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story.lead_photo.caption Chinese Vice Premier Liu He (left) meets with President Donald Trump at the White House on Friday after Liu and U.S. negotiators announced an agreement in the U.S.-China trade war.

WASHINGTON -- President Donald Trump's trade truce with China temporarily cooled tensions between the world's two largest economies, but the fallout from his aggressive approach to trade policy continues to rattle the global economy.

The "agreement in principle" with China -- which has yet to be finalized -- would not roll back the hundreds of billions of dollars of tariffs that China and the U.S. have placed on each others' products. Trump is also escalating his trade fight on other fronts, including imposing higher tariffs on Turkey and preparing to tax $7.5 billion worth of wine, cheese, aircraft and other European goods Friday. His administration will decide next month whether to impose tariffs on cars imported from Europe and other countries.

On Wednesday, Trump dangled the possibility of additional tariffs on the European Union if the bloc is unwilling to reduce the trade imbalance between the United States and the EU.

"I could solve the problem instantly, but it would be too harsh. It would involve tariffs on European products coming into this country, and for right now we're going to try and do it without that. But that would solve the problem instantly, because the United States is not being treated fairly," Trump said during a news conference with the Italian president.

Trump said his unpredictable approach has created leverage and elicited trade concessions from China, Mexico, Japan and others. The administration has now signed limited deals with South Korea and Japan, and it is awaiting congressional approval of the United States-Mexico-Canada Agreement -- a revision of the North American Free Trade Agreement.

But those gains have come at a cost. Trump's tariffs have raised prices for businesses, uprooted global supply chains and created uncertainty for companies, delaying investment and hiring. The pain has spread beyond the United States and China, exacerbating a global economic slowdown, particularly in Europe. Economists warn the damage is likely to outlast any interim trade deal with China.

On Wednesday, the U.S. Commerce Department said retail sales in the United States fell for the first time in seven months as consumers slowed spending, particularly on automobiles. U.S. manufacturing is already in a recession, and factories around the world are slowing production.

In new forecasts released Tuesday, the International Monetary Fund lowered its expectations for global growth in 2019 to 3%, the lowest rate since the financial crisis. The fund attributed much of the damage to rising trade barriers and trade uncertainty, which it blamed for reducing investment and demand for machinery and equipment.

"The major risk to the global economy is a further escalation in trade and geopolitical tensions," said Gita Gopinath, director of the research department at the International Monetary Fund. "This can derail an already fragile recovery in emerging and developing economies and in the euro area."

David Malpass, president of the World Bank, noted in a speech earlier this month the global economy is expected to grow by 2.6% this year, the slowest rate in three years. He cited trade uncertainty, along with the United Kingdom's planned withdrawal from the EU and Europe's economic struggles, as the primary reasons for the slowdown.

The World Trade Organization also said global trade in merchandise is expected to expand by only 1.2% during 2019, in what would be the weakest year since 2009, when the global economy was mired in recession.

Not all of these negative economic effects are a result of the trade war. A credit slowdown in China and weakness in Europe are also weighing on trade and growth. But policymakers said Trump's trade policies could help tip the global economy into recession.

The Federal Reserve has begun cutting interest rates to try to insulate the U.S. economy against the effects of Trump's trade war. But officials have warned that their power is limited and that economic damage is likely to persist, particularly if uncertainty continues and tariffs remain in effect.

Trump and his advisers have attributed any slowdown in growth to troubles overseas and not the trade war. And the administration continues to insist that China is paying the cost of the tariffs, not U.S. businesses or consumers. Trump has also argued that Beijing has offset some of the tariff pain by weakening its currency to make its goods cheaper overseas.

But a new paper by researchers at Harvard University, the University of Chicago and the Fed Bank of Boston suggests that businesses and consumers in the United States are feeling an effect from the trade fight and that the pain could escalate.

Examining the prices paid at the border, researchers found that almost all of the tariffs' cost is being passed on from businesses in China to U.S. importers. When it comes to the prices of these goods at U.S. stores, however, they find the evidence is more mixed, suggesting retailers are absorbing some of the cost of the tariffs, at least temporarily, by reducing their profit margins, rather than passing the entire cost of the tariffs on to their customers.

The study also examines the effect of the tariffs that China has put on U.S. products in retaliation. It shows that U.S. businesses have had less success in passing on the costs of those tariffs to Chinese importers, likely because of the types of goods being sold.

While China can easily swap Brazilian soybeans for U.S. ones, the types of specialized consumer goods that China sells to the United States, like laptops and smartphones, are harder to substitute.

Business on 10/17/2019

Print Headline: U.S.-China truce offers little relief

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