On August 27, 2019, Matthew Johnston writes on Investopedia:
The U.S. and China exchanged fresh blows late last week in their escalating trade war that has been weighing on global economic growth. But the latest round of tit-for-tat tariffs is likely to be much more damaging to the U.S. economy than earlier rounds. The impact of those increased tariffs could send already-tepid global growth dangerously close to recession levels, creating a significant drag on the U.S. economy, according to Morgan Stanley.
“[W]e believe that it is likely that the U.S. will now face a greater impact than it did in the earlier rounds of escalation,” wrote Morgan Stanley’s analysts in their most recent Global Macro Briefing report. “Amid abating tailwinds, the impact of the global slowdown is now more prominently spilling over to the U.S. economy.”
What It Means for Investors
On Friday, China announced that it would be implementing additional tariffs of 5-10% on $75 billion worth of U.S. goods. U.S. President Donald Trump retaliated, announcing an increase of tariffs from 10% to 15% on $300 billion worth of Chinese goods set to come into effect on September 1 and December 15, and an increase on already existing tariffs from 25% to 30%, which will take effect on October 1. Needless to say, negotiations appear to have regressed.
The ramping up of tariffs will only exert more downward pressure on an already weak global economy. Global real GDP growth has fallen to a six-year low of just 3.0% year-over-year, dragged down by lagging corporate confidence, slowing capital expenditures and the lowest trade volume in nearly seven years. Global manufacturing PMI, having contracted for the second consecutive month, is also at a 7-year low.
Supposing the recently announced round of tariffs comes into effect according to schedule, Morgan Stanley predicts global growth to weaken more than previously expected. Year-over-year growth for the first quarter of 2020 is now projected to be 2.6% as opposed to the earlier estimate of 2.8%. For the four quarters ending by the second quarter of 2020, growth is expected to average approximately 2.7%, just 20 bps above the global recession threshold of 2.5%.
“If the U.S. raises tariffs on all imports from China to 25% and China makes a matching response with these measures staying in place for 4-6 months, we believe that the global economy will be in recession in 6-9 months,” said the report.
Amid weaker global growth, the U.S. economy is expected to feel the effects of the escalating trade war more intensely than it has up until this point. Even while trade tensions escalated during the second half of 2018, the U.S. economy received a stimulus from Trump’s corporate-profitability and consumer-income boosting tax cuts. But that effect is fading and new rounds of stimulus don’t come into effect till later this year and are expected to be much smaller in size.
The U.S. labor market, which up until now has exhibited relative strength, is starting to show signs of stress as the already slow growth in the manufacturing and trade-related sectors begins to spillover into overall business sentiment and investment. Payroll additions in July slowed to 141,000 on a six-month moving average basis, down from 234,000 at the start of the year. Growth in aggregate hours worked slowed to 0.7% year-over-year in July from 2.8% in January 2019. Layoffs may be just around the corner.
If weakness in the labor market persists, it could soon lead to falling incomes and less consumer spending. The consumer has been one of bright spots in the U.S. economy, but sentiment fell in August on the announcement of more tariffs and stock market volatility. Despite a recent interest rate cut by the Federal Reserve and expectations of further monetary easing, a full recovery is unlikely as long as trade uncertainty continues and tariffs remain in place.
Looking Ahead
Morgan Stanley concludes that risks of further escalation remain skewed to the downside and that further rounds of increased tariffs would most likely plunge the global economy into a recession. With each side not wanting to back down, it may take further weakening of global growth before the economic pain forces a softening of hardened wills and a subsequent resolution.
Gary Reber Comments:
Another hit article in support of the wealthy capital ownership class calling the tariffs in goods and products imported from Communist China damaging to the United States economy, but citing no blame on the traitorous controlling owners of American corporations who gutted and moved their manufacturing to Communist China as they invested there rather in the United States.
What gets me is the “enemy” is always Russia, but we have not ourselves dependent on manufacturing in authoritarian Russia. Then there is Communist China, a dictatorship with the Chinese Communist Party’s control over the economy and the social behavior of the Chinese people.
There is no fair dealing with Communist China who just cannot and refuses to play fair. The Chinese Communist Party government cannot be trusted and strong responses such a tariffs are absolutely necessary and perhaps further totally decoupling and terminating all trade with Communist China. In any case, the controlling owners of American companies have been directed to remove productive capital assets in Communist China with this directive incentivized with harsh, increased tariffs, which will go into effect sooner than previously announced.
