Economics

Nobody Wins a Trade War

When the U.S. first imposed China-specific tariffs, it was supposed to signal a resurgence in U.S. manufacturing. Instead, a trade war broke out and now both countries are feeling the economic strain.

Robert Spendlove and Joseph Mayans Jul 25, 2019

The Story

As the U.S.-China trade war drags into its second year, both economies are feeling the strain. Global supply chains are highly interconnected, and tariffs levied by each country are creating large distortions in the marketplace. With tariffs on $250 billion worth of Chinese goods, U.S. imports from China have dropped 12 percent in the first five months of 2019, compared to the year before. But instead of the tariffs forcing production back to the U.S., as the White House had hoped, many companies are relocating to lower-cost Asian markets. Vietnam, Taiwan, and South Korea have all seen exports to the U.S. boom as manufacturers move production out of China.

The loss of factories and manufacturing capacity have stifled China’s already weak economy. The country’s gross domestic product – the widest measure of economic activity – recently dropped to the lowest level on record of 6.2 percent. As the second largest economy in the world, China’s lingering weakness could have negative spillover effects across the globe.

As tariffs continue to be levied on Chinese goods, U.S. importers are sourcing products from other Asian countries. Imports from South Korea, Taiwan, and Vietnam have all grown by double digits since 2018.

Graph of US imports
Source: U.S. Census Bureau Foreign Trade Data

China’s economic growth has fallen to the lowest level since the government began publishing official statistics. While growth has been in a long-term downtrend, the trade war has accelerated the decline.

Graph of China Gdp
Source: China National Bureau of Statistics

U.S. Manufacturing Slumps

While China has felt the brunt of the trade war, parts of the U.S. economy are struggling as well. U.S. manufacturing, once thought to benefit from the tariffs on China, is feeling the impact of rising uncertainty and supply-chain interruptions. As the sector is highly dependent on production inputs from China, the tariffs have forced U.S. companies to find new suppliers in other countries or pass the tariff cost on to customers. These difficult choices have dampened previous optimism in the sector. The employment growth seen in manufacturing after the 2016 presidential election has slowed sharply since the trade war began. And, overall manufacturing activity, as reported by the ISM Manufacturing Index, has fallen to the lowest level since 2016.

Employment growth boomed in the U.S. manufacturing sector following the 2016 presidential election but has contracted since the U.S. first imposed China-specific tariffs in July 2018.

Graph of manufacturing employment
Source: Bureau of Labor Statistics

U.S. manufacturing activity has fallen sharply as more businesses report a growing sense of uncertainty and supply-chain difficulties.

Graph of manufacturing activity
Source: Institute for Supply Management, Manufacturing PMI

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