By Jon Hilsenrath and Josh Zumbrun
Small steps toward a trade truce between China and the U.S. last
week likely aren't enough to diminish uncertainties that are
holding back global economic growth.
Negotiators agreed to put off a round of U.S. tariff increases
set for this week but left undecided what will come of an
additional round of tariffs scheduled for December or the tariffs
on about $360 billion worth of imported Chinese goods already in
place. Details on an agreement for China to purchase as much as $50
billion in U.S. agricultural goods were elusive, while
disagreements on matters including intellectual-property
enforcement and Chinese subsidies to state firms, were
unresolved.
Meantime, new fronts in a global trade war are opening,
including a U.S. plan to hit European airlines, whiskey, cheese and
hand tools with tariffs in October and a potential decision in
November on European cars.
"A one-step-forward, two-steps-back approach means U.S.
businesses will continue to struggle under the burden of tariffs
and uncertainty in supply chains," said Gary Shapiro, president of
the Consumer Technology Association, which includes large
television and computer manufacturers. "American businesses thrive
when they can dedicate their time and resources to innovating and
competing globally, not checking Twitter for trade-policy
updates."
Economists have for decades theorized that businesses react to
uncertainty by pulling back on investment and employment, and a
slew of economic data in recent months strongly suggest the theory
has become reality.
U.S. job openings, after exceeding 7.6 million in November 2018,
had dropped 7.5% by August. Orders for long-lasting goods like
trucks and industrial machines dropped 4% between September 2018
and August this year. Exports of goods and services hit a high in
May 2018 and dropped 2.6% by August.
Multinational businesses, after spending a quarter-century
building supply chains that span the globe, are increasingly
holding back expansion until they have a better idea of how a
shifting tariff landscape will affect their costs and profit
margins.
In all, the U.S. economic grew at a 2% annualized rate in the
nine months through June, slowing from a 3% growth rate in the nine
months that preceded that. Forecasters see this persisting. A Wall
Street Journal survey of economists this month projected growth
rates below 2% through the 12 months running up to next year's
presidential election.
"We've got quite a bit of evidence now accumulated from many
sources that this kind of uncertainty puts a damper on investment
and to a lesser extent a damper on hiring," said Steven Davis, a
University of Chicago professor who studies the impact of policy
uncertainty on economic activity.
He sees similar effects playing out in the U.K. over its plans
to leave the European Union. Mr. Davis noted Brexit shows that the
damping effects of trade uncertainty tend to build over time.
Business investment in the U.K. grew at a rate of 1.1% per
quarter during the year before the June 2016 vote to leave the EU.
That slowed to a 0.8% rate per quarter in the year after, then a
0.3% quarterly contraction in the year after that. In the third
quarter of this year, it contracted 0.8%.
Mr. Davis, Nick Bloom of Stanford University and Scott Baker of
Northwestern University have an index that tracks references to
uncertainty in newspaper reports and found in September it was at
nearly twice the level that prevailed on average between 1985 and
2009.
Another team of economists -- Tarek Hassan, Stephan Hollander,
Laurence van Lent and Ahmed Tahoun at Boston University, Tilburg
University, Frankfurt School of Finance and Management and London
Business School, respectively -- measured uncertainty by scanning
through transcripts of investor conference calls held by 9,000
firms world-wide. Their index on trade risks perceived by
executives jumped by 60% since the beginning of 2018. For U.S.
firms, it was up 43%.
Mr. Hassan said smaller firms tend to be hit harder by political
uncertainty than are larger firms, which have more resources to
deal with it. Another conclusion: "The long-term effect of
political uncertainty seems to be much larger than the short term
effect."
The Trump administration says the uncertainty is a necessary
price to pay to fix a broken trade relationship with China. On
Friday, President Trump touted big gains he said he is winning in
the meantime.
"The deal I just made with China is, by far, the greatest and
biggest deal ever made for our Great Patriot Farmers in the history
of our Country," he said on Twitter.
Picnic Time Inc., a Moorpark, Calif., producer of picnic
baskets, barware, cheese boards and other entertainment products,
is a small company that finds itself caught in a crosswind.
The company makes most of its products in China and sells them
in the U.S., with 100 to 110 U.S. workers involved in marketing,
sales and warehousing. A family business since 1982, the company
takes in $20 million to $30 million a year in revenue.
Paul Cosaro, Picnic Time's chief executive, said pricing the
array of 13,000 items the company sells used to be routine:
Negotiations with Chinese suppliers would start in September, with
prices solidified by October. His biggest customers would have
pricing to consider by November, and then by January he would work
trade shows with printed price lists for smaller firms.
Mr. Cosaro said the tariff threats and implementation has thrown
the process into disarray with both Chinese suppliers and U.S.
customers.
"There is a huge opportunity cost there that is almost as
debilitating as the amount of money that we're paying in tariffs,"
he said. "Reacting and changing course and working with the
suppliers and dealing with customers...all of that is so time
consuming."
The Trump administration's decision to shelve a planned tariff
increase to 30% from 25% on $250 billion worth of imported goods
spares Mr. Cosaro a cost increase on baskets, insulated coolers and
outdoor furniture. But he doesn't know what will happen to the cost
of orders of cutting boards and barware that could be hit by
December tariffs.
In turn, Mr. Cosaro is putting expansion plans on hold. Before
the trade war, he was planning a foray into Europe and into U.S.
grocery stores. That would have entailed hiring and buying more
engraving and embroidery machines.
"I just see the opportunities being left on the table," he
said.
Write to Jon Hilsenrath at jon.hilsenrath@wsj.com and Josh
Zumbrun at Josh.Zumbrun@wsj.com
(END) Dow Jones Newswires
October 13, 2019 15:33 ET (19:33 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.