This series of tweets by President Trump has been shocking, to say the least. The stock market reacted poorly, with the Dow Jones Industrial Average down over 600 points, and the S&P 500 index down over 2.5% for the day. The trade war between the U.S. and China continues to escalate almost daily. Within the past day or two, Trump added new tariffs and taxes on Chinese-made goods, China added new tariffs on U.S. goods, and Trump ordered U.S. delivery firms to search for and refuse deliveries containing fentanyl, amongst other trade-related moves both countries have made.
Trump, in theory, is trying to protect American industry and workers, and it is hard to fault him for that. What he says about China’s unfair trade practices makes sense and resonates with American workers. Granting China Most Favored Nation status, and adding China to the World Trade Organization (under President Clinton), profoundly hurt workers in U.S. manufacturing, as jobs were shifted to Chinese companies with lower labor costs. Arguably, it was those workers in states like Ohio and Pennsylvania that gave Trump the Electoral College margin he needed to win. So, it is entirely understandable that Trump is again courting those workers and trying to expand his base of support among them by his tough stance on trade with China.
On the other hand, much of Trump’s support is due to the strong economy that his policies have brought about. Lowering taxes and reducing regulations and government interference in business have been a fantastic boon to the U.S. economy. But the economy is inevitably cyclical, and a down turn in China’s economy – the second largest in the world – will be a drag on the entire world’s economy, and that likely will impact the U.S. economy as well.
So, if China’s economic health declines drastically, it probably will not be good for the U.S. economy in the long run, and there have been many signs that China’s economy is slowing, including lowering of interest rates by China’s central bank and other economic stimulus measures announced by Beijing. The trade war with the U.S., the protests in Hong Kong, higher labor costs in China leading to companies moving their manufacturing to countries with cheaper labor, China’s push to modernize its military – all of these factors (and probably others) have reduced China’s economic growth. If China’s economy drops into a recession, the entire world economy may also, and there have been some signs that it could happen (although it is by no means certain).
Should the world economy drop into a recession, and the U.S economy follows, it could cost Trump the next election. Trump-hating Democrats (pretty much all of them) would be gleeful if the economy did decline, despite the hardship it would bring to many Americans, because that might be the only chance they have to win.
So, our opinion is that President Trump should ratchet down his rhetoric against China and let the trade war cool down for a while. This isn’t to say that he should eliminate tariffs already in place or lessen his support for American workers, but he should also recognize that there are a significant number of U.S. companies that make their money from trade with China. Slow-rolling the trade war for some time, at least until after the election, to try to avoid a recession and give U.S. companies time to adjust/find alternatives to China is the right play now.