Faced with new risks to their supply chain caused by the U.S./China trade dispute, companies are assessing their positions going forward. Many are adjusting their business strategies accordingly, delaying or canceling investment decisions, modifying supply chains, and considering relocation of their manufacturing operations.
We recently sat down with Gus Faucher, Senior Vice President and Chief Economist for PNC Financial Services Group, who discussed the impacts of the trade war on corporate treasury and finance departments at the AFP 2019 Executive Institute.
Andrew Deichler: In your opinion, who gets hurt the most by the trade dispute on the U.S. side? Do you think it's multinational corporations, small and medium-sized businesses, or American consumers?
Gus Faucher: I think American consumers will see a small hit in terms of higher prices for goods imported from China. I think this is causing a great deal of uncertainty for businesses. They're having to rethink their supply chains. If they have production in China, they may be thinking about moving elsewhere. They may be holding off an investment in the United States. I think that businesses are really having to take a hard look at this and say, we don't know how this is going to turn out, and we have to be much more cautious in our thinking, and that we have to be planning for longterm contingencies.
Andrew Deichler: How about businesses in China? How are they reacting?
Gus Faucher: Certainly, for those businesses that export from China to the United States, some of them are raising prices, some of them are taking a hit in their profit margins, and so they are facing costs. That being said, I think the U.S.'s importance to the Chinese economy has declined dramatically over the past decade and a half. And so while this is a problem for the Chinese economy, it doesn't represent an existential threat.
Andrew Deichler: Ironically, out of the world's largest 20 economies, the U.S. has felt the smallest impact from this trade war, given its domestic consumer base. But other economies like Germany, the EU and South Korea have taken a big hit from this. Are companies in some of these other economies needing to make adjustments?
Gus Faucher: Yes. I mean with the U.S. economy, most of the demand has come from within the United States. It's domestic demand. We are generally less exposed to exports and imports than other economies like the European Union, South Korea, Japan, and so forth. Certainly, those businesses in those countries are seeing a slowdown in manufacturing activity. I think it's safe to say that global manufacturing activity is contracting. That's a particular problem for those economies that are heavily dependent on manufacturing like Germany and South Korea, which are being hit by an overall slowing in global trade volumes.
Andrew Deichler: A recent Reuters article noted that bids for a California infrastructure project were 80% higher than expected because construction firms are factoring in higher costs from tariffs and potential increases in the future. If this continues, do you think we could see another halt on commercial real estate development like we saw in 2008?
Gus Faucher: That potential is out there. We've seen higher costs for construction materials. If we see additional tariffs, that would add to those costs. That being said, there still is a lot of commercial development that is taking place, but I think that that's a potential side-effect from the increased tariffs.
Andrew Deichler: Also, regarding 2008, the International Monetary Fund reduced its global growth forecasts for 2019 and 2020 to 3% and 3.4%, respectively. If this trend continues, do you think another global recession is imminent?
Gus Faucher: I think a global recession is unlikely, absent some sort of bigger shock—a significant escalation between the United States and China or a hard Brexit, for example. I think that fundamentals in the United States are much better than they were a decade or so ago. In terms of the depth of the financial system, in terms of consumers, in terms of well-balanced housing markets, the U.S. remains the largest economy globally, and so I think certainly that's good news for the global economy.
I do think that we're seeing more aggressive action from central banks to help offset some of this weakness--actions by the Bank of Japan, the European Central Bank, People's Bank of China, and the Federal Reserve here in the United States. I don't think we have the same issues in the financial system that we did back then in terms of the linkages and the problems in the housing market spreading to the broader financial system, both in the U.S. and globally. Although we are seeing slower global growth, I'm hopeful that with aggressive central bank action, we'll continue to see an expansion in the global economy, and then I think things should pick up by the second half of next year.
Andrew Deichler: The U.S. put some of China's top technology companies on a blacklist, which effectively bars them from doing business with American suppliers. How are you seeing American businesses who work with those particular suppliers adapting?
Gus Faucher: Certainly, they have to look at alternative outlets for their sales, and I think that that's going to weigh on their activity. Also, it does make Chinese companies in general more reluctant to do business with U.S. firms if they're concerned that their supply of these goods could be restricted. I think this is a problem both for the U.S. economy and for the Chinese economy. Obviously, there are national security issues that are involved and so forth, but I think the government also needs to take into account the economic damage that these types of restrictions can cause.
Andrew Deichler: Do you have any final predictions just for U.S./China trade relations? Do you think that we can repair that relationship between the two countries after this?
Gus Faucher: I think it's going to take a lot of time. I think that this has caused significant damage. I think there's a great deal of distrust on both sides. Again, these national security restrictions, that reduces Chinese firms’ willingness to deal with the United States because they're concerned about the availability of supply. The intellectual property issues I think are a primary concern for the United States, and that's going to take some time to resolve. I think that this has done significant damage, and I think it's unlikely that things will come back to normal in a year or two. It's going to take concerted efforts by leadership on both the Chinese and the American sides to restore that. I certainly think that over the long run, the Chinese economy is poised for continued strong economic growth. I think that it's important for the U.S. economy that we continue to have access and that we have back and forth trade between the United States and China.
For more insights on U.S./China business relations, don’t miss AFP President and CEO Jim Kaitz’s podcast interview with Craig Allen, President of the United States-China Business Council (USCBC).