Why The U.S. Shouldn’t Declare Victory Over China’s Tariff Exemptions

China’s surprise move to exempt from tariffs 16 products imported from the U.S. is a clear signal of Beijing’s willingness to negotiate as both sides head into a new round of trade talks in early October. The key, though, will be whether President Trump is willing to move beyond a small concession of delaying increasing tariffs on $250 billion of imports from China from Oct. 1-15, or whether he continues his hard line in the war of rhetoric over trade.

China’s tariff exemptions—the first such waivers since the U.S. and China began waging a trade war—are on products that include shrimp, fish meal, and cancer treatment drugs. China has also signaled that it will buy a modest amount of U.S. agricultural goods. This offer, however, may be contingent on expectations for the U.S. to lessen export restrictions on Huawei Technologies Co. The Huawei restrictions have also been a source of frustration for U.S. chipmakers that may lose billions of dollars in revenue if they cannot supply the Chinese telecom company.

Stakes are high for both sides to resolve the trade war, in the face of an escalating threat of economic slowdown in both countries. The general outlook among many economists is that the U.S. faces an increasing threat of recession if the trade war escalates. Goldman Sachs, for example, has increased its projected impact of the trade war, saying economic growth in the fourth quarter could drop to 1.8%, with the trade war taking 0.6% out of GDP.

Meanwhile, China’s economy is suffering a major slump in growth. As a result, Beijing has sought other ways to alleviate the impacts of tariffs such as by diversifying sources of imports, especially in agriculture. Recently, Argentina’s agriculture ministry announced the country would export soybean meal, Argentina’s largest export product, to China. The more Argentina can supply China, the greater the pain that would be by American soybean farmers who have been the hardest hit by the trade war. China has been the biggest market for American soybeans.

Although the October round of talks are unlikely to resolve the trade war, any progress such as a commitment to further talks in the near future could signal hope for businesses and consumers alike. The timing could be especially fortuitous for retailers, heading into the all-important fourth-quarter shopping seasons.

Tariffs on imports of consumer goods from China are already showing up as higher prices. Consumer confidence has been shaky of late as U.S. consumer sentiment fell in August to the lowest point in six years, with Americans expressing concerns over how President Trump’s policies will affect the economy. 

Consumer spending on goods and services has been strong, although that is not as telling about the overall health of the economy. Rather, it’s viewed as a “coincidence indicator”—meaning it typically declines when GDP contracts, making it irrelevant as a predictor of an economic recession. In fact, strong consumer spending is often typical in the late stages of an economic expansion.

A far bigger predictor is capital investment by U.S. corporations, which have been more cautious in their spending on capital goods and equipment. The latest Institute for Supply Management (ISM) report showed new orders, production, and employment in the manufacturing sector have contracted. The reason, ISM said, was concern over “turbulence” due to the U.S.-China trade war. 

Evidence of the impact of the trade war and an uncertain business climate can also be seen in the latest employment numbers. The manufacturing sector saw very little job growth, while overall employment grew by 130,000 jobs, which was less than the monthly average for this year of 158,000 jobs.

It’s clear that the U.S.-China trade war is hitting business and consumers even before many of the tariffs take effect. While small concessions are a start, it will take a more meaningful rollback or delay of tariffs to show that Washington is willing to negotiate at the upcoming trade talks. This would give a reason for businesses and consumers to be less concerned about the health of the economy.

I am a clinical professor and associate chair of the finance department at Kellogg School of Management at Northwestern University. I write and specialize in the study o...