More Jobs, Faster Growth and Now, the Threat of a Trade War
By BEN CASSELMAN and JIM TANKERSLEY APRIL 6, 2018
The rapidly escalating trade conflict with China has upended the prevailing economic dynamic of falling unemployment and faster growth, leaving policymakers and investors scrambling to figure out the way forward. The threat of a trade war loomed over Jerome H. Powell’s inaugural speech as Federal Reserve chairman on Friday in Chicago, even as he tried to focus attention on the fundamental strength of the American economy.
Financial markets fell Friday morning after President Trump’s latest salvo against China, then tumbled further after Mr. Powell indicated that the Fed saw no imminent need to adjust its outlook. The Standard & Poor’s 500-stock index ended the day down 2.2 percent, closing a turbulent week.
And there was uncertainty in Washington, where lawmakers, lobbyists and even White House officials struggled to discern how much of Mr. Trump’s move was policy and how much was bluster. The president acknowledged that the trade friction could take a toll. “I’m not saying there won’t be a little pain,” he said in a radio interview on Friday. “But we’re going to have a much stronger country when we’re finished.” The concern over trade was evident at Mr. Powell’s appearance before the Economic Club of Chicago. The Fed chief did not mention tariffs in his speech, but in a question-and-answer session afterward, they were the first topic raised.
The Fed chief, who took his post in February, said it was “too early to say” what impact the dueling trade measures would have. “We don’t know the extent to which the tariffs will actually come into effect and, if so, how big will that effect be and what will the timing of it be,” Mr. Powell said. But he made it clear that the Fed would watch closely for any sign that the trade dispute was knocking the recovery off course. The trade tensions complicate what was already a tricky task for the Fed. Hundreds of billions of dollars in tax cuts and spending increases risk fueling inflation, as do wage pressures from a robust labor market.
The government’s monthly jobs report on Friday, while more subdued than in recent months, still pointed to a healthy employment picture. Yet policymakers are wary of acting too aggressively to slow the economy at a time when wage growth has been tepid. The Fed’s response has been gradual interest-rate increases. A trade war could act as a drag on economic growth, forcing the Fed to be even more cautious. But tariffs could also raise consumer prices by limiting cheap imports from China and other countries. That could increase the risk that the Fed will lift rates too quickly, choking off the recovery
“There’s an immediate, knee-jerk reaction to tighten policy more,” said Ellen Zentner, chief United States economist for Morgan Stanley. The latest escalation between the United States and China came Thursday evening, when Mr. Trump said he was considering tariffs on an additional $100 billion of Chinese imports. That came on top of the tariffs on steel and aluminum imposed last month and those on $50 billion in Chinese goods that he proposed in recent days. China has responded with its own new tariffs. It is not clear whether Mr. Trump will make good on his latest threats. Larry Kudlow, Mr. Trump’s new top economic adviser, has sought to portray the tariffs as an opening bid in a negotiating process with China, and he told reporters on Friday that “there are all kinds of back-channel discussions going on.”
But Mr. Trump’s Treasury secretary, Steven Mnuchin, indicated that tensions had reached a more combustible level. “There is the potential of a trade war,” Mr. Mnuchin said Friday on CNBC. “There is a level of risk that we could get into a trade war.” The trade upheaval threatens to undermine an American economy that is at its strongest point since the financial crisis struck a decade ago. Employers have added jobs for 90 consecutive months, by far the longest streak on record; the unemployment rate, at 4.1 percent, is the lowest since 2000.
“The labor market has been strong, and my colleagues and I on the Federal Open Market Committee expect it to remain strong,” Mr. Powell said on Friday, referring to the Fed’s policy group. Wage growth, weak for much of the recovery, ticked up in March, and Mr. Powell said he expected the gains to continue in the months ahead. And while workers would, without a doubt, like to see their pay rise more quickly, the gradual pace is comforting for some investors, who have been watching for any hints that the economy is overheating
In his speech, Mr. Powell said the Fed saw “other signs of economic strength,” citing “steady income gains, rising household wealth and elevated consumer confidence,” which he said would continue to support consumer spending. Other economists agreed, saying that the recently passed tax and spending measures give the economy added momentum. A full-blown trade war might be enough to short-circuit the recovery, they said, but isolated tariffs — even large ones — most likely are not. Certain categories are more vulnerable. Among the retaliatory moves announced by China are new tariffs on soybeans, which could hurt American farmers already struggling with low prices for their crops.
