US economy becomes victim of Trump's trade war

US economy becomes victim of Trump's trade war

When US President Donald Trump first started to act on his trade policies against China, EU, Japan, and now Mexico, many manufacturers and companies were behind him, enduring the rising cost because they believed it could just be a negotiation strategy. But as Global Times writes in the article Trump's trade war pain getting real, it seems like the pain is getting more real with the prolonged trade stand-off as the effects of Trump's massive tax cuts policy on the wane.

According to the Institute for Supply Management, America's Manufacturing Purchasing Managers' Index (PMI) fell to 52.1, is hitting the lowest point since October 2016.
PMI is a closely watched index which is seen as the parameter of manufacturing development and is a sentiment reading in which investors and trader look for clues for the future economic prospect. The number of 50 is considered the alarming line as 50 above indicates expansion in the manufacturing sector while below means contraction.

To be fair, after Trump took office, data released on employment and manufacturing development seems to show he is living up to his campaign promises. According to the White House website, since Trump's election, "503,000 manufacturing jobs have been created, compared to 78,000 in the last two years of the Obama Administration." 

"In a way, Trump's trade war campaign and tax-cuts policy immediately after he took office has given investors confidence in the local market. So there was the return of foreign capital to the country which contributed to the increase in employment," explained by Dr. John Gong, a research fellow at Charhar Institute and professor at the University of International Business and Economics. But even back then, economists have warned that a prolonged trade war could pose serious risks to the future economy. John Gong added that Trump's handsome economic report also partly takes advantage of America's economic boom cycle since 2008.

As Chuck DeVore, Vice President of National Initiatives at the Texas Public Policy Foundation argues in his piece on Forbes, one of the important reasons for the slow increase of manufacturing job creation was due to the burden of regulation. Thus, Trump's deregulation policy has unleashed market capital with a surge increase in the manufacturing sector.
But as the boom cycle inches towards the end, the data also started to show the real cost of the trade war.

More specifically, as Wang Jianhui, general manager of R&D at Capital Securities points out, the fall back in U.S. PMI in May can be attributed to both domestic and external factors. "If you look at the stock index, it has fallen from 52.9 in April to 50.9 in May, this means the anticipation towards future demand has decreased; the decrease in new orders index also shows a weaker domestic demand," Wang explained. Some respondents in the survey have also expressed the concern over the ongoing trade tension between U.S. and China as they could squeeze their profit margins; the uncertainty over the trade relations the U.S. currently has with many other countries also cast a shadow over the already slowing expansion of U.S. manufacturing. According to the IHS Markit survey, some clients are "postponing their orders due to growing uncertainty about the outlook."

This can be seen from the data as well. Wang highlights the import index has been below 50 since March. "On the surface, the decrease in import could be beneficial in reducing U.S. trade imbalance, but it could have serious negative effects on the whole supply chain."  

This could be observed more obviously in the auto market as it is a highly "global industry" that relies on a stable supply chain. The industrial production index for auto parts productions has been below zero from January this year, reaching -6.39 in April. "This means the trade war that the U.S. started has disturbed the global value chain and started to inflict real pain on the U.S. manufacturing sector and economy."

Although the expansion is still going on, the new low in PMI should still be an alarming call to Trump, especially when he is opening a new trade war front with Mexico whose manufacturing sector is closely intertwined with the U.S.: the uncertainty could wear down not only the confidence of investors but also of those "Trump people" who have been behind him this whole time.