China Trade War's Rapid Route to Recession

Douglas A. McIntyre

President Trump tweeted that the Chinese had not done enough to settle a trade war with the United States. His plan, according to his tweets, is to lift 10% tariffs, which are currently in place on $200 billion of Chinese goods, to 25%. Additionally, he said he may impose 20% tariffs across billions of dollars of additional imports. The plan could badly cripple the two largest economies in the world and throw a relatively strong and stable global economy into recession.

China said it would still send a delegation to the United States in an attempt to settle the trade problems. The results of the threats and talks may be only days away.

China’s economy already has shown signs of slowing, based on both PMI and GDP data. Its factories rely heavily on demand from U.S. consumers. Most experts assume that if the United States imposes large tariffs, American companies will buy less and less of this factory output, driving Chinese gross domestic product growth much lower. In turn, U.S. imports to China, a critical key to American jobs, would be badly injured. And high tariffs on Chinese goods would increase what many Americans spend as part of their daily lives. In theory, this would erode consumer purchasing power, which is a major component of U.S. GDP.

China has shown in the past, and threatened recently, that it will do more than impose tariffs on U.S. goods as retaliation. It will make it more difficult for U.S. companies to do business in China. It may restrict the business operations of U.S. companies, which sell everything from cars to technology in China. Many American companies count on China for a large percentage of their revenue. These run the range from General Motors to Apple. If the earnings of companies like this are hit by a trade war, the U.S. stock market rally will reverse itself.

Whatever happens in a trade war on the Chinese side of the ledger, companies in the United States that export to China would have to lay off staff if their products are “taxed” as they enter China. Companies like Apple would face major margin and revenue challenges.

Jobs, the stock market, consumer spending and overall GDP growth are on the line as trade tensions ramp up again. The tremendous and long-lived recovery of the U.S. economy could end almost overnight.