Since the crushing of the Tiananmen Square protests in 1989, the American corporate ownership oligarchy has used Communist China as a giant sweatshop, extracting profits from its massive working class while using the threat of “offshoring” manufacturing to drive down wages within the United States and internationally. Such manufacturing now spans high-value-added industry sectors, such as semiconductor design and production, cell phones, high-end machine tools, medical devices, optics, etc., which has placed Communist China companies, including State-owned enterprises and State subsided enterprises, in direct competition with United States-based technology companies, threatening their control of the pool of profits sweated out of the international working class, who are not the owners of the technologies and manufactories.
Few cast blame on America’s traitors––the wealthy controlling ownership class who run American corporations who have gutted our manufacturing capabilities over the past decades and the government officials, both elected and those in the bureaucracy, who have allowed the weakening of our capabilities to produce for the needs and wants of American citizens.
All you hear is what a bad decision to impose tariffs on Communist China. Never is their talk about why this is a necessary action if we want to establish a fair trade relationship. But no one points out the disparities between labor costs there and in other third world slave-wage labor countries with no regulation over manufacturing and the environment. The disparity in income levels is EXACTLY why we in the United States cannot compete with slave labor! WE MUST stop dealing with, trading with slave labor countries or institute effective tariffs to de-incentivized American corporations producing in slave labor countries. How can an American corporation producing wholly in the United States pay workers $15 to $30 per hour when the American corporations who outsource their supply chain parts and finished products or completely off-shore production, pay as low as $1.10 a day for workers? Even if the highest hourly rate in Communist China is $4.00 per hour, this remains a huge difference.
Another reason for our debilitating dependency on third world developing economies is greed. The controlling wealthy owners of American corporations would rather maximize profit over affordability or job and ownership creation here in the United States.
Yes, the problem should be squarely be blamed on “hoggist” capitalists. Communist China, as a primary pillar of their economic reform program, which began in 1979, created the environment to encourage foreign manufacturing investment. Because of that, the United States companies came in droves to take advantage of an opportunity to manufacture at a low cost and increase profits.
Did they come to help Communist China grow? Of course not! They came purely for the profits. It was Communist China, an authoritarian-controlled state, that created the opportunity for the controlling owners of American corporations and other Western companies, as a strategy for Communist China’s growth.
One has got to question if people who support going back to “free trade” and no tariffs really understand the long-term consequences for our children and grandchildren. With or without D. Trump as President, if we do not decouple from dependency on manufactured supply chain and finished products produced in Communist China and other third world slave labor countries, we will continue on the path of economic decline. We will have no manufacturing and slide into a third world country with the masses living in poverty, dependent on the controlling-ownership power of oligarchs for their subsistence.
No one can say that the task of decoupling our dependency on Communist China will be easy or painless, as moving extensive supply chains, built up over decades to meet compliance standards and deliver quality products, is incredibly complicated and expensive, but it is the only way to reclaim our manufacturing prowess. This is all about economic survival in an age of tectonic shifts in the technologies of production, in which robotics, artificial intelligence, and other advances in technology will continue to destroy jobs and most citizens will become more dependent economically on the monopoly wealthy capital ownership class or as Marx put it, on a “dictatorship of the proletariat.” We can set the standard for economic democracy, in which EVERY citizen is a capital owner, and show the world how to self-develop and realize inclusive prosperity, inclusive opportunity, and inclusive economic justice for their citizens.
Our end game needs to be our decoupling from dependency on supply chain parts and finished products manufactured in authoritarian, State-controlled Communist China, especially with respect to the manufacturing investments made by the controlling owners of American corporations. And instead embark on a “Marshall Plan” effort to democratize and broaden individual capital ownership using “pure”, interest-free capital credit investments that self-liquidate and that are tied to creating new American citizen owners, with the long-term objective of empowering EVERY child, woman and man to become an owner of new wealth-creating, income-producing capital assets. In this way, we can embrace the deployment of the most technologically advanced automation and “machine” production, which does not require mass worker input, but provides a new source of income earnings for EVERY citizen.
The Western advanced economies should form a global coalition aimed at stopping Communist China’s unfair practices, such as State-owned enterprises and State subsidies, as well as technology transfer requirements, and put a stop to overseas investment by the Chinese.
We must not let up on tariffs, and actually strengthen tariffs on ALL goods imported into the United States from Communist China and ALL other slave-wage labor, lower cost production countries. This is necessary to de-incentivize further American investment in those countries with the intent to manufacture supply chain parts and finished products, instead of investment in manufacturing in the United States.
Otherwise, Americans will be disabled from building a future economy that can support general affluence for EVERY citizen and instead will continue to empower Communist China to achieve its goal of solidifying itself as the world’s manufacturing center and its deployment of the Belt and Road Initiative to make countries dependent on it.
