The U.S. and China – Godzilla and Ghidorah — are engage in a major clash over trade whose consequences go well beyond the borders of both countries.
When the world’s two largest economies — Godzilla and Ghidorah — engage in a major clash there’s bound to be little attention paid to anything else.
Retail sales, home construction and industrial production are on the docket this week, but it won’t matter much to Wall Street if the U.S. and China can’t resolve a tense dispute over trade rules that’s festered since last summer.
President Trump on Friday ordered the U.S. to raise a previous 10% tariff on $200 billion in Chinese goods to 25% and said the tariff would might soon apply to all goods coming from the country.
The standoff has been worse for China, owner of the world’s second largest economy, but the U.S. hasn’t gone unscathed. Business investment, a major source of growth, has tapered off since tariffs were applied last year. Midwestern farmers who grow soy have borne the brunt of the trade war.
The short-term effects of higher tariffs probably won’t amount to much, economists say, but the longer the dispute goes on, the worst it will get. When giants collide, the damage spreads well beyond the immediate field of conflict.
“While negotiations are ongoing, and the possibility of a deal remains significant, a further escalation of trade tensions would have dire consequences for both protagonists and the rest of the world economy,” contended Gregory Daco, chief U.S. economist at Oxford Economics.
The more immediate effect has been on a U.S. stock market that took a beating last week. The Dow Jones Industrial Average DJIA, +0.44% briefly fell almost 1,000 points and lost about 3% of its value — surely not the kind of news welcome to million of Americans who rely on the stock market for their retirement funds.
“This is Trump’s world now,” said Steve Blitz, chief economist at TS Lombard. “You want to know what is going to happen to markets, look to the White House.”
For those still looking at the steady drip of economic reports gauging the health of the U.S. economy, the short-run prognosis actually looks pretty good. Retail sales are expected to show a solid increase in April and housing could get a boost from falling interest rates.
Manufacturers, for their part, aren’t expanding as rapidly as they were last year — but they are still growing.
That about sums up the U.S. economy. It’s growing all right, but not quite as fast, and more dangers like a trade war with China add to the risk that growth could slow even further.