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In the US-China trade war, neither side wins. Photo: Reuters
Opinion
Abacus
by Tom Holland
Abacus
by Tom Holland

One country is winning the trade war. It’s not the US and it’s not China

  • US President Donald Trump once claimed that trade wars are ‘good and easy to win’, yet in his tussle with China the data appears to be proving him wrong
  • That’s not to say there haven’t been any winners, though – they just might not be the ones you would think

Donald Trump says “trade wars are good and easy to win”. Conversely, orthodox economists like to say that in trade wars, there are no winners. Strictly speaking, neither view is correct; things aren’t that simple.

The agreement between Trump and Xi Jinping in Osaka last month to put further tariff increases on hold and to resume bilateral negotiations amounts to a ceasefire which marks the end of the first round of the US-China trade war. So this is a good time to look at how the conflict has played out so far and to examine who, if anyone, is winning, and who is losing.
First, let’s look at the United States, which continues to levy tariffs of 25 per cent on some US$200 billion of imports from China.
According to a group of eminent economists, including International Monetary Fund head of research Gita Gopinath, almost all the cost of those tariffs are being borne by US businesses, through lower margins, or by US consumers, in the form of higher prices.

If true, that would make the US a clear loser in the trade war. Except it is very hard to see the effect in US economic data.

US corporate profit margins are at a record high. And by the Federal Reserve’s preferred measure, the US consumer inflation rate fell to just 1.66 per cent in the first quarter of the year, well below the Fed’s target rate of 2 per cent. So it is not obvious that either US businesses or US consumers are losing out.

However, there is one obvious area where it can be argued the US is failing to achieve its objective. Trump’s stated aim in declaring his trade war was to reduce the US trade deficit with China. And if we look at a 12-month rolling sum, the bilateral deficit has indeed narrowed in recent months, from almost US$420 billion in December to just over US$400 billion in May.

However, over the same period, the overall US trade deficit with the rest of the world has grown by US$15 billion. And in the year since Trump opened hostilities, the overall US trade deficit has grown considerably faster than the US economy. So it can hardly be said that the US is winning its trade war. On balance it rather appears to be losing.

Next, China. Since November, China’s exports to the US have fallen, declining from a 12-month rolling sum of US$481 billion to US$464 billion. That sounds like a clear loss, until you consider that the yuan has declined in value in the meantime. As a result, China’s exports to the US have barely fallen at all in yuan terms, merely levelling off. So it is not obvious that China is a big loser in terms of its export shipments.

However, despite some success in circumventing US export controls, Chinese companies have definitely been on the losing end of Washington’s attempts to prevent them acquiring high-end US technologies.

And even where Chinese tech companies continue to operate, as in the case of Huawei, the threat of a possible US-driven shutdown in the future will deter some third-party countries from using Chinese kit in important projects. In this sense, China, too, is a loser in the trade war.
Europe has been one of the biggest losers from the US-China trade war. Photo: Reuters

But if both the US and China are losing the war, they are by no means the biggest losers.

That dubious distinction goes to Europe, where in recent years the growth of exports to China and to countries along China’s Asian supply chains was about all that was keeping the euro zone’s member economies from sinking into recession. With Chinese and Asian demand for European capital goods and luxuries hit hard by trade war uncertainties, the euro zone’s economic growth rate collapsed by more than half over the 12 months to March.

So far it would appear that the economists are right, and that in a trade war no one emerges a winner. Nevertheless, there are some economies that do appear to have come out ahead on points from the first round of the US-China fight.

Xi is not boss in US-China struggle. Neither is Trump. Here’s who is

Foremost among these is Vietnam. As US tariffs hit China, Vietnamese factories ramped up production of mobile phones, clothing and shoes to make the most of their cost advantage. As a result, Vietnam’s exports to the US jumped 29 per cent in the first five months of this year compared with the same period in 2018.
Meanwhile, inward investment doubled in the first quarter of 2019. And around a third of new inward investment deals are being struck by Hong Kong-based companies, which are aiming to move as much as a third of their production away from China as a result of the trade war.

In the long run, this shift in manufacturing for export will be a major shot in the arm for Vietnam’s economy, creating jobs, bringing in technology and know-how, and spurring investment in infrastructure, leaving Vietnam a clear winner.

In the long-run, Vietnam’s shift in manufacturing for export will be a major shot in the arm. Photo: EPA

Yet in the near-term, the trade war isn’t all good news. Just last week, the US government cracked down on transshipments of steel products through Vietnam to the US in order to avoid US tariffs. Further actions aimed at Chinese exports slapped with “Made in Vietnam” labels are set to follow.

Meanwhile, demand for capital goods and components to feed the local export industry has almost pushed Vietnam from a trade surplus into a deficit. Worse, the government’s practice of managing the Vietnamese dong against the US dollar means that the currency has appreciated against those of the country’s Asian competitors, making its factories less competitive. And it cannot devalue, lest it deter inward investment and draw US fire as a currency manipulator.

So while the economists are wrong when they say there are no winners at all in a trade war, Trump is also wrong: even for neutral countries that stand to come out on top, trade wars are anything but easy to win.

Tom Holland is a former SCMP staff member who has been writing about Asian affairs for more than 25 years

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