National

Data: Caixin, Institute of Supply Management; Chart: Axios Visuals

The manufacturing sectors of the U.S. and China are moving in opposite directions, and data released Monday shows the gap is widening.

On one side: China's Caixin purchasing managers' index, a private survey of the country’s manufacturing activity, had its strongest reading since February 2018. The improvement was driven largely by increased domestic demand, which has picked up as foreign sales continue to sink because of the trade war.

"The Chinese government’s stimulus measures, although relatively modest so far, are helping to buffer China’s industrial sector," Eswar Prasad, a senior fellow at the Brookings Institution and former head of the IMF’s China Division, tells Axios in an email.

"The notion that China’s economy faced a drastic slowdown was a bit overblown. They have been facing a steady gradual slowdown that they are not uncomfortable with as growth around 6 percent is a more sustainable rate, now that they are a $13 trillion economy."

On the other side: The Chicago Business Barometer, which tracks Midwestern business activity steered mainly by trade and manufacturing, fell back into contraction in September. A measure of business confidence within the index dropped to its lowest level since 2009.

The unexpected weakness "indicates strain in 'real economy' sectors like manufacturing that drive nationwide consumer spending," the Wall Street Journal notes.

"The combined gross domestic product for states in the Great Lakes and Plains regions, as defined by the U.S. Bureau of Economic Analysis, account for almost one-fifth of U.S. GDP. Pain in the Midwest will quickly ripple outward."

Of note: Looking at the chart, 50 is the level separating expansion from contraction.

What's next: Today, the Institute for Supply Management will publish its monthly U.S. manufacturing survey, which declined in August for the first time in 3 years.

The state of play in the manufacturing trade war

Domestic demand has picked up as foreign sales sink because of the trade war.

Business

U.S. China trade war

Trade war

After a record economic expansion, the coronavirus pandemic sent the U.S. economy into a recession as unemployment soared to staggering heights. The country now faces urgent questions about how much stimulus is needed for reeling consumers and businesses, and what a recovery might look like.

Economy & Business

Axios Pro Rata

The Carlyle Group's David Rubenstein has called capital one of America's greatest exports, particularly in regards to China. Now there's talk of a blockade.

The big picture: Bloomberg reported on Friday that the White House is considering limitations on U.S. investments in Chinese companies. Several other news outlets reported the same, including Axios. The White House itself did not confirm or deny the reports.

Details: Discussions included the possibilities of de-listing Chinese companies from U.S. stock exchanges and banning federal employee pensions funds from investing in Chinese equities.

There is no known talk of making similar restrictions on state or municipal pension funds' direct of indirect investments. But, were it to expand there, it could create major headaches for venture and private equity firms that invest in Chinese companies (even private ones, since hold periods usually extend post-IPO).

What they're saying: A Treasury Department spokesperson subsequently said the administration is not contemplating changes to listing rules for Chinese companies "at this time," and Trump economic advisor Peter Navarro today told CNBC that the original Bloomberg story was "fake news." 

The bottom line: The trade war may be moving well beyond tariffs, even if those involved are struggling to keep their stories straight.

Go deeper: China seems unfazed by U.S. threats to limit investor access

U.S. ban on Chinese investments would take trade war to a new level

Axios What's Next

A proposed U.S. crackdown on sharing technology with China could threaten the development of self-driving vehicles, the Wall Street Journal reports.

Why it matters: Many companies developing autonomous driving systems split their work between the U.S. and China, with offices, investors, engineers and customers in both countries. Unscrambling that egg could be difficult.

“Our company would be split in half,” David Liu, CEO of Plus.ai, told WSJ. The American self-driving software developer recently teamed up with Chinese truck maker FAW Group.

The U.S.’ proposed controls are “a cloud hanging over every technology company,” he said.

The big picture: China's aspiration to dominate the AV field is heavily dependent on R&D centers in Silicon Valley.

Even though some companies don't plan to deploy AVs in the U.S., there's a certain cachet that comes from validating their technology and securing investment in California — the epicenter of AV research.

