Trump insists China will suffer from trade war despite data showing tariffs are hurting US

US manufacturing shrinks for the first time in three years following new tariffs

Donald Trump continues the escalate his trade war with China (EPA)

Donald Trump said on Tuesday that Chinese manufacturing would “crumble” if the country did not agree to the United States’ trade terms.

His comments come as newly released data shows his trade war was washing back to American shores and hurting the factories that the president has aimed to protect.

Days after new tariffs went into effect on both sides of the Pacific, a closely watched index of American manufacturing activity fell to 49.1 from 51.2, signalling a contraction in US factory activity for the first time since 2016.

The companies responding to the Institute for Supply Management survey, which the index is based on, cited shrinking export orders as a result of the trade dispute, as well as the challenge of moving supply chains out of China to avoid the tariffs.

The manufacturing sector’s struggles are likely to increase as the world’s two largest economies continue to escalate their trade fight.

On Sunday, the president placed a new 15 per cent tariff on a range of consumer goods, including clothing, lawn mowers, sewing machines, food and jewellery.

Beijing retaliated by increasing tariffs on $75 (£61.7) billion worth of American products. China also said on Monday that it was filing a complaint at the World Trade Organisation over Mr Trump’s new tariffs.

Markets sank on weaker economic news and worries about the trade war. The S&P 500 was down about 0.9 per cent, with particular weakness in industrial and energy stocks.

Prices of key industrial commodities were also lower, with futures prices for benchmark American crude oil down roughly 3 per cent.

Copper, considered a barometer of the health of the global industrial sector, was down a bit less than 1 per cent.

The yield on the 10-year Treasury note declined to 1.45 per cent, as jittery investors continued to buy government bonds, pushing prices up and yields lower.

The drop in bond yields this year — the yield on the 10-year note was above 3 per cent in late 2018 — suggests a broad-based cut in expectations for economic growth among investors.

“The US trade war with the world has blown open a great big hole in manufacturers’ confidence,” Chris Rupkey, the chief financial economist at MUFG Union Bank, wrote in a note Tuesday. “The manufacturing sector has officially turned down and is falling for the first time this year as the China tariffs and slowdown in exports has really started to bite.”

The president has continued to insist that pain from the trade war is falling primarily on China, not the United States.

On Friday, he said American companies were leaving China in response to his tariffs, a development that put the United States in an “incredible negotiating position”. And he said any business that complained about financial pain from the tariffs was suffering from bad management, not the trade war.

On Tuesday, he warned Beijing not to try to wait for a new administration to come into office after the 2020 election, saying that China’s supply chain “will crumble” and that it would be “a long time to be haemorrhaging jobs and companies on a long-shot”.

Many chief executives and trade groups say they support the president’s goal of changing China’s economic practices, particularly those that require businesses to hand over valuable technology as a condition of operating in China.

But businesses have begun to express concern about the seemingly unending trade war.

Many big companies, particularly those in the retail and manufacturing sectors, have downgraded sales and profit forecasts as a result of the tariffs.

The trade war’s potential to slow America’s economic expansion, including its impact on the manufacturing sector, has already prompted concern from Federal Reserve officials.

The Federal Reserve cut rates for the first time in more than a decade in July and officials have said they are prepared to cut further to protect the economy against fallout from slowing global growth and trade risks.

Even some officials who did not vote in favour of July’s rate cut say economic risks have increased.

Eric Rosengren, president of the Federal Reserve Bank of Boston and a monetary policy voter this year, indicated that he still favours waiting and watching incoming economic data before making interest rate cuts beyond the July move, which he voted against.

But he also said it is “clearly reasonable” to judge that risks to the economy are elevated, and “should those risks become a reality, the appropriate monetary policy would be to ease aggressively”, suggesting that he might favour rapid interest rate cuts if economic data soured meaningfully.

The Trump administration has been pressuring China for more than two years to make a trade deal that would strengthen its protections for American intellectual property and result in large purchases of American products.

But the two sides continue to have significant disagreements, including which of Mr Trump’s tariffs should be rolled back and what kind of legal changes China must make to treat American companies more fairly.

Since talks between the two countries stalled in May, Mr Trump has moved ahead with his threat to tax nearly everything China sends to the United States.

On Sunday, the Trump administration placed a 15 per cent levy on roughly $112 (£92.1) billion worth of Chinese goods and plans to place tariffs on roughly $160 (£131.7) billion worth of cellphones, laptops, clothing and toys on 15 December.

The US president has also said the United States will raise tariffs on $250 (£205.7) billion worth of products to 30 per cent from 25 per cent on 1 October.

China has vowed to retaliate on 15 December with more tariffs of its own.

While a deal appears far from certain, the two sides could still avert the increases and declare another ceasefire.

The United States and China have discussed a meeting in Washington in September, and American and Chinese officials will both be present on the sidelines of the UN General Assembly meeting in New York later in the month.

Myron Brilliant, the executive vice president of the US Chamber of Commerce, said the two governments would have to work to restore some trust before any conclusion to the trade war would be reached — perhaps through Chinese purchases of American agricultural goods, something Mr Trump has long focused on.

“There’s a trust deficit between the two governments,” he said. “We need steppingstones to build confidence in the relationship so both governments are positioned to get a deal down the road.”

The New York Times