Whether it’s after the midterm elections or later, the US will eventually realise it can’t beat China in the trade war
- David Brown says China has too many economic weapons for the US to prevail in the trade war
- America’s growing budget deficits and trade gaps are getting worse not better, complicating its policy choices
It is common knowledge that, in a full-blown trade war, there are no outright winners and everyone ends up a loser. It is a zero-sum game where world trade is compromised, global growth slows, jobs are lost and livelihoods ruined.
China and the United States will end up even more at odds and global political harmony will be badly damaged. Still, even dark clouds have silver linings and there are good reasons why China should take heart rather than sink into despair.
The odds are that China will ultimately win this war and US President Donald Trump will end up a spent force. It is not just the upcoming midterm elections which matter – and Trump will probably be mortally wounded – but the fact Beijing holds all the key economic cards.
Watch: US-China trade war – day 105 and counting
China’s solid external position, its pivotal US Treasury holdings and plentiful policy options to fall back on give Beijing a strong hand over the US. If China plays its cards right, it can call Trump’s bluff.
If Beijing wants to get tough, it has a formidable array of weapons to fall back on, not least slashing interest rates, unleashing a weaker yuan and dumping US Treasurys in the open market.
The US might be buzzing with strong growth and full employment, but weak economic links remain. America’s twin black holes – the yawning budget and trade gaps – are getting worse not better, complicating its future policy choices.
Trump is turning a blind eye now, but at some stage markets will bite back and it will mean growing pressure on US bond yields, swap and credit spreads, and deepening uncertainty for world financial stability. It simply boils down to who blinks first.
Despite all the White House hyperbole that America is “winning the war”, Washington is still losing the battle with Beijing, as China keeps racking up bigger trade surpluses over the US.
The latest data showed a US$34.1 billion trade gap with China in September (US$53.2 billion with all partners), a rise of nearly 20 per cent from a year ago, with no sign of improvement. The underlying trend is still rising with the annual US-China trade deficit heading to over US$400 billion, nearly double what it was a decade ago.
It is not China’s fault for being successful at producing goods and services which US consumers and business want and home producers fail to match. The US has excess domestic demand which China’s supply side is more than happy to mop up.
If Trump wants to redress the balance, he either has to tone down America’s economic policy overload and accept slower growth or else browbeat US industry into investing more, boosting productivity and improving trade competitiveness. It is pointless for Trump to be tough on China without being honest about US industry’s failings.
Ironically, Trump’s trade tactics are actually doing China a favour, keeping Beijing’s attention on the task of restructuring the economy into one more focused on internal demand and less export-dependent in the long run.
As a centrally planned economy, Beijing is able to coordinate resources more quickly and effectively than the US, where market forces are likely to respond in a much more haphazard and sporadic way.
China’s Belt and Road Initiative is a prime example of Beijing being able to marshal resources for the economy’s long-term benefit – channelling investment towards strategic trade partnerships, ramping up China’s global standing and supporting domestic growth in one fell swoop.
By contrast, the blunt force of Trump’s tax cuts might have levered up US growth in the near term, but it means dire consequences for the US budget and trade deficits longer term.
At some stage, America’s farm and rust belts will wake up and see Trump’s agenda for what it is – leading the US into deeper trouble.
US manufacturers and soybean farmers are already feeling early ill-effects from the trade war which can only worsen over time.
The last thing Trump needs ahead of the midterm elections is deeply unsettled markets and a badly damaged reputation. It is time for Trump to see sense.
David Brown is chief executive of New View Economics