14 Chinese companies have licenses to test self-driving cars in California, WSJ reports.

What to watch: The Trump administration could use technology controls as a bargaining chip in its ongoing trade confrontation with Beijing, China expert Michael Dunne, CEO of ZoZo Go, tells the paper.

“We’re at a crossroads,” Dunne says. “Will it be reciprocal openness or reciprocal protection?”

Go deeper: Why China could be first with self-driving cars

U.S.-China trade tensions could slow AVs

Many companies developing AV systems split their work between the U.S. and China.

This illustration shows a car with headlines in the shape of stars.

Transportation

World

The Trump administration is considering moves that would stem the flow of money from U.S. investors to China, Bloomberg and other news outlets report and Axios has confirmed.  

Why it matters: If carried out, the moves would escalate the U.S.-China fight beyond the scope of trade and tariffs. 

While it would be big blow for China at a time when they are opening up markets to foreign investors, it would also be disruptive to U.S. markets: 156 Chinese companies with a total market capitalization of $1.2 trillion were listed on major U.S. stock exchanges as of February, as the FT points out.

Delisting Chinese firms from U.S. stock exchanges.

Banning the U.S. government from including Chinese equities in pension funds.

Limiting Chinese companies' inclusion in U.S. stock indices

Worth noting: It's unclear how these measures could be implemented as they're aggressive moves that would face huge backlash from Wall Street.

White House weighs limiting U.S. investments in China

The proposed moves would escalate the U.S.-China fight beyond the scope of trade and tariffs.

 U.S. President Donald Trump and China's President Xi Jinping meet business leaders at the Great Hall of the People on November 9, 2017 in Beijing, China

President Trump and Chinese President Xi Jinping in Beijing in 2017. Photo: Thomas Peter/Pool/Getty Images

Lumber mills in the U.S. have been a casualty of President Trump's trade war with China, as a significant dip in demand has pushed hardwood lumber prices down, the Wall Street Journal reports.

Why it matters: Chinese buyers were critical for lumber after the 2008 financial crisis, as American construction and furniture production dropped. Now, Beijing's retaliatory tariffs on as much as 25% of lumber and wood imports are draining the U.S. industry. 

By the numbers: The percentage of American hardwood exports to China dropped from a peak 54.19% in 2017 to 49.5% in 2018, according to the Department of Agriculture. 

By this year, that number dropped to 41.34%. 

As of August, lumber prices fell 20% from the previous year. 

Other countries are reaping the benefits of the American market's downfall. Russia and Gabon now make up 17% of imports by value, up from 12% through July of 2018.

The Trump administration and Congress have met with industry leaders who are pushing for comparable assistance to what American farmers have received since the trade war began. 

But the Department of Commerce indicated it has no procedure for distributing such aid, according to the WSJ.

“There is no question that these tariffs have virtually destroyed a segment of our industry,” said Steven Anthony, president of Anthony Timberlands.

What's next: The Journal said some companies are pushing U.S. buyers to purchase more hardwood products to make up for the losses.

Jim Hourdequin, CEO of Lyme Timber Co., presented an idea: A marketing push similar to the "Got Milk?" ads that the dairy industry famously produced in the 1990s.

Go deeper: The market wants a U.S.-China trade deal

Trump trade war rebounds hard on America's lumber workers

A tractor picks up a large piece of a tree.

Trump trade war

Bullish stock traders have taken just about every opportunity to buy U.S. equities after positive news about developments in the U.S.-China trade war this year, but both the S&P 500 and Nasdaq had their worst day in a month on Tuesday as obstacles to that deal mounted.

What's happening: Stocks reversed earlier gains after President Trump addressed the UN and accused China of failing to keep its promises and engaging in predatory practices that had cost millions of jobs in the U.S. and other countries.

"Trump's comments to the U.N. were very antagonistic toward China. In the last couple of weeks there's been optimism trade would go in a positive direction," Chris Zaccarelli, chief investment officer at Independent Advisor Alliance, told Reuters. 