The nation’s factories, a sector that Mr. Trump has championed, have become a bright spot in the recovery — a development Mr. Powell underlined on his Chicago visit by touring an incubator for industrial start-ups. But Mr. Trump’s tariffs could force manufacturers to pay more for materials, and China’s countermeasures could hurt their overseas sales.
Just the prospect of tariffs — even before they begin to take a direct bite — could hurt the economy if it makes corporate executives reluctant to invest. Becky Frankiewicz, president of ManpowerGroup, a staffing firm, said she was already hearing from clients that they are more hesitant to commit to major projects, at least until they see whether this week’s skirmishes develop into an all-out trade war.
“We’re not seeing the impact directly of tariffs yet, but we would say there’s pretty broad conservatism as a result,” she said. Mr. Powell said Fed policymakers, too, were conscious of concerns from corporate executives.
“We did hear from a number of business leaders around the country that changes in trade policy had become a bit of a risk to the medium-term outlook,” Mr. Powell said in the question-and-answer session. Continued turmoil in financial markets could begin to hurt spending, especially among higher earners, who are more likely to own stocks. Ms. Zentner said surveys suggested that some high-income consumers had already become more pessimistic as markets have become more volatile. “It’s starting to affect those groups, whose spending is more tied to the stock market,” Ms. Zentner said.
“If they simply pause their spending or become more prudent in their spending because of market volatility, it drags down consumer spending in the aggregate.” The effect of all this on the Fed’s thinking won’t be clear until the next policy meeting on May 1 and 2. Fed officials raised interest rates by a quarter of a percentage point at their most recent meeting, in March, to a range of 1.5 percent to 1.75 percent. Officials indicated that they considered the economy and labor market healthy, and that they expected to raise rates twice more this year and three times in 2019.
Mr. Powell, like his predecessor, Janet L. Yellen, cast that gradual series of increases as a carefully planned strategy to ensure that the Fed will not need to raise rates abruptly in the event of a steep rise in inflation. But he also cautioned that policymakers could change course if necessary.
“Our views about appropriate monetary policy in the months and years ahead will be informed by incoming economic data and the evolving outlook,” Mr. Powell said. “If the outlook changes, so will monetary policy. Our overarching objective will remain the same: fostering a strong economy for all Americans — one that provides plentiful jobs and low and stable inflation.”
U.S. and China Play Chicken on Trade, and Neither Swerves
By KEITH BRADSHER APRIL 6, 2018
SHANGHAI — At the heart of the intensifying trade dispute between the United States and China is a fundamental question: Which country is more willing to endure short-term pain for the long-term gain of playing a leading role in high-tech industries. China has embarked on an aggressive and expensive plan to retool its economy for the future as it moves to dominate in robotics, aerospace, artificial intelligence and more.
President Trump has said China’s approach relies on unfair and predatory practices, and on stolen American technology. And even as Chinese leaders say they want to avoid a trade war, they are staunchly defending their plans and showing little sign of backing down.
Mr. Trump’s threat to sharply escalate the administration’s tariffs on Chinese imports — a threat he reiterated on Friday — shows that neither side has yet gone far enough to persuade the other to compromise. Bigger and broader tariffs may be necessary to get China’s attention. “The administration, if it’s serious, better be prepared for much more,” said Derek Scissors, resident scholar at the American Enterprise Institute.
China’s $300 billion plan for government assistance, Made in China 2025, calls for helping cutting-edge industries by providing low-interest loans from state-controlled banks, guaranteeing large market shares in China and offering extensive research subsidies. The goal is to help Chinese firms acquire Western competitors, develop advanced technology and construct immense factories with considerable economies of scale. It is an agenda that China would probably go to great lengths to protect.
“We will not start a war — however, if someone starts a war, we will definitely fight back,” Gao Feng, the commerce ministry spokesman, said at a news conference in Beijing on Friday. “No options will be ruled out.” For the United States, victory in such a war would be difficult to verify, much less achieve. China could say it plans to ease back on government support. But that could be difficult to quantify because of the country’s opaque political system and the state’s control of information.
