China’s PMI Surges As Trade Battle Will Target US Services Sector

It is good to be in the manufacturing business in China now. The nation’s purchasing manufacturer’s index jumped more than expected to 53.8% in September, up 2.1% points from August, the China Federation of Logistics and Purchasing said.

The enthusiasm over China’s growth may end soon, for reasons that are all too well-known. The battle that has begun to brew with the US over the value of the yuan and trade deficits has gotten progressively more heated.  The U.S. House of Representatives has passed legislation that would make it easier for the government to sanction China for its policies. China says that the move violates WTO policy. That may not matter for now. It could take the WTO months to resolve any complaint.

The PMI data will give US politicians more ammunition for their case that China does too well in the export business at the expense of American jobs and exports. A vocal group of economists say this is not so. China’s advantages are ones of labor costs and the inability of US citizens to save money instead of spending it.

There is no way to accurately predict what would happen to the China PMI if the US decides to place substantial tariffs on the Asian nation’s goods. Manufactured goods would begin to pile up on China’s docks. The factories that ship to ports for export would need to slow their rate of production, eventually. China’s large labor class, the engine of its consumer sector, would face layoffs. The relationship between workers and manufacturers in China is already unsteady. Labor believe that it is time to share in the success of the People’s Republic through higher wages.

There is no way to gauge whether the US or China would suffer more in a trade war. That is what worries US companies and some members of Congress. China could impede the export of US goods to the mainland. A face-off between the two nations would also hurt the US export of services such as software.

It is the services sector and the export of American software, entertainment, and expertise which may create more of the scars to the US economy than the hurt that a trade war with China would do to America. Manufacturing in the U.S. is the Old World of the economy. The exports of intellectual property and services, the New World economy in America, is risky because it is at the heart of whatever growth the US economy has left.

A trade war is really not an exchange of incapacitating each nation’s factory businesses. It is the extent to which the services sector would be hurt that is the issue for the US.

Douglas A. McIntyre