"It was the tone and the fact he listed out in great detail all the gripes the U.S. has with China." 

"All that trade optimism that's been building has been sucked out of the air and replaced with pessimism."

U.S. stocks fell further after Congressman John Lewis committed his support for impeachment proceedings based on reports Trump pressured Ukraine's president to investigate former Vice President Joe Biden and his son by withholding U.S. aid.

“This is going to be news that spills out over time, but I can’t imagine the start of this process improves the tone of the U.S.-China trade talks … if I’m China I feel empowered," Art Hogan, chief market strategist at National Securities, told CNBC. 

"This is a market that’s been hanging on that tone getting better and I think it just got worse on the president’s hawkish tone at the UN and this process."

Where it stands: The impeachment inquiry House Speaker Nancy Pelosi announced Tuesday doesn't realistically portend a Trump exit from the White House, but it does further cloud what the market can expect from government policy, said Marc Chandler, global market strategist at Bannockburn Global Forex.

“My sense is the impeachment is well ahead of the country. I don’t think it’s going to be successful, and ... I don’t think the country is behind it. It just adds to uncertainty,” Chandler wrote in a note.

Go deeper: China cancels U.S. farm visits while Trump holds out for a "big deal"

The market just wants a U.S.-China trade deal

It dropped after Trump's UN speech and a march toward impeachment.

Farmer subsidies from the Trump administration aimed at mitigating the effects of the U.S.-China trade war have reached $28 billion, about double the amount of money shelled out in the government bailout of Detroit automakers in 2009, Bloomberg reports. 

Why it matters: Trump's bailout still doesn't cover all of the farmers' losses. The government has provided $973 million in aid to Iowa farmers during a trade war that is estimated to have cost them $1.7 billion in losses, according to Iowa State University researchers cited by Bloomberg.

The big picture: The farmers' losses are just another data point underscoring the negative effects that the trade war has had on Americans. It has led to bigger trade deficits with China, dented consumer sentiment and is weighing down the global economy, according to the International Monetary Fund.

Yes, but: Despite those losses, the trade war doesn't appear to have broken Trump's support in rural areas. 

Trump had a 52% approval rating among people in rural areas in August, compared to a 40% approval rating overall, per Gallup.

Trump's support among farmers increased from 60% to 67% between 2018 and 2019, according to a Farm Futures poll taken this summer. 

Farm aid from Trump’s trade war has cost more than double the 2009 auto bailout

The administration has doled out $28 billion in farmer subsidies thus far.

President Trump and Chinese President Xi Jinping. 

Photo: Sheng Jiapeng/China News Service/Visual China Group via Getty Images

Politics

Reproduced from NPR; Table: Axios Visuals

The impact of tariffs has been difficult to quantify because U.S. retailers that pay them can choose whether or not to pass the costs on to customers.

In an effort to show how one quintessentially American business is handling the issue, NPR tracked prices at a Georgia Walmart over the course of a year.

The big picture: "When it comes to the prices inside NPR's tariff-inspired shopping cart, the average price change since August 2018 was a 3% increase," write NPR's Alina Selyukh and Charlotte Norsworthy. "That's almost double the current rate of inflation."

Yes, but: Prices haven't moved uniformly in one direction.

Over the past year the price tags on some items included in the "NPR basket" — a mix of items from across the store drawn up after consulting the 2018 lists of tariffs the White House imposed on imports from China, Mexico and Canada — actually got smaller.

"The two most expensive Chinese-made items in NPR's basket got cheaper: a TV by 12% and a microwave by 17%. That's because TVs and other electronics have been getting cheaper for years," per NPR.

Why it matters: "Many makers and sellers have so far chosen to absorb most of the tariffs, spread them across dozens of items, or pressure suppliers to bear more of the burden. Big U.S. retailers — such as Walmart, Target and others — get the final say on the price tags, and for them, jolting shoppers with price hikes is the last resort," they write.

