US-China Trade War Enters 3rd Year

In 2020, a slowdown in both the US and China economy is expected as the so-called trade war enters third year. Although the two countries are likely to sign the “phase one” trade deal early January, investors remain cautious as many see it more like a truce, unable to solve main trade issues. Also, with the US presidential election next year, uncertainty and cautiousness should head into 2020 as well.
Joana Taborda | joana.taborda@tradingeconomics.com 1/1/2020 12:05:20 PM
In 2018 and 2019, the US has imposed a 25% tariff on $250 billion of Chinese goods while China retaliated with tariffs on $185 billion worth of US goods. The phase one trade deal allegedly includes China purchasing more American farm goods such as soybeans and pork and commitments on intellectual property and currency. The US agreed to reduce some existing tariffs, removing 15% duties on $120 billion of Chinese imports. China expects the deal to help boost investor confidence and trade and the US to reach a more fair-trade relation with China. However, the deal is incomplete and does not remove the main drags. 

Here are the facts:
The Chinese economy is in the worst shape as the growth has been slowing down since the first round of tariffs was imposed by the US in February 2018. The GDP grew 6% yoy in Q3 2019, the least since the first quarter of 1992. Exports to the US, the biggest sales market, fell 28% in the first 10 months of 2019. Manufacturing production has been slowing since the beginning of 2018 (monthly average of 5.6% year-on-year compared to 6.3% in 2018 and 7.1% in 2017). The yuan weakened near 11% and the Shanghai Composite lost 4%.

The US economy is still in the very good shape but signs of downshifting are becoming more evident as uncertainty spreads to manufacturers, exporters and companies in general.
On the positive note, the US GDP has been expanding strongly since 2018 (average of 2.5% since Q1 2018) and grew by an annualized 2.1% qoq in Q3. China first imposed tariffs in April of 2018 and during 2018 many companies in the US increased exports, imports and production aiming to anticipate the impact of the new fees. Since the first tariffs were imposed by China, the USD gained around 7%, the Dow Jones added 21%, the Nasdaq increased 27% and the S&P 500 22%.

Yet, the 2018 production boost starts to fade.
- exports to China slumped 32.5% in the first 10 months of 2019 and total exports went down 17%
- imports from China shrank 29% and total imports went down 17%
- industrial production growth averaged 1% yoy in 2019 compared to 4% in 2018 and 2.3% in 2017; the ISM Manufacturing PMI averaged 51.6 in 2019 compared to 58.8 in 2018 and 57.4 in 2017 and the ISM non-manufacturing PMI averaged 55.6 in 2019, 58.9 in 2018 and 56.9 in 2017
- smaller businesses are becoming less optimistic; the NFIB Small Business Optimism Index averaged 103 in 2019, 107 in 2018 and 105 in 2017.


US-China Trade War Enters 3rd Year