The political squabbling between China and the United States over trade and other issues affect the world’s two largest economies through a variety of mechanisms with unpredictable results.
For example, prices of stock in both nations have been hurt as some shareholders sold their shares and other investors were reluctant to buy shares of companies that might be hurt by rising tariffs. These actions cut demand for certain stocks, making prices fall. Shareholders are part-owners of companies who hope to profit when the company prospers and grows. Rising tariff costs make growth less likely, and that hurts investor confidence.
World Trade Organization spokesman Dan Pruzin told Reuters that worries about trade are already being felt.
“Companies are hesitating to invest, markets are getting jittery, and some prices are rising,” he said, adding that further escalation could hurt “jobs and growth,” sending “economic shock waves” around the world.
Trade squabbles can hurt business confidence, because managers are less willing to take the risk of buying new machines, building new factories or hiring new workers. Less expansion means less demand for equipment, and a smaller workforce means fewer people have the money to rent apartments, buy food or finance a new car. Less demand for goods and services ripples through the economy and sparks less economic activity and less growth.
U.S. farmers are another group feeling the effects of this trade dispute, as Beijing raises tariffs on U.S. soybeans. Higher tariffs raise food costs for Chinese consumers, so demand falls for U.S. farm products, a key American export. Anticipating slackening demand for U.S. soybeans, market prices dropped even before the tariffs were imposed. That means U.S. farmers can no longer afford to buy as many tractors and hire as many workers. Fewer workers mean fewer people with the money to buy products, which slows economic growth in farm states.
Meantime, new U.S. tariffs hit Chinese-made vehicles, aircraft, boats, engines, heavy equipment and many other industrial products. China’s Xinhua news agency said new U.S. tariffs are an effort to “bully” Beijing. The agency says the new tariffs violate international trade rules, and will hurt many companies and “ordinary consumers.”
Experts say Washington tried to avoid tariffs on China that would directly raise costs to U.S. consumers. Economists say increasing taxes on products that help create consumer goods will still raise costs to consumers, fuel inflation and hurt demand.
PNC Bank Senior Economist Bill Adams, an expert on China’s economy, says one step China could take, but has not, would be to let its currency value drop. A weaker currency would mean Chinese-made products are cheaper and more competitive on international markets. Adams says China has taken steps recently to prop up the value of its currency. While a weaker currency helps exports, it can fuel inflation by raising the costs of imported products like oil or other raw materials needed by Chinese companies.
In the meantime, uncertainty fueled by trade disputes puts upward pressure on the value of the U.S. dollar, because investors see the United States as a safe haven in times of economic strife. But a stronger, more expensive dollar means U.S. products are more expensive for foreign customers, which hurts American exports and economic growth.
All of this means it is hard to predict how this trade dispute will play out. Experts say it will depend in large measure on how many times the two sides raise tariffs in response to each other, how high the tariffs go, and how long the bickering lasts.
William Zarit, the chairman of the American Chamber of Commerce in China, writes that this is the biggest trade dispute between China and the United States in 40 years.
The two sides must work something out, Zarit says, because a “strong bilateral trade and investment relationship is too important to both countries for it to be mired in verbal and trade remedy attacks and counterattacks.”
He says a new agreement would “significantly benefit both economies.”