Trade War Escalation Comes At Inopportune Moment For Economy

WASHINGTON (AP) — The escalation of the U.S.-China trade fight comes at a particularly inopportune moment for the global economy, threatening to turn a period of slower growth into recession.

In the past week, President Donald Trump has said he will impose new taxes on hundreds of billions of dollars of Chinese imports. Beijing responded by halting purchases of U.S. farm goods and allowing the value of its currency, the yuan, to fall to an 11-year low. Trump, in turn, labeled China a currency manipulator, a step that has little immediate effect but could lead to future tariff hikes.

The rapid-fire sequence of events "shatters confidence, trust and expectations," said Sung Won Sohn, an economist at Loyola Marymount University in California. World stock markets tumbled Monday — the Dow Jones Industrial Average lost 767 points or 2.9% — before rebounding Tuesday. The Dow recovered from a steep fall Wednesday morning and was down 68 points in afternoon trading.

The prospects for a trade deal, which appeared bright as recently as mid-May, have dimmed to near-invisibility.

"They are all moving in the wrong directions," Sohn said. "I don't think the Chinese are looking for a trade deal during the current term of President Trump. They have decided he is too unpredictable to negotiate with."

When companies across the world lose confidence or certainty about global trade policies, they tend to postpone plans to invest, expand and hire. Spread across the global economy and over time, those trends can trigger a severe economic downturn.

The trade dispute has already had spillover effects across the globe. In Germany, Europe's industrial powerhouse, factory output fell in June for the second time in three months, partly because its exports to China have fallen. China is purchasing less manufacturing equipment from Germany as its own economy weakens.

And Japan's exports have fallen for seven straight months, partly because Japanese factories ship electrical components and semiconductors to China for assembly into smartphones and other tech gadgets.

Barely a month ago, Trump and President Xi Jinping announced a truce in their battle over allegations that Beijing forces foreign companies to hand over trade secrets, unfairly subsidizes Chinese companies and engages in cyber-theft of intellectual property.

The cease-fire broke last week when Trump, professing frustration that 12 rounds of negotiations had failed to break the impasse, said he would impose tariffs Sept. 1 on $300 billion of Chinese imports that he previously left untouched.

Those duties would cover mostly consumer goods, such as toys, clothes, and smartphones, products that were largely spared in the Trump administration's earlier rounds of tariffs. That could raise prices for U.S. consumers just in time for holiday shopping.

The world economy hardly needs the strain. The International Monetary Fund, the World Bank and other forecasters have all downgraded their forecasts for global growth this year.

It isn't just the trade war. Manufacturers around the world have allowed their inventories to build up and now are slowing production to bring their stockpiles closer to customer demand. JPMorgan's global manufacturing index fell in July for the third straight month to the lowest level since 2012. Moody's Investors Service predicts that global auto sales will drop 3.8% this year.

The prospect that Britain will leave the European Union without a trade deal — a risk that seemed to rise after Boris Johnson became prime minister last month —imperils Europe's economic prospects. And Japan is preparing to raise its consumption tax in October, which could stifle its economy.

Global trade investment has chilled because of Trump's decision to impose tariffs on foreign steel, aluminum, dishwashers, solar panels and hundreds of Chinese imports — and the retaliation those steps have drawn from other countries. Companies are waiting to see whether and how the disputes work out.

"There are considerable downside risks with an escalation of protectionism," said Sara Johnson, executive director of global economics at the research firm IHS Markit. "We're disrupting supply chains, and tariffs ultimately lead to less efficient global production."

Oxford Economics says business pessimism has risen sharply: 56% of the companies it surveyed from July 12 to Aug. 1 said the risk of a sharp global slowdown has risen, up from 32% in the spring.

The tit-for-tat exchange Monday over China's currency brought a new, dangerous element into the mix: the prospect of a currency war.

"We haven't been on this terrain since the 1930s," said Joe Brusuelas, chief economist at the consultancy RSM.

Trump has made clear he wants to see the U.S. dollar drop against the yuan, the euro and other currencies. That's one reason he's applied relentless pressure to the Federal Reserve to cut U.S. interest rates — a move that tends to drive the dollar lower. (The Fed last week cut its key interest rate for first time in a decade.)

"The president has signaled that he has no problem with a weaker dollar," said Joe Manimbo, senior market analyst at Western Union Business Solutions. "This is certainly unprecedented in modern times."

Turning a trade war into a currency war shifts the battlefield to currency markets, where policymakers have much less control.

"Currency wars take on a life of their own," Brusuelas said.

In the 1997-1998 Asian financial crisis, traders dumped Asian currencies and delivered devastating recessions to Thailand, Indonesia and South Korea, where borrowers struggled to repay U.S. dollar-denominated loans and left local banks drowning in bad debt.

Indeed, a dollar-versus-yuan fight is unlikely to remain confined to the United States and China. If other countries see Chinese or U.S. exporters gaining a currency advantage, they will feel pressure to respond by pushing their currencies lower, too.

"Currency wars are guaranteed not to stay two-party affairs," Brusuelas said.

AP Economics Writer Christopher Rugaber contributed to this story.