Trade War May Not End Before Election

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What if the trade war goes on past the election? Both the U.S. and Chinese economies could be deeply damaged. The presidential election could easily be affected. China’s top leadership, which has an iron hand on its government, could lose some of its standing with the broader Communist Party of China that elects them, at least on paper.

Goldman Sachs chief economist Jan Hatzius sent a note to clients, according to Reuters, in which he predicted the trade war could last well over a year. As part of the U.S. response, the Federal Reserve would decide to cut rates several times in an effort to keep America from a recession. Hatzius expects as many as three rate cuts, which could take interest rates close to zero.

The argument assumes that neither side blinks in a trade war as both the United States and China see which country can bleed the longest, economically. The American advantage is a decade-long recovery from the Great Recession that has not lost its legs. It also has taken unemployment down to 3.7%, below the 5% level that many economists consider full employment. The Chinese economy has a gross domestic product (GDP) growth engine that has kept growth at over 6% for several decades, even through the Great Recession. It is largely controlled by the central government, which can throw tens of billions of dollars into the economy.

Regardless of the power of either economy, a stock market sell-off that took the Dow Jones industrials down as much as 700 points shows how quickly at least one engine of U.S. GDP can be compromised. Many Americans have money in the market, even if it is through mutual funds and exchange-traded funds. If these people see the value of their portfolios shrink, consumer spending could as well. The domino effect of that is that some businesses will lose a portion of their customer demand. Retail and consumer-facing companies like airlines come to mind. Tariffs on agriculture could significantly cripple that entire sector.

In China, the question is how long the government can prop up the economy if its export machine is undermined. Its manufacturing sector employees tens of millions of people. Some large global companies already have started to move their manufacturing to other countries, including Vietnam. No place is big enough to replace China, but a rush in relocation would still hit its factories hard.

A trade war is viewed as one of the few events that could knock the entire global economy off track. The United States and China are by far the two largest economies by GDP. Any damage would curtail demand from them both for goods and services that come from other nations.

A hard hit to the global economy could easily drive it back into recession, particularly if it lasts well over another year.

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