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The trade war has entered a new phase: the blame game.

As tensions escalate again, there’s been a flurry of finger-pointing and flag-waving between Washington and Beijing with both sides eager, for domestic political reasons, to assign blame for the slowly emerging economic damage.

In the U.S., Trump is presiding over an economy slowing to the very sort of middling growth he promised to turbo charge. Yet few would argue his trade policies aren’t contributing to the slowdown. Just ask Federal Reserve Chairman Jerome Powell, who blames trade uncertainty for the need for at least one interest-rate cut, maybe more.

The trade-war blame game has several arenas:

  • Dissing the dollar. Trump blames the Fed for causing the dollar’s appreciation — a headwind for exporters. The reality is that expectations for his tax cuts and deregulation juiced the economy (and the dollar) in late-2016 into 2017 before the sugar high wore off. The buck came down a bit as the trade wars heated up in mid-2018 but has stayed elevated. Meanwhile, his trade policies have contributed to weaker economies (and currencies) from Australia to South Korea to Germany.
  • Investment sours. The great promise of Trumponomics was that the tax cuts and protectionism would unleash business investment. But that hasn’t happened in a sustainable way. If anything, uncertainty is causing a pause, which helped drag down second-quarter growth. Goldman Sachs (NYSE:) economists blame it for boosting recession concerns. Even some around Trump recognize this. Kevin Hassett, the former head of Trump’s Council of Economic Advisers, once called uncertainty the bitter lemon the U.S. had to bite into to fight the “scurvy” of imbalanced trade.
  • Factories downshift. By some measures, American manufacturing is in a technical recession with industrial production contracting in the first two quarters of the year. Trump blames the Fed and harps on the dollar’s strength. But that ignores a chief culprit. U.S. manufacturers are getting hit on both the cost and revenue side. Tariffs have driven up the cost of inputs ranging from steel to electronic components from China. Meanwhile, exports are being hit not just by the dollar but by retaliation from China, the EU and other trading partners.
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If blame is indeed the name of the game for now, Beijing knows how to play, too. Chinese state media in recent days has unloaded on the U.S. for “reneging on promises” after Trump said he would impose 10% additional tariffs on $300 billion in Chinese exports starting in September.

Charting the Trade War

China’s exports have been shifting away from the U.S. toward other markets as trade tensions between the world’s two biggest economy continue to deteriorate. Shipments to the European Union and Asean countries have risen this year, while the U.S. share of exports has shrunk.

Today’s Must Reads

  • Low-price pledge | Walmart (NYSE:) prides itself on low prices, but as soda, snack and toothpaste makers boost what they charge in response to rising costs and looming tariffs, something’s got to give.
  • Declining trust | South Korea moved to downgrade Japan from its list of most trusted trading partners while also seeking talks to end a spat that’s hurt ties between the two export giants.
  • New Zealand’s Brexit | As the U.K. prepares to leave the European Union without a deal, there may be lessons Britain can learn from the South Pacific island nation’s experience.
  • Holding fire | Chinese officials are holding back from rolling out big monetary stimulus, keeping options in reserve as the trade standoff with the U.S. morphs into a global currency war.
  • Fighting words | Huawei’s billionaire founder plans a three- to five-year overhaul of the networking giant, creating an “iron army” that can help it survive U.S. restrictions.

Economic Analysis

  • Consumer resilience | July retail sales will be a key to whether U.S. consumer demand is holding up.
  • September to remember | Next tariff wave may mean a big hit to S&P 500 gross margins and earnings.
READ  Recession signal? Revenue of the smallest businesses dropped 3% in Q1

Coming Up

  • Aug. 14: India trade balance
  • Aug. 16: EU trade balance

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