“We do not want to be servants to the Chinese.” — President Trump Tweet, Sept. 1
Last Tuesday, the Institute for Supply Management (ISM) released data that showed U.S. manufacturing sector declined for the first time since 2016. New orders dropped to a more than seven-year low. Purchasing Managers’ Index (PMI) reported a reading of 50.3 in August, the lowest in almost a decade. PMI is an index of the prevailing direction of economic trends in the manufacturing and service sectors.
These two data releases increased worries that the U.S. will suffer a recession in 18 to 24 months. It could possibly complicate the re-election prospects for President Donald Trump. Trump’s trademark “Make America Great Again” buoyed his presidential prospects in 2016.
The trade tensions between the United States and China have disrupted global supply chains. Factories from Germany, Italy, Japan, South Korea and Taiwan have all reported lower output.
ISM reported that trade disruptions was the most significant issue for U.S. purchasing and supply executives. Tariffs on Chinese manufactured goods has disrupted the global supply chain and forced manufacturers to move from China.
Global growth outlook has declined to the lowest level since the 2008 financial crisis. In response, central banks have reduced interest rates in order to stimulate borrowing and investment. Some $ 17 trillion of debt now trades at negative levels.
The U.S. Census Bureau reported a $31 billion drop in Chinese imports for the first half of 2019 vs. 2018. Over the past year, the U.S. and China have been engaged in an escalating bilateral trade war that has penalized U.S.-based brands that rely on Chinese manufacturing. Their profit margins have been squeezed because competition makes it hard to pass on their added tariff costs.
Trade tensions have experienced the following negative cycle. America imposed tariffs followed by Chinese retaliation.
Recently, Trump announced that the U.S. would impose a 15 percent tariff on another $300 billion worth of Chinese imports, starting in September.
China responded by its asking state-owned firms to suspend their U.S. agricultural purchases. They also allowed their currency to slide to a 11-year low against the dollar (7.2 Yuan to the dollar). In response, Washington accused China of currency manipulation. A cheaper Yuan makes their goods cheaper and U.S. exports to China more expensive.
Instead of relocating their Chinese manufacturing back to America, as the Trump administration had hoped, companies are shifting these operations to other offshore locations such as Vietnam, Malaysia and India.
Manufacturers have repeatedly moved to lower-cost areas. In the mid-1960s manufacturers shifted operations from Japan to Taiwan and South Korea. In the 1990s, they shifted out of Taiwan and Korea and into China.
Once companies move out of China, it is unlikely that they will move back. Most analysts see the realignment of global supply chains as probable given the China-U.S. competition for world dominance. China wants initially to replace America’s hegemony in the Indo-Pacific region, becoming its political, economic, and military leader. Beijing would like to counter Washington globally when needed.
The trade war puts a premium on corporate agility. Companies need to respond quickly to supply chain disruptions. Prices on imported goods might not rise as much as expected as a result of tariffs on imports. However, “Made in China” labels will decline.
In the first quarter 2019, U.S. real gross domestic product increased just 2 percent, some 1 percent lower than 12 months earlier. Economists cite two reasons: (1) the 2017 tax cut’s stimulus effects have waned and (2) the global economy is cooling. Trump warned that he would redouble his pressure on China if he wins a second term. Make America Great Again sounds hollow in today’s economic malaise.
Originally published in the Sarasota Herald-Tribune
