A silver lining is in the clouds if the economies of China, Asia can pull through the immediate squall
Asia could end up healthier, being more focused on supporting the growth and development of a services-based, consumption driven economy
“Winds moderate to severe, moving east. Visibility poor. Storms possible”.
-- Shipping Forecast, BBC Radio 4, 06:00 GMT every morning.
From simmering tensions, to a spat, to a skirmish, to a war. How might trade relations between the United States and its global partners in general, and China in particular, play out in the coming weeks and months ahead?
In recent days, depressingly, the likelihood of a trade war between the US and China has escalated. The earlier restraint which ostensibly influenced policy in the White House appears to have been replaced – alongside various cabinet members - with a more direct approach apparently led by President Donald Trump himself.
Reportedly, the scale and scope of tariffs impacting Chinese exports from electronics to telecommunications equipment could amount to some US$60 billion and could be announced as soon as next week.
Of course, these tariffs come on top of the duties on steel and aluminium announced last week, and ahead of the Section 301 investigation in China’s alleged infringement of intellectual property rights, expected to be published later this month.
The big unknown is how China may respond to protectionist provocations. A retaliatory response of equivalent magnitude is possible, with the politically sensitive US agricultural exports – coarse grains, soybeans, cotton and beef - a likely target.
Beijing could also call off talks on the US$250 billion of commercial deals – including the US$37 billion purchase of Boeing planes – during Trump’s Beijing visit last November.
Yet, who would win a trade war when tit-for-tat and like-for-like actions prevent a clear advantage from emerging?
A globalist’s response would suggest no one. Their narrative suggests that when two economies are closely interlinked, protectionism becomes a form of self-harm negatively impacting confidence, investment, and economic growth. Mutually assured destruction (MAD), in other words.
But a trade war can resonate with a domestic audience. As provocative, chaotic and economically illogical as Trump’s lurch towards protectionism may seem to some, to others – particularly Trump supporters – the prospect of redressing imbalances, levelling playing fields, and preventing the loss of advanced technology holds significant appeal. November’s midterm elections and the president’s own recently announced re-election campaign both increase the need to keep these supporters fired up.
My own view is that the US could come out of this trade dispute with China rather better than many expect, not least because the side running the trade surplus tends to have more to lose than the one with the deficit.
And my goodness, does China ever have a surplus. In 2017, for example, it posted a monster trade surplus of US$278 billion with the US, and US$130 billion with the European Union.
In fact, the vast scale of China’s trade imbalance with the West obviously suggests something more at play than simple competitive pricing and the ability to make stuff that everyone wants to buy. Structural distortions providing unfair trade advantages clearly exist, and amid the sweeping populism evident across developed markets, it would be entirely myopic not to expect a backlash.
The US has clearly put its foot down, and so has the EU. In the same week that the US announced its tariffs, the EU also announced a raft of substantially more draconian set of sanctions on China. The EU is extending anti-dumping duties of 48-72 per cent on stainless steel pipe producers for a further five years, in response to fears that excess capacity would be dumped into the EU at below market prices.
So, what’s the likely endgame in Trump’s trade war on China?
Near term, for the reasons discussed above, I believe China will seek to actively negotiate with the US to avoid damaging its valuable trade flows.
The US is likely to address its main beef with Beijing - the lack of equal and reciprocal access for US businesses selling their goods and services in China - instead of cutting off those Chinese exports that are sought after by American consumers. As such, expect China to grant greater access to selected markets for US companies, set in place agencies and monitoring systems to increase protection of US intellectual property rights, and further step up commitments to buy more US-made goods to reduce the trade deficit somewhat.
In the longer term, we should expect trade disputes to increase in both frequency and severity. A potent trifecta of populism, ageing population and technology – all feeding on each other – suggests we are at the start of a period of heightened volatility.
Globalisation and the export models that created economic growth across the Asia region look to be firmly in retreat, and should give way to a more fragmented, localised, and multipolar world.
The good news is that this potent force will actually accelerate economic rebalancing in both China and Asia, leading both to become less reliant on, and less susceptible to the volatility of global trade. Asia as a whole could thus end up healthier; being more focused on supporting the growth and development of a services-based, consumption driven economy.
Choppy waters ahead undoubtedly, but smoother sailing over the long term.
John Woods is the Chief Investment Officer, Asia-Pacific, at Credit Suisse