A Trump trade war victory over China could be disastrous for the US

U.S. President Donald Trump appears to be winning the trade war. China is reeling from the effects of trade tariffs imposed by the United States and may be facing a major slowdown in its growth that could be worsened by additional tariffs, analysts say.

China’s rock solid economy has already started showing cracks. Growth in its manufacturing sector has slowed, its stock market has tumbled and the country has faced “extremely complicated and severe” domestic and external conditions in the first half of the year, statistics authority spokesman Mao Shengyong said in a statement earlier this month. The country’s political leaders are also trying to roll back massive credit and debt expansion.

But that’s not just bad news for China. It could also spell disaster for American workers, U.S.-based companies and economies around the world.

RELATED: Impact of trade tensions between US and China

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Impact of trade tensions between US and China

Head chef Liang Xin poses with a piece of beef imported from the U.S. in the kitchen at Wolfgang's, a high-end steak house in East Beijing's Sanlitun district, China, April 6, 2018. Liang said U.S. beef has always been limited in China, so he doesn't know how customers would react if the restaurant has to raise prices.

(REUTERS/Thomas Peter)

Liu Anqi rolls dough in flour made from imported grain at the baking studio she runs with friends, in Beijing, China, April 12, 2018. Liu has just opened a bakery in Beijing with her friend. She also teaches customers how to make cakes with a brand of flour that uses only wheat from the United States and Canada. "Flour is one of the most important ingredients in baking and its quality varies with different brands," Liu said, adding that finding a new brand would be time-consuming and higher taxes on this wheat would force her to raise cake prices and tuition fees, which could turn customers away. 

(REUTERS/Thomas Peter)

A detail of the Harley-Davidson brand name is photographed on the motorcycle of Guo Qingshan in his village outside Beijing, China, April 7, 2018. "I love the sound of the engine and the muscle of the motor. When I ride it, I feel free and proud," Guo said. However, Guo has his limits. If prices rise, Guo said he wouldn't contemplate buying another Harley. 

(REUTERS/Thomas Peter)

Fried vegetables are seen in the kitchen of the restaurant where chef Liu Ming works, in Beijing, China, April 11, 2018. Liu said the oil that his restaurant uses is produced with soybeans imported from the United States, and the business won't change the brand even if prices rise. "We use this oil because it gives the food a bright colour and does not leave a strange smell or taste," he said. "We don't know what will happen to our dishes if we change the oil."

(REUTERS/Thomas Peter)

Xie Guoqiang, who runs the Vin Place wine and liquors store, poses for a photograph inside the shop in Beijing, China, April 10, 2018. Xie said in an interview that the tariffs would have little impact on his business, as the shop mostly imports wine and liquors from France, Chile, Austria and Argentina.

(REUTERS/Damir Sagolj)

A bottle of Jack Daniel's Tennessee whiskey is seen on a shelf at the Vin Place wine and liquors store in Beijing, China April 10, 2018. Xie Guoqiang, who runs Vin Place, said in an interview that the tariffs would have little impact on his business, as the shop mostly imports wine and liquors from France, Chile, Austria and Argentina.

(REUTERS/Damir Sagolj)

Liu Ming, a chef at a Sichuan restaurant in Beijing, poses for a picture at the back door of the kitchen where he works in Beijing, China, April 11, 2018. Liu said the oil that his restaurant uses is produced with soybeans imported from the United States, and the business won't change the brand even if prices rise. "We use this oil because it gives the food a bright colour and does not leave a strange smell or taste," he said. "We don't know what will happen to our dishes if we change the oil." 

(REUTERS/Thomas Peter)

Liu Anqi uses flour made from imported grain at the baking studio she runs with friends, in Beijing, China, April 12, 2018. Liu has just opened a bakery in Beijing with her friend. She also teaches customers how to make cakes with a brand of flour that uses only wheat from the United States and Canada. "Flour is one of the most important ingredients in baking and its quality varies with different brands," Liu said, adding that finding a new brand would be time-consuming and higher taxes on this wheat would force her to raise cake prices and tuition fees, which could turn customers away. 

(REUTERS/Thomas Peter)

A bottle of oil is seen in the kitchen of the restaurant where chef Liu Ming works, in Beijing, China, April 11, 2018. Liu said the oil that his restaurant uses is produced with soybeans imported from the United States, and the business won't change the brand even if prices rise. "We use this oil because it gives the food a bright colour and does not leave a strange smell or taste," he said. "We don't know what will happen to our dishes if we change the oil." 

(REUTERS/Thomas Peter)

Zang Yi poses for a picture as her Tesla car is charging at a charging point in Beijing, China, April 13, 2018. Zang said if the trade tensions resulted in pricier U.S. imports, she wouldn't consider American brands when the time comes to buy a new car. "With the tariff, I would have to pay tax of 100,000 yuan to 200,000 yuan if I were to buy a new Tesla," she said. 

(REUTERS/Thomas Peter)

Zang Yi charges her Tesla car at a charging point in Beijing, China, April 13, 2018. Zang said if the trade tensions resulted in pricier U.S. imports, she wouldn't consider American brands when the time comes to buy a new car. "With the tariff, I would have to pay tax of 100,000 yuan to 200,000 yuan if I were to buy a new Tesla," she said. 

(REUTERS/Thomas Peter)

A Chinese woman tastes wine during a wine seminar in Beijing, China, April 14, 2018.

(REUTERS/Thomas Peter)

Shan Yuliang, salesperson at a cigarette and wine shop, poses with a carton of Marlboro cigarettes in Beijing, China, April 8, 2018. "The moment I saw the news about the trade war on the internet, I felt something big was coming. Previously I would not think about what brand to buy. Now I will give it a second thought and avoid buying American products to defend my country," Shan said. 