China could back off from rules that favor local competitors and require American companies to share technology if they want access to the Chinese market. For example, foreign automakers face pressure to transfer electric-car technology to their local partners, and foreign technology companies are increasingly required to submit to security reviews. Foreign businesses have long complained that many of the rules they must follow are unwritten.
China’s government-financed campaign is already paying off in some ways. Drive into downtown Shanghai from Pudong International Airport and you pass a seemingly endless series of huge hangars and vast, glass-walled design centers, all part of the country’s effort to create a commercial aircraft manufacturing giant to rival Boeing or Airbus.
Travel to factory districts in Shanghai and on the outskirts of many other Chinese cities and you see enormous, newly built factories ready to churn out electric cars, the batteries they use and other components. Proving that the Chinese government unfairly supports the effort could be difficult, however.
The United States could press its argument with the World Trade Organization, which oversees global trading rules and prohibits big loans from government-controlled banks at artificially low interest rates. But the W.T.O. requires many contracts and government documents to prove cases, evidence that can be hard to get in a tightly controlled country like China.
Even when the W.T.O. rules against China, persuading the country to comply can be challenging. One such ruling, involving China’s restrictions on foreign electronic payment systems, was issued nearly six years ago. China is still mulling how it will comply — despite numerous complaints from the Obama administration and more recent nudges from the Trump administration.
So the United States has turned to tariffs. That means it is using a 1980s tool to address an industrial policy issue that is already shaping the 21st century. Mr. Trump’s top trade official, Robert Lighthizer, was a deputy United States trade representative under President Ronald Reagan. The tariffs that Mr. Lighthizer threatened against Japan in those days are among the same ones he is wielding now. But the two periods differ in two big ways.
One is that Japan depended on the United States in the ’80s for military protection from the Soviet Union. China, by contrast, is an increasingly assertive global rival, sending naval vessels to the Baltic Sea and building a naval base in East Africa. The second major difference between then and now is that the European Union deeply resented the tariffs of the 1980s, and Mr. Trump’s use of them could make it difficult to persuade European officials to present a united front.
In response to American tariffs, Beijing could simply shift business from American companies like Boeing and Ford to European rivals like Airbus and Daimler. Chinese officials dispute the American accusations about their unfair trade practices. They say Mr. Trump’s tariffs violate W.T.O. rules, and they dispute claims that China forces American companies to hand over technology.
As for Made in China 2025, Chinese officials say the plan is only guidance, not a government directive — and that foreign companies are free to participate, too. In China’s current industrial policy, the Trump administration sees an extension of how the country has already come to dominate one major industry of the future: solar power.
Mr. Trump himself is no fan of solar panels. He has spoken enthusiastically about coal, not renewable energy, throughout his campaign and his presidency. But the solar power industry is one of the biggest success stories so far in China’s efforts involving advanced industries. The United States played a central role in developing solar panels and manufacturing them until a decade ago.
Around then, the Chinese government decided to finance a lavish expansion of the sector. State-controlled banks lent tens of billions of dollars at low interest rates despite the high-profile bankruptcies of solar manufacturers. Chinese firms now produce three-quarters of the world’s solar panels.
Most American and European companies have closed factories, and many have become insolvent. China’s success in producing solar panels has given Beijing a blueprint for seizing the lead in a long list of other high-tech industries.
Many foreign companies are caught between China’s industrial ambitions and Washington’s efforts to stop them, including major aerospace companies and carmakers. The conflict may spread: Made in China 2025 could create major competitors to General Electric and Intel, and to companies outside the United States like Siemens and Samsung.
Tariffs could hurt such companies if the United States and China follow through on their plans. They also risk losing their competitiveness if Beijing succeeds in subsidizing the creation of large Chinese rivals in their industries.
Boeing, for example, could be hit by American tariffs on civilian aircraft parts it buys from Avic, a state controlled Chinese military and aviation company — required purchases if the company, which is based in Chicago, wants to sell planes in China.
China, in turn, is pushing a consortium that includes Avic to become a Boeing rival. Boeing, like other multinational companies, has refrained from endorsing or criticizing the tariffs. “Although our members are unhappy with retaliatory tariffs being used,” said Kenneth Jarrett, the president of the American Chamber of Commerce in Shanghai, “there is a belief that greater pressure has to be brought to bear on China.”