Donald Trump’s cunning plan to make America great again by launching a trade war with China has officially backfired. Last week, a keenly watched measure of US manufacturing showed firms cutting back on production and jobs at a rate not seen since 2009. Recession warning lights are flashing and the outlook seems a world away from the cheery one presented by the president when he entered the White House in 2017.
It is quite something for a president to impose a trade policy that weighs heavily on parts of a crucial sector for the US economy – and it’s a bizarre tactic given that the votes of manufacturing workers delivered him his first term in office.
Economists had predicted the financial consequences for carmakers, machine-tool firms and the plastics industry following a tit-for-tat battle over import tariffs – as had trade experts over the course of the past 18 months. They were unanimous that Trump’s plan to raise the tariff on hundreds of products, and China’s determination to return the favour, would hurt both countries.
While it has proved to be a bigger blow to Chinese exporters, it was inevitable that US companies would also suffer, and not just because their exports would be more expensive for Chinese consumers.
The trade war has spilled over to infect the furthest reaches of the global economy, damaging business confidence and dragging down growth in Japan, the eurozone and much of the developing world.
Britain could not be in a worse position, with its own self-inflicted economic woes only adding to the negative effects of the global slowdown. Three years of post-referendum Brexit debate has already knocked around 2% off the path of GDP growth predictions made in March 2016 by the Treasury’s independent forecaster, the Office for Budget Responsibility. That means the UK would now be about £40bn richer if the referendum had never taken place.
The September surveys of business sentiment show that talk of a no-deal Brexit has only made matters worse. Without stable retail sales and a surge in unfunded government spending over the past year, mostly to employ more civil servants to cope with Brexit, the UK would be in recession.
Manufacturing, construction and the services sector all contracted last month at a speed that many economists found shocking. Boris Johnson may believe he is justified in hailing the strength of the UK economy as he seeks to shore up support for leaving the EU. Businesses would say otherwise.
Across the Atlantic, Trump’s inclination would be to ask Congress for more tax cuts to keep consumers happy. Friday’s non-farm payroll numbers showed unemployment falling to a 50-year low and wages rising to keep consumers spending, despite job creation slowing markedly. Like their UK counterparts, US consumers have so far remained immune to talk of a recession. But Congress is in no mood to give the president anything at the moment – especially while an impeachment inquiry is in full flow.
So the president turned instead to berating the US Federal Reserve into cutting interest rates, which acts like a tax giveaway for indebted consumers. With reluctance, the Fed has obliged twice this year. And it may do again before the year is out, though the pace of rate cuts is not fast enough for Trump.
The president is aware that interest rate cuts have turned into a competitive game. Cuts by the Fed have merely kept pace with moves by the European Central Bank, the People’s Bank of China and the Bank of Japan to ease credit and make it cheaper to borrow. The Bank of England is likely to be next.
These moves limit the effect of US policymaking and rob Trump of his only mechanism to prevent the current slowdown accelerating into 2020 and his re-election year.