WASHINGTON—Farmers took a big hit. Importers of auto parts, furniture and machinery choked down punishing tariffs. Investment between the world’s two largest economies tumbled.
Yet despite the damage to these trade-related sectors, most of the U.S. economy sailed through two turbulent years of trade war with China with barely a scratch, a review of key economic indicators shows.
The outcome is in contrast to warnings in 2018 by those who thought the trade conflict could push the U.S. economy into recession. World Trade Organization leader Roberto Azevêdo warned in March 2018 that tit-for-tat tariffs globally could become an “eye for an eye [that] will leave us all blind and the world in a deep recession.”
Still, as the U.S. and China prepare to sign a first-stage trade accord Wednesday, some economists warn that it could take years for the full consequences to be realized—especially with most Chinese imports still subject to U.S. tariffs.
“People are wanting to wrap this up in a bow and draw lessons and put this behind us, but I really think it’s way too premature,” said Chad Bown, senior fellow at the Peterson Institute for International Economics, a nonpartisan policy outfit.
Others question whether the gains from the initial deal were worth the cost, including economic growth trending near 2% in 2019, well short of the Trump administration’s goal of 3%.
The American economy might not have been wrecked, nor did it record a banner year. Job growth faltered in manufacturing, and farm sales plunged.
“China is set to do little more than restore agricultural purchases and offer some nice words on financial services and intellectual property,” said Benn Steil, the director of international economics at the Council on Foreign Relations. “Trump could have had that two years ago without the tariff damage.”
The administration counters that the deal will prove in coming years to be a landmark breakthrough with China. U.S. Trade Representative Robert Lighthizer has said that the accord makes “significant improvement in all the major areas” of U.S.-China trade and that “no one would’ve thought we could have done what we did.”
Here’s a look at how the trade war affected key sectors of the economy.
Agriculture
American farmers took the brunt of the damage, as China largely halted purchases of major U.S. exports like soybeans. Annual U.S. farm exports to China plunged from nearly $25 billion in recent years to below $7 billion at its low point in the 12 months through April 2019.
The damage was tempered to a degree by the U.S. government responding with $28 billion in aid to farmers. The USDA estimated aid payments will make up one-third of U.S. farm income in 2019.
Farmers also fretted that trading relations with China they worked hard to secure might never recover. Agricultural purchases are now set to resume under the phase-one trade deal, with a goal of reaching $40 billion to $50 billion a year.
Inflation and Prices
The Trump administration’s tariffs on $360 billion of Chinese imports initially focused on machinery and capital goods purchased by businesses, but later expanded to a range of consumer products.
A basket of goods subject to the tariffs, including auto parts, appliances and furniture, has risen in price by about 3% since 2017, compared with a decline of about 1% for core goods. Overall inflation has remained stable though; the total consumer-price index rose 2% in the past year.
While President Trump frequently claimed China would pay the tariffs, they are in fact paid by U.S. importers.
Research by Alberto Cavallo, a professor at Harvard University and leading expert on inflation, showed that the prices paid by importers for goods with tariffs jumped, meaning Chinese exporters didn’t cut their prices, or absorb tariffs through currency depreciation.
“The burden has mostly fallen on the U.S. importers because a) Chinese exporters have not reduced their U.S. dollar border prices, and b) U.S. importers/retailers have chosen not to pass on to the U.S. consumers most of the additional cost,” said Mr. Cavallo, who co-wrote a paper on the economic impact of the tariffs with the chief economist of the International Monetary Fund, as well as economists at the Boston Federal Reserve and University of Chicago.
Bilateral Trade
After decades of surging commerce between the world’s two largest economies, trade took a sharp step back. U.S. exports to China dropped by nearly $30 billion, while imports from China fell by over $70 billion, for a decline of over $100 billion in trade.
“We have learned that trade wars generate very large effects on trade flows but smaller effects on trade deficits,” said Gregory Daco, chief U.S. economist for Oxford Economics, a U.K.-based forecasting and quantitative analysis company.
The trade deficit in goods also fell, one of the Trump administration’s goals of the policy, but by only $60 billion. In the 12 months through November, that deficit remained at about $360 billion.
This is where the tariffs caught Beijing’s attention, even though China didn’t pay the tariffs directly. Falling imports hurt manufacturers in Chinese port cities, putting some small companies out of business, while sending larger suppliers in search of ways to reduce costs or pass them on to American buyers. Coupled with a slowing global economy, the trade war caused Chinese exports last year to stagnate, a painful contrast to exports growth of 10% in 2018.
Investment
Investment in the U.S. economy slumped. Foreign direct investment slowed to nearly a halt in the early part of 2018, and has been weak again in mid-2019.
Total investment in the U.S. economy, which includes building structures like new factories or purchasing equipment for those factories, contracted in the second and third quarters of 2019.
Nancy McLernon, president of the Organization for International Investment, which represents companies making cross-border investments, said international companies in general are more reluctant to invest in the U.S. “That’s bad news, especially when you consider that international companies employ 20 percent of America’s manufacturing workforce and produce 25 percent of all U.S. goods exports.”
Jobs
Factories in both the U.S. and China suffered amid a slowdown in global trade and investment.
Industrial activity world-wide slumped. U.S. factories have been a weak spot. In the jobs report released Friday, the Labor Department reported U.S. manufacturers shed 12,000 jobs in December.
But most Americans work in fields that have nothing to do with the trade war, and U.S. job gains have been driven by industries like professional services, leisure and hospital, as well as health care.
Economic Growth
In early 2018, the Trump administration was taking a victory lap after achieving its goal of growing the economy by 3% a year, or more. In February, the White House forecast that the economy would continue growing over 3% a year in 2018 and 2019, and that the economy would be so strong the Federal Reserve would continue raising interest rates.
But instead of the economy being strong enough for rate increases, as the trade war wore on, the administration began imploring the Fed to slash interest rates to bolster the economy. The Fed cut rates three times. Even so, the economy has cooled toward 2%. Though a stumble, it remains far from a recession.
Other factors slowed the U.S. economy. The boost from the 2017 tax overhaul was beginning to fade. Europe’s and China’s economies face long-running demographic challenges. A number of major emerging markets like Argentina and Turkey experienced currency crises that dragged down global growth. Overall, global growth in 2019 had its worst year since the financial crisis.
China’s growth faltered too, after running at nearly 7% in 2017, its economy is predicted by the World Bank to grow less than 6% in 2020.
The trade war—which called into question the fundamentals of U.S.-China relations—kept Chinese business sentiment depressed and ordinary consumers wary.
Many Chinese businesses felt that Washington’s end goal was to keep China from rising. The feeling of uncertainty prevailed. China’s economy had already been slowing for the better part of the past decade, due to its own structural issues.
As many businesses put investment and expansion plans on hold and even laid off workers, the Chinese economy sunk to its slowest pace in about three decades.
Without the trade war, Mr. Daco of Oxford Economists estimates the U.S. would have grown 2.6% last year, and the global economy about 2.9%.
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Exactly how much was lost, can’t be determined, because no one can know how many factories might otherwise have been opened; how many plans were postponed as executives chased exemptions to tariffs; how many investments would have been made; or how many metric tons of soybeans China might have needed from U.S. buyers.
“One thing we learned: It’s not just the tariffs and how large they are,” said Ayhan Kose, director of the World Bank’s global macroeconomic outlook. “It is this type of uncertainty. How the discourse takes place has a huge impact on uncertainty and in turn on activity. It is the constant unpredictability of what happens next.”
—Chao Deng and Liyan Qi in Beijing contributed to this article.
Write to Josh Zumbrun at Josh.Zumbrun@wsj.com
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