during a meeting on the sidelines of the G-20 summit in Osaka, western Japan.
AdChoices
AdChoices
AdChoices

More From The Washington Post

The Washington Post
The Washington Post
image beaconimage beaconimage beacon