Domestic politics might worsen the US-China trade conflict, says CME Group chief economist

Potential tit-for-tat trade war will derail global growth and rock financial markets, says Blu Putnam

PUBLISHED : Monday, 09 April, 2018, 10:27pm
UPDATED : Tuesday, 10 April, 2018, 3:06pm

A potential tit-for-tat trade war between the world’s two largest economies will hurt global growth and rock financial markets, said the chief economist at CME Group, operator of the world’s largest futures exchange. And US-China trade relations are at the risk of sliding into this scenario because the two countries’ leaders might have more to consider in terms of domestic politics, than in short-term economic impact.

In a one-on-one interview with the South China Morning Post in Hong Kong, Blu Putnam said the global economy had been experiencing synchronised growth for the first time in about a decade, with growth of 4.2 per cent projected for 2018. But a trade war between the United States and China will disrupt trade flows and dent growth, which will incur great volatility in equity markets.

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“Right now, we are in the rhetoric phase,” he said. “The market is still digesting the escalating trade-related rhetoric between the two countries. Nothing has happened so far.”

Asian stock markets closed higher on Monday, with indexes in Japan, Hong Kong, Australia, Shanghai and South Korea all snagging gains.

But equity market volatility has surged in the past six weeks, indicating that investors are nervous.

And a worsening trade relationship between Washington and Beijing could also spill over to other areas, such as the US treasuries market and interest rates.

“There are many ways China can inflict pain on the US, including capital flows,” said Putnam.

The possibility of a deteriorating trade dispute cannot be ruled out, as both countries’ policies could be shaped by domestic political purposes, he said. “Politics is more important than economics in analysing the dynamic [of US-China trade relations] in the short term,” said Putnam.

US President Donald Trump has gone on the offensive in recent weeks, taking on China over trade, and implying that the tariffs are retaliation against China’s “theft” of American intellectual property, and that they will create more jobs in the US.

“It’s probably one of the reasons I was elected; Maybe one of the main reasons,” Trump said while speaking about the tariffs.

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Right now, we are in the rhetoric phase
Blu Putnam, chief economist, CME Group

By delivering on previous promises, Trump is “campaigning” ahead of the 2018 midterm election in November, as the Republicans are trying hard to hold on to majorities in the Congress, said Putnam.

“He probably thinks what got him elected will keep him [in office]. ”

On the other side, domestic politics could also push China to take more action against the US, as anger in the country is on the rise in the online space, fuelled by China’s resurgent economic strength and antagonism towards the West, with the government selectively tolerating such displays.

A nationalistic sentiment might force Beijing to take a tougher stand, which could lead to conflict in trade and other areas.

“It’s beyond economic interpretation,” said Putnam. “[But] we have to be aware of that [possibility].”