54 Finance & economics The EconomistAugust 17th 2019
2 companies make plans over a five- to ten-
year horizon and invest in assets with a life
of 10-20 years. But with each new tariff an-
nouncement, the rules for trading their
products become less stable. And the scope
of the trade war has expanded beyond
goods to technology and currencies. Per-
haps the international banking system,
shipping companies or foreign joint ven-
tures could be next. The most sophisticat-
ed firms try to gauge such risks.
The high level of uncertainty is measur-
able. A study from 2016 by Scott Baker of
Northwestern University, Nick Bloom of
Stanford University and Steven Davis of the
University of Chicago quantified policy un-
certainty in America using newspaper re-
ports. Their index of trade-policy uncer-
tainty has soared in recent months (see
chart). And such increases in uncertainty
tend to have real effects. The researchers
found that increases in their index were as-
sociated with dampened investment and
slower hiring. More recently, Ryan Sweet of
Moody’s Analytics, a financial firm, finds
that changes in business confidence and
economic-policy uncertainty appear to
predict changes in managers’ capital
spending.
Given all this, how is investment in
America holding up? In the second quarter
non-residential business investment
shrank at an annualised rate of 0.6%. The
question is to what extent the trade war is
the culprit, rather than industry-specific
factors, domestic economic trends or the
global manufacturing cycle. To get a sense
of this The Economist has analysed around
2,400 listed American companies in 42
sectors, taking into account both their in-
vestment levels and how dependent their
sector is on Chinese inputs.
Firms with a higher degree of Sino-reli-
ance do seem to have scaled back invest-
ment. The 20 sectors most exposed to in-
puts from China accounted for a third of
total investment by the 2,400 firms. In to-
tal these sectors saw aggregate capital
spending drop by 1% in the past four quar-
ters compared with the prior year. Mean-while the other 22 sectors, which are less
exposed to China, saw investment rise by
14%. The analysis is simple: other factors
may well have played a role.
But business executives too report an
effect on investment. A survey compiled by
the Federal Reserve Bank of Atlanta in Janu-
ary found that trade tensions had crimped
investment by 1.2%. Tariffs were men-
tioned in a quarter of all earnings calls
among companies in the s&p 500 index in
the second quarter of 2019, according to fig-
ures from FactSet, a data-analytics firm.
One of the sectors most exposed to China is
chemicals. In July Jim Fitterling, chief ex-
ecutive of Dow, a big producer, told inves-
tors on an earnings call that he would keep
capital spending “tight” until he got “better
visibility”, adding that he thought a trade
deal was needed to “get some confidence
back in this market”.
Wall Street economists are also crunch-
ing data on how trade-policy uncertainty is
altering companies’ behaviour. In June re-
searchers at Goldman Sachs had been scep-
tical that the trade war was hampering in-
vestment, pointing out that overall policy
uncertainty was low. But more recently
they have altered their view, finding that,
after adjusting for underlying trends, sec-
tors that sell more to China (rather than
those that buy from it) were seeing slowerinvestment growth than those that were
less exposed.
Goldman’s economists also found that
tariff announcements were associated
with worsening financial conditions
(higher borrowing costs, lower equity
prices or a stronger dollar). Expectations of
interest-rate cuts by the Federal Reserve
have only offset half of the shift in financial
conditions. Overall the analysts reckon
that, including indirect effects, the hit to
gdp would be 0.6%—material, but not
enough to tip America into recession.
The overall picture, therefore, is that
there is now good evidence that the trade
war is leading some firms to crimp invest-
ment. Pessimists worry that the knock-on
effect from this capital-spending stumble
could be far-reaching and more painful
than the likes of Goldman expect. In the
long run it could sap productivity. In the
short run it could cause firms to scale back
hiring. That could then damage consum-
ers’ confidence.
Much depends on whether hostilities
between America and China intensify. On
August 13th Mr Trump said that he had a
“very, very productive call” with China’s
leaders. But few on the ground take seri-
ously the prospect of a lasting reconcilia-
tion. Jake Parker of the us-China Business
Council, a lobby group, reports that his
members have realised that the threat of
future levies would still lurk even if a deal
were struck and tariffs lifted. Blows to Chi-
na’s economy could also spill back to
America.
And Mr Trump has plenty more ways of
injecting fear into the economy. He must
decide whether to reinstate onerous re-
strictions on American companies that do
business with Huawei, a Chinese telecom-
munications giant, by August 19th. His la-
belling of China as a currency manipulator
could ignite a currency war. If the sickness
that is now visible in most trade-exposed
sectors spills over to the rest of the econ-
omy, that would set off a downward spiral
that not even lifting tariffs, and allowing in
Ms Lazar’s stuffed toys, would reverse. 7Getting realSources: policyuncertainty.com; FactSet; Goldman Sachs Global InvestmentResearchUnited StatesPolicy-uncertainty index*, 1985-2010=100 Averagecapitalexpendituretosalesratio*BasedonpolicytermsmentionedinUSnewspapers1985 90 95 2000 05 10 15 1902004006008001,000EconomicpolicyTrade policy2002 04 06 08 10 12 14 16 1902468Other sectorsSectors with high sales
exposure to China