On Thursday morning, as Walmart delivered a stark warning that Donald Trump’s widening trade war with China would lead to higher prices for American consumers, John Flynn stood in front of one of the US retailer’s stores in Virginia defiantly defending the US president.
“I think he’s doing the right thing, America is becoming very dependent on stuff from China,” said Mr Flynn, a 55-year-old real estate agent who grew up in the steel country of western Pennsylvania. “If prices go up, prices go up. It’s going to hurt them [the Chinese] in the long run too. So it’s just a matter of who blinks first,” he said, as he stepped into his Honda Accord.
Mr Flynn’s words from the parking lot in Manassas — near the site of the first major land battle of the American civil war — will give Mr Trump comfort that he can prevail in the biggest economic gamble of his presidency.
Two weeks ago, he balked at an agreement that was coming together to reset trade relations with China, accusing officials in Beijing of reneging on their commitments. Instead, Mr Trump moved to impose billions of dollars in new tariffs on Chinese goods and threatened to slap on even more as early as late June, raising the stakes for the global economy, financial markets and his own political future heading into the 2020 election season.
US and Chinese officials insist that negotiations have not broken down entirely, and Mr Trump has said he will meet Xi Jinping, the Chinese president, next month at the G20 summit in Japan, stoking expectations that a downward spiral in relations can be avoided. But the odds of a quick settlement are fading, raising the prospect of a protracted commercial stand-off between the world’s largest economies.
When the US this week launched an attack on Huawei, the Chinese telecommunications company, by placing it on an export blacklist that could severely damage its business, it further raised fears of an enduring confrontation.
“This represents a material escalation in tensions with the Chinese government. We have truly crossed the Rubicon,” Chris Krueger, an analyst at Cowen Washington Research Group, said following the Huawei announcement. “The Kissinger consensus is dead and China is a strategic rival. Full stop.”
Mr Trump’s bet is that the American economy, with unemployment at half-century lows and US gross domestic product expanding at an annualised 3.2 per cent in the first quarter of the year, can withstand the pain from the trade war with China. The fact that US growth held firm even after past rounds of tariffs sent tremors through financial markets emboldened the president to take a tougher line in the talks with China.
But unless a deal is reached soon, the US economy will bear the brunt of the new and higher tariffs, which will act as an extra tax on a wide gamut of products, from construction materials to farm equipment and electronics. Analysts at Oxford Economics estimate that if a 25 per cent tariff is extended to all of China’s exports to the US, it could deliver a 0.5 per cent knock to the level of American GDP next year. Consumers — particularly low-income Americans and the elderly on fixed retirement packages — would begin to feel the effects of the trade conflict as tariffs drive up costs, lifting inflation.
Chase Rice, the owner of a family-run hardware store in Manassas, has been on the front lines of the China trade war for months, and keeping up with higher prices imposed by vendors has been a big challenge. “It’s not a 2-3 per cent hike,” he says, “there are 5, 10 per cent-plus hikes on things — you can’t absorb that, it’s definitely something you have to pass along.”
Nathan Sheets, a former top US Treasury official who is now chief economist at PGIM Fixed Income, says the US has enough momentum to absorb the trade tensions and is in a better place than many other economies.
But he sees “significant downside risks”. One worry shared by many analysts is that a major escalation in the US-China stand-off could deliver a blow to financial market confidence, as well as corporate and consumer optimism. While the Federal Reserve might feel compelled to respond with easier policy if there were a major sell-off in markets, the central bank has relatively limited monetary firepower at its disposal.
The bigger concern is the longer-term damage the trade wars could cause. Businesses have already been disrupted as they weigh supply chain shifts out of China, raising fears that the two intertwined economies are headed towards a decoupling. Curtailing competition and closing down overseas markets will only harm the US economy, says Mary Lovely of the Peterson Institute for International Economics.
“He seems to be getting away with it, but in the longer run there will be a price to pay,” she says. “We will look back and say it slowed down US innovation and US growth.”
Jason Furman, former chairman of Barack Obama’s Council of Economic Advisers, says he did not believe the pay-off for the US of any future trade deal with China was sufficient to justify Mr Trump’s strategy. But he adds: “Anyone counting on a dramatic deterioration in the macro economic numbers to bring an end to the US side of this is likely to be disappointed.”
The blow to China would be greater if all of its exports to the US are taxed at 25 per cent, in part. Whereas the US exported $120bn of goods to China last year, China is far more reliant on the US, shipping $540bn of goods to the US. The hit in 2020 to Chinese GDP, which has already shown some weakness in recent months, would be 1.3 per cent under this scenario, says Greg Daco, chief US economist of Oxford Economics.
“Domestic economic activity has lost some momentum, which is not promising as the economy girds for a prolonged and intensifying trade war with the US,” says Eswar Prasad, a professor at Cornell University and former head of the International Monetary Fund’s China division.
But China has room to add further stimulus, says Matthew Goodman, senior Asian economics adviser of the Center for Strategic and International Studies. “I would not bet on them either caving or losing more in the event of a broader trade war,” he adds.
While China would not welcome the prospect of a prolonged trade war, analysts believe the Communist party’s control over everything from the renminbi’s dollar exchange rate to the state-dominated banking system will help it prevail.
Attitudes are also hardening across the Chinese bureaucracy. As one semi-official social media account used to channel Beijing’s anger put it after Mr Trump’s latest salvo: “We do not want a fight but are not afraid of one to safeguard national dignity and our core interests.”
Adding insult to injury in the minds of party officials, Mr Trump announced his decision to escalate the trade war on the same weekend that Beijing was celebrating the 100th anniversary of the May 4 movement — a patriotic student uprising against the decision to award Germany’s colonies in China to Japan at the end of the first world war.
On both Tuesday and Friday evening this week, a leading China Central Television channel rejigged its line-up to broadcast two classic movies about the Korean war. The 1950s conflict is known in China as the war to resist US aggression and assist Korea.
Since the talks hit a brick wall earlier this month, Mr Trump has both tried to belittle the trade war with China — calling it a “little squabble” — while dismissing the impact on American consumers.
But his administration has been scrambling to limit the fallout by promising a second multibillion-dollar bailout of US farmers hit by retaliatory tariffs from China.
Although many US lawmakers have embraced Mr Trump’s trade war, there is unrest among some of his closest Republican allies. A Fox News poll released this week showed that 45 per cent of Americans believe raising tariffs on China will hurt the economy, while 34 per cent said it would help.
But there are not many signs that the US administration is feeling huge pressure to back away.
In a briefing with reporters this month, US trade representative Robert Lighthizer suggested the status quo in trade between the US and China established since Beijing joined the WTO in 2001 was far more damaging than anything emanating from the tariffs, because of the theft of US intellectual property and rampant subsidies.
“The practices that we are objecting to by China are having a very negative effect on the US economy now, and in the future. And getting those corrected . . . is just a fundamental objective of this president,” Mr Lighthizer said.
Hawks in the Trump administration believe that the longer the stand-off continues, the more it will encourage US companies to keep stop doing business with China — their ultimate goal.
But back at the Manassas Walmart, many are unconvinced that Mr Trump’s trade war will be healthy for the US economy. “I can see why we need to push back on China, I just don’t think what we are doing is the appropriate way to do it,” says Anne Dancy, a 74-year old retired sales and marketing expert. “There’s no strategic plan, it’s all whatever Trump decides to tweet that particular part of the day — that’s the plan.”