My thought bubble: The fact that average prices of the NPR basket have risen by about double the rate of inflation suggests the tariffs are playing a role in increased prices even at a retail behemoth like Walmart.

Go deeper: NPR shopping cart economics: How prices changed at a Walmart in 1 year

The real-world impact of the trade war

Prices haven't moved uniformly in one direction.

Tariffs

Data: Tariffs Hurt the Heartland; Chart: Andrew Witherspoon/Axios

While news that President Trump plans to postpone the latest round of tariffs on $250 billion worth of Chinese imports for 2 weeks will likely soothe the market, his tariffs have already done a number on the U.S. economy.

Why it matters: "The data speaks for itself," Torsten Slok, chief economist at Deutsche Bank Securities, says in a note to clients. "The trade war is having a serious negative impact on the U.S. economy."

Slok's note includes data from recent months detailing clear downturns in several areas, including: fixed investment and capital expenditures, CEO and business confidence, the percentage of firms planning to hire, consumer goods spending, job openings, and average hours worked, among others.

Threat level: The trade war with China has already reduced U.S. employment by 300,000 jobs, compared with likely employment levels absent the trade war, Moody’s Analytics estimates.

That number will rise to about 450,000 by the end of the year if there's no change in policy and could top 900,000 by the end of 2020, the firm’s chief economist, Mark Zandi, told Yahoo Finance's Rick Newman.

The big picture: The most damaging part of a trade war is not the tariffs, but the costs associated with the uncertainty it creates. However, the tariffs themselves also are making a dent.

The total amount of tariffs paid to the U.S. Treasury has skyrocketed because not only have the tariffs increased, both U.S. and Chinese companies are scrambling to ship more goods to get out in front of further tariff increases.

That has pushed the total U.S. importers paid for tariffs to an all-time high of $6.8 billion in July alone, according to data from Tariffs Hurt the Heartland, an alliance of trade groups opposing the measures.

Between the lines: Trump’s tariff policy has reduced the economic benefits from programs like tax cuts and deregulation that had a positive effect on the economy, David G. Tuerck and William Burke write in a recent paperfrom the National Foundation for American Policy.

They estimate tariffs will cost U.S. households $2,000 each by next year.

They also note that the positive impact of deregulation has been cut by 29% because of the tariffs, "and the additional anticipated tariffs on Chinese imports will eliminate all remaining economic gains from the administration’s deregulation actions."

The bottom line: Some have argued that because manufacturing and trade are such small pieces of the U.S. economy the trade war would have a negligible impact. But it's no longer just the manufacturing sector that's hurting as a result of the trade war — harm is now being inflicted and felt throughout the economy.

Go deeper: Trump delays tariff increases on Chinese goods ahead of trade talks

Trump's trade war is being felt throughout the economy

It reduced the benefits from programs like tax cuts and deregulation.

Trade between China and the United States has continued to fall ahead of October negotiations and a further tit-for-tat escalation of tariffs, according to customs data reported by AP.

The big picture: Imports of American products to China dropped to $10.3 billion in August, down 22% from the same month last year. Chinese exports to the U.S. also plummeted to $44.4 billion in August, down 16%. China's trade surplus with the U.S. shrunk to $31.3 billion in August, down $27 billion from a year prior. 

Both sides of the escalating trade war hiked tariffs on billions of dollars worth of goods last month, disrupting industries ranging from agriculture to the auto sector to consumer products.

Talks between President Trump and Chinese President Xi Jinping earlier this summer ended without a deal. Negotiators are set to meet again in October, with Trump planning additional tariff increases on Oct. 1 and Dec. 15.

On Sept. 1, the U.S. imposed a 15% tariff on $112 billion worth of Chinese goods. China retaliated by resuming 25% tariffs on American cars and adding 5–10% tariffs on $75 billion worth of goods.

On Oct. 1, Trump will increase existing tariffs on $250 billion worth of Chinese goods from 25% to 30%.