(REUTERS/Thomas Peter)

Wine tasting teacher Li Yangang poses for a picture during a wine seminar in Beijing, China, April 14, 2018. Li said in an interview that reduced sales of American wine in China would not hurt the local market because of its relatively small market share. "Australian wine and French wine would have a bigger impact," he said. 

(REUTERS/Thomas Peter)

Cartons of Marlboro cigarettes are seen stacked up on a shelf between Chinese cigarettes at a cigarette and wine shop in Beijing, China, April 8, 2018. 

(REUTERS/Thomas Peter)

Student He Bingzhang lights a Marlboro cigarette in Beijing, China, April 8, 2018. "I don't think the trade war would change my behaviour. I don't smoke a lot, probably one pack a month. Even if it costs 100 yuan, I would still buy Marlboro because it is affordable," He said. 

(REUTERS/Thomas Peter)

Student He Bingzhang poses for a picture as he smokes a Marlboro cigarette in Beijing, China, April 8, 2018. "I don't think the trade war would change my behaviour. I don't smoke a lot, probably one pack a month. Even if it costs 100 yuan, I would still buy Marlboro because it is affordable," He said. 

(REUTERS/Thomas Peter)

Guo Qingshan poses on his Harley-Davidson motorcycle in his village outside Beijing, China, April 7, 2018. "I love the sound of the engine and the muscle of the motor. When I ride it, I feel free and proud," Guo said. However, Guo has his limits. If prices rise, Guo said he wouldn't contemplate buying another Harley. 

(REUTERS/Thomas Peter)

Beef imported from the U.S. is seen at Wolfgang's, a high-end steak house in East Beijing's Sanlitun district, China, April 6, 2018. A 15-kg whole cut of beef from the United States is around 20 percent more expensive than its Australian counterpart, said Daniel Sui, deputy general manager at Wolfgang's. "Customers like U.S. beef because it tastes juicy and tender, but Wolfgang's only sells around seven to eight pieces of U.S. imported beef steak each day," Sui said. "The limited supply is because the Chinese government bans feed additives and only 5 percent of U.S. beef is qualified for export." 

(REUTERS/Thomas Peter)

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James Barrineau, head of emerging markets debt at Schroders, argues that a slowdown in China carries global contagion risks. China is not only the world’s second largest economy — and the world’s largest measured by purchasing power parity — it’s also a top trading partner with almost every country on the planet and a major focus of U.S. policy making.

“If the market were to conclude that trade wars were causing significant stress in an economy of that size I think risk appetite globally would dry up pretty quickly,” Barrineau told Yahoo Finance in a phone interview.

The U.S. is ‘especially vulnerable’

That would be a major risk to U.S. markets, particularly stocks and other financial assets, as the benchmark S&P 500 index already is trading at historically high levels. Further, because Trump has antagonized and threatened tariffs not just on China but the European Union, Japan, Canada, Mexico and many of the world’s largest economies, the United States would be hit harder than other nations, the International Monetary Fund said last week.

“As the focus of global retaliation, the United States finds a relatively high share of its exports taxed in global markets in such a broader trade conflict, and it is therefore especially vulnerable,” IMF chief economist Maury Obstfeld said in a statement.

Trump has threatened to increase tariffs on more than $500 billion worth of Chinese imports to the United States — nearly the totality of what the Asian nation sends — which would far exceed the tariffs China can place on U.S. imports, simply because they import far less. But that doesn’t mean that China can’t retaliate.

Chinese officials said this week that they would not intentionally devalue their currency, which has fallen 5% since June to its weakest level against the dollar (USDCNY=X) in more than a year.

Even if that’s true, Chinese policy makers still have a number of options.

Liz Young, senior investment strategist at BNY Mellon Investment Management North America, says that there are more “hidden risks” than possible benefits for the United States and the rest of the world “if things start to really blow up in China with the trade war.”

“They can put on some qualitative measures: They can delay [mergers between U.S. and Chinese companies], they can encourage their consumers not to buy U.S. products,” Young said via phone. “But those aren’t quantifiable, they would probably affect sentiment more than anything else.”

The danger of sentiment

Worsening sentiment could be a silent killer for the U.S. economy because many American companies are deriving significant revenue from their operations in China, said Linda Zhang, founder and CEO of Purview Investments, who grew up in China.

While import/export statistics show significantly more products coming from China into the United States than in the opposite direction, that total doesn’t account for much of the haul from U.S. enterprises that have set up shop in China and sell products locally. If Chinese customers were to turn against those companies – whether on their own or at the direction of the Chinese Communist Party – the hit could be substantial, she said.

A recent survey from financial research firm FactSet shows that the 20 U.S. companies in the S&P 500 with the highest level of sales in China totaled $158.4 billion during the most recently reported full fiscal year. Apple, the world’s largest company, reported $44.8 billion in Chinese sales that year and five U.S. companies, including Broadcom Ltd. and Qualcomm Inc., reported that more than half of their sales came from China. FactSet identified 62 companies with major sales in the country.

Anti-American sentiment in China could mean significantly reduced sales for these companies, which represent a major share of the U.S. stock market, potentially leading to a drop in stock prices and a bear market or a recession.

Seeking to get out ahead of these negative effects, companies would likely move more operations to China, Zhang said. More companies moving to China or to other countries outside the United States that aren’t involved in a trade war likely means more job losses in the U.S.

“Trade statistics often distort the global economic reality today,” Zhang told Yahoo Finance in an email following a meeting in Manhattan. “As China has become the most important overseas market for many American firms setting up operations there … such distortion of the trade reality becomes even more severe.”

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Dion Rabouin is a global markets reporter for Yahoo Finance. Follow him on Twitter: @DionRabouin.

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