Strategy & economics
Trade war gloom hits the US
America’s manufacturers, farmers and consumers are bearing the cost of Trump's trade policy
President Trump is confident that the US has the upper hand in a trade war with China. In reality, however, there is increasing evidence that trade tensions are harming the US economy – and not just temporarily.
For the first time in three years, the ISM manufacturing index, a closely-watched measure of US industrial activity, fell into contractionary territory in August. Weakness was apparent across the board, with new export orders, production and employment all falling sharply. In particular, new export orders plunged to a level not seen since the financial crisis. It is clear evidence that the US is also suffering from trade hostilities.
The index has historically been a good indicator of the outlook for US corporate profits. In the past, when it has dipped into contraction, we have also seen earnings growth at S&P 500 companies fall into negative territory within the following six to nine months. It is not a warning signal to be taken lightly.
US farmers are also suffering as a consequence of the trade war. They risk seeing the dream of large scale Chinese purchases turn into a nightmare. As part of its response to US tariffs, China asked state-owned enterprises to halt imports of US agricultural products. There are signs it may soften this hard-line stance, but the trade war has already hurt American farmers. Take soybeans. US exports to China have collapsed over the past couple of years. The US exported $12 billion of soybeans in 2017 – but only $3 billion in 2018, according to Bloomberg. The shortfall has come from Brazil. China is already negotiating next year’s soybean purchases from Brazil in a sign that the supply shift could become permanent, especially as Brazil ramps up its capacity. US farmers have much to lose.
Last but not least, the latest round of tariffs involves consumer goods like laptops, toys and phones. The US imported $28 billion of toys in 2018, of which roughly 75% came from China, making it by far the most important supplier. Toy imports jumped almost 20% in July this year. Sadly, this was not in anticipation of a bumper Christmas. It was much more likely evidence of retailers bringing forward orders to avoid further tariff hikes later in the year. For many Americans, a more expensive Christmas could be the first indication of the cost of President Trump’s trade policy.
Janet Mui, CFA is the global economist at Cazenove Capital, the wealth management division of Schroders. Janet is responsible for the formulation and communication of Cazenove’s top-down views. She is a member of the investment committee that oversees strategic and tactical asset allocation at Cazenove. Janet is also the macro spokesperson and a regular commentator at major media outlets including the BBC, Bloomberg and CNBC.
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