On Dec. 15, the U.S. will hit another batch of $160 billion of Chinese imports with 15% tariffs, originally delayed to reduce the impact on Christmas shoppers. China will retaliate with its second batch of tariffs on $75 billion of American goods.

Between the lines: Per AP, "Some analysts suggest Beijing is holding out in hopes Trump will feel pressure to make a more favorable deal as his campaign for the 2020 presidential election picks up. Trump has warned that if he is reelected, China will face a tougher U.S. negotiating stance."

Top Trump officials increasingly view China as a national security threat

Trade between U.S. and China plummets ahead of October negotiations

Imports of American products to China dropped to $10.3 billion in August, down 22% from last year.

Lost amid headlines about the coronavirus pandemic and the seemingly unstoppable stock market rally, has been the monthslong escalation of tensions in the U.S.-China trade war —  and it's likely here to stay.

Why it matters: The tariffs continue to impress a sizable tax on U.S. companies and consumers, adding additional costs and red tape for small businesses, farmers, manufacturers and households trying to stay afloat amid the pandemic.

"The trade war has been quietly intensifying," Stephen Gallagher, chief economist at Société Générale, tells Axios.

Driving the news: White House chief of staff Mark Meadows said late Wednesday that administration officials are "looking at the national security risk as it relates to TikTok, WeChat and other apps" from China and could announce bans in the coming weeks.

That followed remarks from President Trump on Tuesday that he had no plans for "phase two" trade deal negotiations and was "not interested right now in talking to China.”

What's happening: The "phase one" deal was cheered by investors as a positive first step, because it stopped a tit-for-tat tariff escalation that was poised to add a tax to nearly every product traded between the U.S. and China.

However, it did nothing about tariffs on hundreds of billions of dollars of Chinese imports already in place that are paid by U.S. companies.

Why you'll hear about this again: With the U.S. ratcheting up the pressure, there is a decreasing likelihood China lives up to its "phase one" agreement.

That means a diminished outlook for industries that were counting on the $200 billion in increased purchases of U.S. agriculture, energy and manufacturing after a brutal 2019.

Remember: The primary cost of tariffs isn't the tariffs themselves, but the deadweight loss of consumers buying more expensive, or less efficient, products.

The trade war also is a major factor pushing businesses to pull supply chains and production out of China, increasing costs and uprooting longstanding relationships.

For big companies, this will weigh on margins; for small companies, it could mean going out of business.

Don't sleep: Deutsche Bank’s global head of tech strategy Apjit Walia warns that the demand disruption, supply chain upheaval and bifurcated tech standards from a "Tech Cold War" between the U.S. and China could cost the sector more than $3.5 trillion over the next five years.

What's next: Even if Trump loses in November, investors don't expect a significant change in the U.S. approach to China given Joe Biden's recent rhetoric and bipartisan legislation condemning China for its treatment of Uighur Muslims and restrictions on public companies.

The U.S.-China trade war quietly escalates

Photo Illustration: Sarah Grillo/Axios. Photos: Alex Wong/Getty Images and Lintao Zhang/Getty Images

Technology

China

China is becoming the most formidable rival America has faced, and the risk of confrontation with Russia, North Korea or Iran still looms. Authoritarians are rising, the chaotic Afghanistan exit revealed the limits of U.S. power, and the pandemic, climate change and other critical challenges continue to pose grave threats.

President Biden has made the COVID-19 crisis and a post-Trump return to national unity and traditional democratic ideals his top priorities. From vaccinations to stimulus to schools, Biden is seeking bipartisan compromise while showing a willingness to use executive authority and bare Democratic majorities in the U.S. House and Senate to implement his policies. Republican leaders are navigating deep party divisions over if and how to move beyond former President Trump.

Politics & Policy

From the Valley to D.C., Big Tech players like Facebook, Google and Amazon are under more scrutiny than ever as new technology develops and privacy and antitrust concerns grow in lockstep with companies’ ambitions.

Protectionism is poised to play an elevated role in global dealmaking, particularly as countries grapple with the economic fallout of COVID-19.

