A trade war cannot give China and America what they need. A wake-up call is overdue

  • David Brown says the two economies are so intertwined that when one falters, so, eventually, will the other. There is a way to address both their needs without coming to blows, and Beijing and Washington must put their minds to finding it
PUBLISHED : Monday, 19 November, 2018, 1:00pm
UPDATED : Monday, 19 November, 2018, 10:29pm

When big worlds collide, the universe falls into chaos and confusion. It is happening right now as China and America risk deeper fallout over trade. Markets may be wringing their hands in mortal dread at what happens next but it does not have to end badly. They both have a mutual need to settle this amicably as both economies have much in common. America and China are no different in wanting stronger growth, better job creation, and peace and prosperity for their nations.

If they can work this one out, there should be light at the end of the tunnel and plenty of opportunity for markets to celebrate. Where there is a will, there should be a way. 

Perhaps the time for confrontation is coming to an end. Hints last Friday that US President Donald Trump may back down from imposing more tariffs on China, after Beijing sent the US a list of measures it was willing to take to resolve tensions, is the start of the breakthrough that we all need right now. There is a long way to go, but if the worst of the face-off is over, then there is hope for world financial markets and for the global economy to get back on the road to recovery.

It is far too glib to say the row is the product of two contrasting systems – unfettered capitalism in America and a centrally planned market economy in China – both rubbing each other up the wrong way. There is no historical inevitability that either side will implode. China and America are both highly developed economies and will adapt to change. The response to the 2008 crash is proof of that.

China is too important a market for foreign firms to exit

Even though they differ greatly, both countries need each other badly. The codependency between the US and China is extremely strong and can work in both nations’ favour.

Recent conjecture that China is winning the trade war is wrong. Nobody wins a trade war as everyone loses out in the bigger picture. World trade is affected, global growth slows, jobs are lost, livelihoods wrecked and prosperity affected. China customs data shows exports to the US in September rose 13 per cent higher than a year ago, while underlying annual import growth from America has crashed to zero, but it is far too early to draw any safe conclusions. The monthly data is notoriously volatile and the longer-term trend shows the potential dangers ahead.

The longer-term correlation between both countries’ trade flows is extremely strong. If US exports to China are hitting a brick wall, then China will feel the effects through global multiplier effects as the trade row drags down world economic activity. If Trump is truly having an epiphany moment, Chinese President Xi Jinping also needs a wake-up call that the time for compromise is long overdue.

America needs China’s goods to release pent-up domestic demand that would otherwise add to inflationary pressure. China needs a healthy US economy and buoyant world trade to help it prosper. The sticking points are the US’ burgeoning budget and trade deficits and China’s over-reliance on external stimulus. There is a solution that helps meet both needs. The US must rebuild its domestic manufacturing base and China needs to focus on building up its home markets at the same time.

Deliver on your promises, end the trade war: observers tell Beijing

Critically, both countries need to come together to thrash out their respective problems amicably. A heated trade war is not the answer. Both countries need each other to consolidate strong sustainable growth for both economies, at neither nation’s expense. Talking is just the start and working together is the ultimate goal. A new US-China economic pact could seal the deal.

They might not like to admit it, but America and China’s fortunes are conjoined – each economy is dependent on the other as the world’s two greatest superpowers. Everyone benefits in the long run if they can coexist on a basis of mutual harmony and cooperation.

If China and America can manage to patch up their trade differences, the whole world moves forward. If they fail, we all fall into a black hole.

David Brown is the chief executive of New View Economics