There are signs that the US is losing the upper hand in the trade war with China. Experts expect that the impact of the tariffs will become increasingly visible on consumer spending, business investment and confidence.

If trade wars are “good and easy to win”, why is Donald Trump starting to lose his battle with China? There were two more milestones in the deepening tariffs tussle between the two largest economies on September 1st.

First, U.S. tariffs on US$112 billion of Chinese goods came into effect, upping the cost of nappies, televisions and food. Second, business survey data suggested U.S. factories are now suffering more than their Chinese rivals. Here are the three ways that show the U.S. is losing the upper hand:

Beijing drags currency markets into trade battle
China’s huge trade surplus with the U.S. meant Beijing has been lacking ammunition in its tariffs battle.

After the White House announced the latest tariffs on goods worth hundreds of billions of dollars, China fought back with a weapon it had promised to leave on the sidelines.

Beijing dragged the trade war into currency markets by allowing the yuan, also known as the renminbi, to depreciate past the symbolically significant 7 per dollar mark. By letting its currency sink almost 4% to an 11-year low, China is partially offsetting the effect of U.S. tariffs and keeping its exports competitive.

“There are some costs to China from a weaker renminbi but export growth in yuan terms does appear to be stabilizing,” says Stephen Gallo at BMO Capital Markets. “Chinese policymakers seem to be treading carefully with fiscal and monetary stimulus owing to the existing debt overhang and financial stability risks,” he says. The depreciation of the yuan is “therefore a convenient alternative.”

Is the trade war coming back to bite the U.S.?
Trump has repeatedly boasted that China’s economy struggled to cope with tariffs on goods sent to its biggest export market. Chinese growth in the second quarter was indeed the worst since records began in 1992 — but there are tentative signs of a rebound.

This week Caixin’s manufacturing purchasing managers’ index (PMI), a closely watched gauge of the private sector, indicated Chinese factories edged back into growth in August. Production rebounded to a five-month high as Beijing’s stimulus started to feed through. However, growth in China’s factories remained lacklustre. U.S. factories endured a significant slowdown. IHS Markit’s PMI survey suggests they had their first contraction since 2009 last month, suggesting the Chinese have edged ahead.

Gregory Daco at Oxford Economics says “a combination of rising trade tensions and slower global growth” led to increasing pressure on U.S. firms: “There is an increasing confidence spillover from deteriorating confidence in the private sector.”

Confidence sinks on Wall Street and main street
The sudden surge in trade tensions and the Wall Street wobble in August appears to have dented confidence among the U.S.’s crucial consumers. The University of Michigan consumer sentiment index suffered its biggest monthly dive since 2012. Its economist Richard Curtin warned “erosion of consumer confidence due to tariff policies is now well under way.” Daco says that impact of the tariffs will become “increasingly visible” on consumer spending, business investment and confidence.

“That will feed the existing slowdown in the U.S. economy and risks pushing us closer and closer into that danger zone where the economy is much more susceptible.”

Trump will have to face the reality: that trade wars are not easy to win, and there are few victors.

Source:  Financial Post