Driving the news: Governments are creating new regulations and incentives to maintain local ownership of homegrown companies.

France’s Finance Ministry on Friday formed a fund to invest in domestic tech companies if they receive unsolicited takeover offers from foreign suitors. It begins with €150 million, managed via state-backed lender Bpifrance, but could expand to €500 million next year.

Australia has proposed a series of changes related to foreign takeover offers in all sorts of industries, regardless of deal size, including one that would let the country's treasurer force divestitures on the basis of national security.

Poland, Hungary and the Czech Republic are in various stages of implementing new restrictions of foreign direct investments, with the goal of restricting takeovers by non-EU companies.

Germany also strengthened its screening of foreign direct investments, initially aimed at health care, but it's expected to expand to other "sensitive" industries like artificial intelligence.

Sweden today got into the act, with top government officials introducing a series of proposals to better screen foreign direct investments.

India last month said that companies from its seven neighboring nations, including China, must receive government approval for takeovers of Indian businesses. It also applies to other changes to beneficial ownership.

The U.S. doesn't appear likely to enact similar restrictions, regardless of White House saber-rattling toward China, although there was that proposal from some congressional Democrats in April to put an overall moratorium on large M&A until the pandemic subsides.

By the numbers: Global cross-border merger activity is down 40% year-to-date, compared to an overall 43% drop in total M&A, per Refintiv. Cross-border deals for European targets, however, are down 5% versus an overall 12% increase in European dealmaking.

The bottom line: The world may be flat, but political policy is marked by peaks and valleys.

Governments turn to protectionism in pandemic fallout

Global cross-border merger activity is down 40% year-to-date.

Protectionism

Data: U.S. Dept. of Commerce; Chart: Chris Canipe/Axios


President Trump's trade war has led to even bigger trade deficits with China, even though it was intended to improve the trade balance. But it's not just China — the deficit has increased with most of our other major trade partners, too.

Why it matters: While economists agree that trade deficits aren't a good way to measure   a trade relationship, they are the metric Trump fixates on, made campaign promises about and uses to evaluate relationships with other countries. 

Throughout his campaign, Trump vowed that he would wipe away the U.S.'s trade deficits: "You will see a drop [in the trade deficit] like you’ve never seen before.” 

Reality check: Among the U.S.'s 15 biggest trading partners, the trade balance has moved in the wrong direction for Trump in 10 of those countries between 2016 and 2018, while the aggregate trade deficit has jumped from $503 billion to $628B.

While Trump can explain the deficit spike with China as a short-term sacrifice for long-term benefit, it doesn't account for the wider trend.

The latest: The U.S. trade deficit in the first 6 months of 2019 is even bigger than in the last two years.

What's going on: Trump's tax cuts are as much to blame for the increase in the trade deficit as anything else, writes Axios Markets editor Dion Rabouin:

More money in Americans' pockets leads to more consumption, often of Chinese-made goods.

The tax cut helped boost the value of the dollar, which makes imports to the U.S. relatively cheaper.

The big picture: Trade deficits mean we buy more from a country than they buy from us, but that doesn’t necessarily mean the relationship is unfair, writes Axios business editor Dan Primack. 

For example, you have a “trade deficit” with your local grocery: you give them money and get food in return. 

Between the lines: Despite the dubious merit of the trade deficit as a useful barometer of the health of a trade relationship, Trump's obsession with the number has led to strained relations with key allies.

As Axios' Jonathan Swan reported in 2017, the trade deficit is one of the items he always wants to be briefed on before meeting with a foreign leader.

Trump picked a fight with Justin Trudeau over the trade balance, later acknowledging that he made up numbers in arguing that the U.S. has a trade deficit with Canada. It has a surplus.

Coupled with immigration, the trade deficit has been a major source of Trump's animus toward Mexico.

It led Trump to threaten auto tariffs on Europe. 

Despite promises, Trump's trade deficits are only growing

Under Trump, the U.S. trade deficit has increased by $125 billion.

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