If President Trump wants another four years in the Oval Office, he needs to strike a deal with China. Soon.
For Chinese President Xi Jinping, the stakes are just as high. What began as a trickle of firms moving production out of China could become a torrent; the threat to his authority from faltering growth and the recent challenge from Hong Kong dissidents is real.
The leaders of the two countries will meet at the Group of 20 Summit in Osaka, Japan on Friday and Saturday; it is essential for both sides to resolve this dispute.
We are at a tipping point. Imposing another round of tariffs on Chinese goods, as President Trump has threatened, will clobber the U.S. consumer, who has so far felt little impact from the trade war. The likely damage to the U.S. economy could cost Trump his reelection.
The U.S. expansion is slowing, and even with a benevolent Federal Reserve, we will not return to 3-percent growth unless business leaders become confident that our trade relations have stabilized.
The Fed is now forecasting growth of 2.1 percent this year; that’s not much of an improvement over the Obama years. Trump’s signature campaign pitch is that he has re-energized the economy; that claim requires him removing the single biggest impediment to growth — the trade war.
For Xi, the recent massive demonstrations in Hong Kong and abandonment of the proposed extradition law challenged his authoritarian leadership and were an extreme embarrassment. The slowing Chinese economy adds to the pressure on Xi, who has taken responsibility for producing the growth that officials consider key to social stability.
It could get worse.
Several U.S. companies, including Apple, have announced they will move some production out of China. That decision makes sense on many fronts, including wanting to diversify, as Beijing exhibits increasing disregard for the rule of law.
It is also reasonable given the rapid rise in China’s wages, which are now considerably higher than the prevailing pay in Mexico or Vietnam. The trade dispute has accelerated what was an inevitable re-evaluation of supply chains.
President Trump is similarly at a crossroads. Most Americans support his confrontation with China. But, few have felt any repercussions from the imposition of tariffs that have been the president’s chief strategic weapon.
American farmers have been caught in the crossfire, but most consumers are enjoying a rare combination of rising wages, expanding job opportunities and negligible inflation. That heady mix has led to excellent retail sales and still-elevated consumer optimism.
That could change overnight if Trump goes forward with 25-percent tariffs on a much longer list of Chinese-made consumer goods, as he has promised to do if a deal is not struck.
Meanwhile, the manufacturing sector, which Trump promised to revitalize, has lost steam. Over the past several months, the optimism and increased confidence that greeted Donald Trump’s election in 2016 has dissipated. Industrial activity has slowed, as starkly indicated by the latest reading from the Empire Manufacturing Index.
That June survey of manufacturers in New York State posted its biggest drop on record and ended up in negative territory for the first time in two years, indicating contraction. New orders, unfilled orders and inventories all declined. That was unexpected.
Further bad news came from the Cass Freight Index report, which tracks the shipment of goods across the U.S. In May, that indicator dropped 6 percent, the sixth-consecutive month to show a decline.
The authors of that report stated, “… we see the shipments index as going from ‘warning of a potential slowdown’ to ‘signaling an economic contraction.'”
CEO confidence, as measured by Chief Executive Magazine, turned sharply lower in June as business managers grew alarmed about trade disputes. Their survey of 384 CEOs recorded a 6-percent drop in optimism between May and June. Confidence about a pending trade deal with China had caused an upturn in their outlook in May.
A decline in business leaders’ optimism is especially troubling. During President Obama’s eight years in office, America’s corporate chieftains played defense, harboring cash and declining to invest for fear that some costly new regulation would pummel their prospects. Business capital spending lagged, a missing ingredient that guaranteed a sub-par recovery from the financial crisis.
The election of the pro-business Donald Trump, the promise of regulatory relief and the GOP tax cuts turned around sentiment and encouraged a sharp upturn in capital spending, long overdue.
The result was a 3.6-percent rise in productivity in the first quarter, the first uptick in four years, a development most economists associate with rising wages. From 2007 to 2018, productivity increased at a mere 1.3 percent.
Sure enough, wages began to increase at a faster rate, surpassing 3 percent on an annual basis, as productivity gains allowed businesses to adsorb the costs.
A better jobs market also contributed to the wage hikes, which in turn have spurred robust consumer spending. That sector of the economy is still strong. But, absent growth in business investment, and with CEO optimism souring, the consumer may not continue to be driver of growth it needs to be — especially if prices on imported goods suddenly jump.
President Trump is right to confront China. But the possible cost of the trade war — choking off growth and ceding his reelection — is too high. It is now essential that he find other ways to pressure the Xi regime.
Published on The Hill