After the trade war, US-China relations will not be the same again

Neal Kimberley says now Beijing recognises that Trump’s tariff moves – though in the name of fair trade – stem from a change in America’s strategic intent, it, too, is rethinking the bilateral relationship. Neither side is likely to want a return to the old status quo

PUBLISHED : Tuesday, 02 October, 2018, 12:17pm
UPDATED : Tuesday, 02 October, 2018, 10:45pm

“A glass is easily broken, but difficult to repair,” Chinese Foreign Minister Wang Yi said last week in New York, in reference to the current state of China-US relations. But, even if present differences can ultimately be resolved, there’s no going back to how things were. The glass may not yet have shattered, but it is cracked. 

US President Donald Trump railed last week about a recent China Daily-sponsored advertising supplement that ran in an Iowan newspaper, the Des Moines Register.

Trump has argued that such an action represented an attempt to interfere in next month’s US midterm congressional elections, but the supplement’s attempt to flag up how, in particular, Iowa’s farmers have benefited from the way the China-US economic relationship has evolved, nevertheless rings true. By extension, those farmers will lose out if that same economic relationship isn’t repaired.

Last month, Iowa State University estimated that the imposition of tariffs in 2018 on products exported by the state, of which those retaliatory imposts levied by China are a very material part, could cost the Iowan agricultural economy up to US$2.2 billion.

China says US farmers may never regain market share lost in trade war

More pointedly, the university report said, previous trade battles such as the Russian grain embargo of the 1980s and the 2009 dispute with China (tyres versus chickens), show that “once trade market share is lost, it is difficult for markets to return to the previous relationships”.

Then there’s the potential inelasticity of US demand for Chinese goods. If those goods cannot be easily substituted, either from within the United States or from an alternative overseas source not covered by Trump’s trade tariffs, the US consumer will either have to forego those purchases or pay up for them. In the latter case, at least to some extent, the Trump tariffs could become a tax on the US consumer.

Watch: Trade war fears for Chinese pork

At the same time, China might well consider that it has allowed itself to become both overly dependent on certain agricultural imports from the US and that the success of its export sector in selling to US consumers has left China somewhat vulnerable to the kind of tariffs imposed by the Trump administration.

Additionally, recent US sanctions on the Equipment Development Department of China’s Ministry of Defence, after Beijing bought Russian Su-35 combat aircraft and S-400 surface-to-air missile equipment, was understandably not well received in China.

India is also said to be set to buy the S-400 system. Beijing’s unease will only increase if Washington then fails to sanction India over such a Russian arms purchase.

US tells China: we want competition, not cooperation

In reality, neither Beijing nor Washington may think a return to the trade relationship of the recent past is possible or desirable. “China’s leaders have been forced into a fundamental reassessment of the country’s development strategy,” Larry Brainard, chief emerging markets economist at investment research firm TS Lombard, wrote last month.

China is “facing tariffs on the bulk of their exports to the US for the indefinite future, binding constraints on acquiring US cutting-edge technology and domestic economic dislocation as [Chinese] firms adjust to the tariffs,” he added.

In such circumstances, TS Lombard feels that despite the China-US trade war, “the economic forces that led to globalisation are alive and well” and that “market forces will now reassemble trade in ways that achieve low costs of production but not primarily by bringing manufacturing production to the US” and “will create a new Asian trading bloc with China at its centre”.

Watch: Trade war has little impact on Chinese growth, says ADB

China will lose trade war, then things will get really nasty

Of course, that begs the question of how closely other countries in Asia might wish to tie themselves to China. China has previously showed itself prepared to exercise economic clout in pursuit of other objectives, as reported in the Post online on Saturday.

In 2012, Manila complained that Beijing had stopped buying bananas from the Philippines, following the maritime dispute over the Scarborough Shoal in the South China Sea, while last year, South Korea’s decision to install the US Terminal High Altitude Area Defence (THAAD) anti-missile system also elicited an economic response from China.

But TS Lombard’s notion that the continuing US-China trade dispute will “re-globalise China’s trade” is an intriguing concept, especially if, as HSBC feels, China “looks set to be the world’s largest economy by 2030”.

For all Washington argues that its current resort to tariffs is an attempt to reset the China-US economic relationship to achieve “fair” trade, an assertion Trump reiterated in West Virginia on Saturday, it’s hard not to conclude that the US now sees China as a strategic competitor and is reacting accordingly.

The glass has cracked.

Neal Kimberley is a commentator on macroeconomics and financial markets