Trump's China trade war is destroying the US economy

Trump's China trade war is destroying the US economy

President Donald Trump's trade war is already wiping out small American manufacturing businesses, and it will have a more negative impact on the US economy than most are expecting, economists at the Swiss banking giant UBS say.

As Business Insider writes in an article "A top economist warns Trump's China trade war is doing more damage to the US economy than people think",  Seth Carpenter, UBS' top US-focused economist, expects tariffs imposed by Trump on Chinese goods and China's retaliatory levies to halve the speed of gross-domestic-product growth in the world's largest economy. "We are outliers compared to the rest of Wall Street in terms of how big an effect the tariffs have on the US economy," he said in London on Thursday at the launch of the bank's 2019 Global Economic Outlook. "We expect a material slowing in the fourth quarter of this year — so right now — into the first quarter of next year."

He pointed to official UBS forecasts, which see annualized growth at 1.7% in the fourth quarter and just 1.5% in the first quarter of 2019. The annualized growth rate in the third quarter, as reported by the US Bureau of Economic Analysis, was 3.5% — which already represented a slowing from the previous quarter and showed a significant negative impact from the trade war.

Most of the slowdown, UBS says, is likely to come in the manufacturing sector, which is much more sensitive to changing prices for raw materials. The impact is likely to be so acute that many new manufacturers are likely to go out of business. Yet much of Trump's reasoning behind the trade war is to reinvigorate the US manufacturing sector.

Here's the key extract from Carpenter's presentation on Thursday (emphasis ours): "The US economy has created more manufacturing jobs in the past year than at any point since the 1990s. We know from a variety of different sources that the vast majority of that increase in employment is coming at brand new firms. Brand new firms notoriously have very thin margins and a lack of ability to pass on costs. Small cost shocks tend to cause large disruptions to new firms. We see some of these new firms failing, others of them failing to expand in a way they would have otherwise."

Carpenter's warning about the negative impacts of the trade war are the latest in a chorus of warnings about the consequences of the president's policies. Earlier this week, for instance, the world's biggest shipping company, Maersk, argued that the trade war was already having a material impact on global trade.

Carpenter did however, offer some reassurance. "What we know from manufacturing, especially in the United States, is that you have very lean inventories, you have fragile but easy-to-repair supply chains," he said. "And so when there's a hit, the swing in quantities is large, but fairly short-lived." UBS forecasts that annualized growth in the second quarter of 2019 will be about 2.7%.


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