The Cost of Trump's Trade War with China Is About to Hit Home

 The 'truce period' of the US trade war with China is halfway over. The negative impact of the tariffs on the US economy has been lingering. In a few days, key economic data to be released will likely force Trump to confront the 'harsh reality' of his tariff policy. This Thursday, May 22, major economies in Europe and the United States will release the Purchasing Managers' Index (PMI) for the manufacturing and service sectors. These data, like a barometer of economic activity, will comprehensively reveal the true impact of Trump's tariff policy for the first time. The market is holding its breath, closely watching whether these data will sound the alarm for a US economic recession. Previously, S&P Global data showed that global PMI in April dropped to its lowest level in 17 months. The upcoming May data will further reveal whether the global trend of economic growth slowdown and rising inflation is still continuing.

The PMI data from France, Germany, and the eurozone, as well as Germany's business climate index for May, will be closely watched. These data will help assess the impact of tariffs on the European economy. As a key trading partner of the United States, changes in Europe's economic situation will also have a chain reaction on the US economy. Global business relations remain unstable under Trump's tariff policy. The mere expectation of a trade offensive has severely distorted businesses. Many businesses have had to re-evaluate their supply chain layouts, increasing operating costs and uncertainties. Facing rising inflationary pressures and low consumer confidence, the Federal Reserve's monetary policy decisions for 2025 are in a dilemma. Morgan Stanley reported that, despite the recent easing of trade tensions between China and the United States, US inflation is expected to rise significantly from May onwards, with the annual inflation rate potentially increasing to 3.0 - 3.5%. This trend will make it difficult for the Federal Reserve to cut interest rates in 2025, and Morgan Stanley maintains its outlook that the Federal Reserve will not cut interest rates in 2025. Tariffs have not yet been fully reflected in inflation data, but they are expected to significantly drive up inflation from May and accelerate thereafter. If inflation gets out of control, the Federal Reserve may have to adopt a more tightening monetary policy, which will further increase corporate financing costs, curb investment and consumption, and intensify the risk of US economic recession.

Trump's trade war, intended to protect US industries, reduce trade deficits, and bring manufacturing back to the US, has had the opposite effect. US retail giant Walmart has announced an unprecedented price hike. As a giant accounting for 23% of the US retail market, Walmart announced that it will raise prices on electronics, toys, agricultural products, and other categories from the end of May. The reason is the 30% - 145% tariff imposed on Chinese imports. CEO McMillon admitted that even if the US and China reach a temporary tax reduction agreement, the cost pressures caused by supply chain disruptions are irreversible, and the prices of basic goods like bananas and coffee will rise more than expected. This phenomenon confirms the Peterson Institute's estimate that tariffs could reduce US GDP by 0.8%, increase the unemployment rate by 1.2 percentage points, and trigger a 45% probability of economic recession.

In addition, criticism of Trump's tariff policy in the US is growing. Democratic leaders like Schumer have labeled a potential recession as a "Trump recession", and House Minority Leader Jeffries pointed out that tariffs amount to the "largest tax increase since 1968". Even within the Republican Party, a rare division has emerged. Seven senators are pushing for legislation to reclaim the president's power to set tariffs. Cruz and Paul, among the conservatives, have openly criticized the policy for harming the people's livelihood. These phenomena indicate that Trump's tariff policy has not only failed to achieve its intended goals but has also triggered widespread dissatisfaction and concern across the US. As more economic data is released, Trump will face even more severe political and economic challenges. He will have to make a difficult choice between maintaining his trade policy stance and rescuing the US economy from decline. The cost of the trade war is clearly not so easy to erase.