As President Donald Trump highlights the superior firepower of the U.S. in the trade war with China, analysts warn that while China's economy would probably be most affected, the escalating battle between the two countries is also likely to harm U.S. consumers and farmers, and ultimately the national economy.
Following a week busy with rhetoric from both sides, the U.S. has raised tariffs on $250 billion of Chinese imports to 25%, while Beijing imposed levies of up to 25% on a $60 billion of U.S. imports from June 1, including agricultural products such as soybeans, fruit juices and beef. The Office of the U.S. Trade Representative on May 14 released a further list of Chinese products valued at roughly $300 billion that it plans to target with 25% tariffs.
Trump downplayed the conflict as a "little squabble," pointing to his personal relationship with Chinese President Xi Jinping and falsely reiterating that Beijing will be paying the tariffs, when it is importers of those products who have to pay the import taxes. "I think it's going to turn out extremely well," Trump said May 14, according to reports. "We're in a very strong position."
Markets appear unconvinced that a benign outcome is guaranteed. The S&P 500 index had its worst day of 2019 on May 14, falling 2.4% and leaving it 3.3% lower since the beginning of last week. Money has poured into safe-haven assets with the yield on the 10-year U.S. Treasury note falling 12 basis points since May 3 to 2.42%.
U.S. consumers will "feel the pain" should all the tariffs be fully implemented, despite Trump's reassurances that companies can simply shift production sites elsewhere in Asia or to the U.S., Ryan Sweet, director of real-time analytics for Moody's Analytics, said in an interview. With consumers paying more for everyday goods, inflation is likely to rise and U.S. GDP growth could be harmed, he said.
"Business confidence and consumer confidence will get worse, and the economy will feel the full effect," he said.
While the trade fight will likely crimp U.S. economic activity, the potential damage to China's economy is greater, Scope Ratings wrote in a May 15 report.
"The U.S. can simply add extra tariffs to more Chinese exports to the U.S. than China can to American imports in view of a record Chinese goods surplus of $419 billion with the U.S. in 2018 in addition to China's comparative economic vulnerabilities, given the current economic slowdown and structural economic transition," said Dennis Shen, an analyst at Scope.
China's reliance on U.S. technology also means that it may have more to lose from a protracted dispute as well as an unfavorable resolution to the disagreement.
"China's long-term growth objectives rely on continuous technology improvements and productivity enhancements to close income gaps with the West," Shaun Roache, S&P Global Asia-Pacific chief economist, wrote in a May 15 report. "Slower tech transfer means slower potential growth and a much tougher rebalancing."
The short-term effects of the trade battle are "manageable," but "the long-term effects on China's macro-credit prospects are significant, and are likely being underestimated," said Roache.
The trade war began with a U.S. Commerce Department investigation into Chinese trading practices in 2017 that found that Beijing routinely forced the transfer of technology of U.S. companies doing business there, coerced them into joint ventures and engaged in other market-distorting practices. Tariffs were imposed as punishment before trade talks began, but now sticking points remain on any enforcement of a deal due to the Trump administration's concerns that China may not hold up its end. China, meanwhile, has expressed concerns with the tariffs that are in place.
In the U.S., economists and other trade watchers say consumers will be the ones to foot the bill for the tariffs, while farmers will continue to suffer.
Tariffs Hurt the Heartland, a coalition of U.S. trade groups, estimated that a 25% tariff on all remaining imports from China, coupled with retaliation, would raise the annual cost of the U.S. family of four by nearly $2,300 per year and reduce U.S. GDP by 1%.
"The patience of farmers, manufacturers, businesses and consumers is wearing thin," the group said in a statement. "Forcing American consumers to pay more for clothes, shoes, toys, electronics and even food, while making it more difficult for exporters to compete will do nothing to hold China accountable."
More U.S. tariffs would likely mean more retaliation against U.S. agriculture, which has already suffered massive blows in the form of stifled exports, oversupply and rapidly falling prices as a casualty of the trade battle.
Despite widespread concern from farm groups over retaliatory actions, Trump has emphasized U.S. countermeasures to try to support agriculture. On May 13, he promised $15 billion in aid to U.S. farmers, which would come on top of the existing $12 billion program launched in 2018 to fight the economic effects of China's tariffs.
"Our farmers will be very happy," Trump said May 13.
However, soybean futures have fallen to 10-year lows amid dramatically reduced exports to China, wheat shipments to China are nearly nonexistent, and pork producers face crippling tariffs in what was previously a top-tier export market.
The National Farmers Union recently said it cannot "expect markets to go back to the way they were," saying "the damage has already been done." Senate Finance Committee Chairman Chuck Grassley, an Iowa Republican, warned that raising tariffs will hurt both the U.S. and Chinese economies.
Rufus Yerxa, the president of the National Foreign Trade Council, said that most of the companies he represents now assume that there will not be a trade deal and are preparing for the worst-case scenario, similar to how previous commitments by the Chinese to purchase more U.S. farm goods likely will not come to fruition now.
"I think the ag sector is starting to come to grips with the fact that a commitment from the Chinese to buy ag isn't going to happen," Yerxa said in an interview.
Despite the obvious implications for the price of goods in the U.S., the tit-for-tat moves come mere days after it appeared that negotiators from both sides were all but ready to secure a deal to end the conflict.
The Trump administration accused China of reneging on its commitments, and Chinese Foreign Ministry spokesperson Geng Shuang fired back, telling reporters May 14 that it was Washington that has backtracked on prior agreements made in 11 rounds of talks.
Trump told reporters that he would be meeting with Xi at the G-20 Summit in Osaka, Japan, in late June, a meeting he has deemed necessary before any deal with China can be implemented. The U.S. International Trade Commission is slated to hold a public hearing June 17 on the proposed $300 billion batch of goods to be tariffed, 11 days before the Trump-Xi meeting is scheduled.
"There was so much happy talk from both sides before this latest breakdown that seemed to suggest a deal was almost inevitable," said Yerxa, a former deputy director general of the World Trade Organization. "What business people are assuming now is that we could be hunkering down for a long-term fight and that there are fundamental differences that may make it very difficult for each side to step back from their hardline positions and strike a deal."