January 2019 marked the one-year anniversary of the inception of the US - China trade war. What started with the US increasing import tariffs on Chinese solar panels and washing machines, later spiralled into retaliatory and counter-retaliatory tariff measures between the two countries.
Throughout much of 2018, the global business community looked on with apprehension as the two largest economies escalated their trade dispute, which, at its peak, tallied 360 billion USD in combined tariffs. At the close of 2018, the world breathed a sigh of relief when the US and China called for a temporary truce and agreed to resume trade negotiations.
Where are we now on the trade war?
At the G20 Summit in Buenos Aires, the US and China agreed to suspend any further increases in tariffs for 90 days while both countries tried to work out a trade deal. However, by late January 2019, it became clear that a deal was unlikely to be reached by the expiry of the 90-days deadline on March 1st. Once more, market nerves were calmed when President Trump announced that the US would extend negotiations beyond March 1st. But this time, no new concrete deadline was given, implying that either country could potentially resume tariff hikes at any time if negotiation is deemed to have failed.
At the time of this writing, both President Xi and President Trump are expected to meet at a summit in Mar-a-Lago, Florida at the end of March. However, February’s unexpected failure of a US - North Korea deal might see China’s enthusiasm for the summit cooling in fear of a similar outcome.[1]
What does it mean for the global economy?
Gauging the precise effects of the US - China trade war on the global economy is difficult. The Chinese economy was slowing down well before 2018, with real GDP growth falling from 10.6% in 2010 to 6.8% by 2017.[2] The US also moved away from a nearly decade-long quantitative easing policy in late 2015, signalling the tightening of this monetary stimulus. Coupled with other political and economic uncertainties occurring at the time – such as Brexit, the rise of protectionist governments in the EU, North Korean nuclear threats, and the collapse of the Venezuelan economy – the global economy would have decelerated even without the dawn of a new trade dispute between the US and China.
Export and import figures can be difficult to analyse. Distortions due to last minute stockpiling by traders had the effect of temporarily bumping up Chinese export figures throughout 2018.
Trade distortion through circumvention is another relevant issue,[3] as is varying seasonal distortion (e.g., the Chinese Lunar New Year occurs on slightly different dates each year, affecting data on Chinese year-end export figures), each of which can result in lags and bumps in trade statistics. Nonetheless, there is a general consensus that Chinese exports, in real economic terms, are falling. Chinese exports to the US fell 26.2% in February – and in the other direction, US exports to China fell 28.6%.[4]
Perhaps more important is the effect of the US - China trade war on business sentiments. In a recent survey conducted by S&P Global on 270 companies, about 40% of businesses surveyed indicated that they have postponed investment due to uncertainties involving the trade war.[5] This hesitancy in turn has had a real adverse impact on the economy by reducing potential GDP growth.
Where are we likely to end up?
Negotiations since December were not without progress (or hope). China offered to reduce tensions in the early days of the truce by temporarily removing tariffs on US automobiles and auto parts for a period of 3 months. China also resumed purchases of US soybeans.[6] Negotiations continue between both countries, with the US seeking to redress its concerns on intellectual property misappropriation (or “technology theft” as the US sees it), removal of market distorting subsidies, and improved market assess to the Chinese financial and service sectors. China, for its part, seeks to preserve its autonomy in dictating its political and economic policies – including continuing access to technology and its sphere of economic influence.
If this dispute were “simply” a matter of economics, perhaps the US and China would be able to reach some accord. Unfortunately, there is much more at stake.[7] China’s ascendency as a global power and how the country should be treated,[8] as well as the differences in political ideologies (the US-led liberal international order versus the emerging authoritarian alternative) are the undercurrents to the present trade dispute. These tensions flared during the course of trade negotiations, which were peppered with high profile arrests[9], and ran in parallel with the US and North Korea denuclearisation talks.
Given that that the underlying geopolitical friction and ideological differences remain unresolved, the outcome of a US - China trade deal, even if successfully reached between President Trump and President Xi, is likely to be temporary and limited.
Any trade deal between the US and China will likely be transactional. There might be concessions on specific classes of products, “agreements to agree” on the principles for market access or treatment of intellectual property. Each president may then tout to their respective home audience that they got the better end of the deal.
However, the economic and trade relationship between the two countries is likely to return to an uneasy status quo – awaiting a future re-emergence of a trade dispute when the economic climate and mood of the constituents make such a development expedient.
[1] See https://www.wsj.com/articles/u-s-china-trade-deal-isnt-imminent-ambassador-branstad-says-11552031163.
[2] See https://www.weforum.org/agenda/2019/01/these-are-the-biggest-risks-to-the-global-economy-in-2019/.
[3] Refer to our prior article “US – China Trade War: What’s at Stake for Thailand,” published on October 16, 2018, for a more in-depth discussion on the implications of trade circumvention.
[4] See https://www.wsj.com/articles/chinese-exports-slump-as-slowdown-deepens-11552027014?mod=article_inline.
[5] See https://thehill.com/opinion/finance/426833-us-china-trade-war-is-expediting-the-inevitable.
[6] See https://www.reuters.com/article/us-usa-trade-china-soybeans/exclusive-china-makes-first-big-us-soybean-purchase-since-trump-xi-truce-idUSKBN1OB29S.
[7] See https://www.cbc.ca/news/business/china-trade-talks-1.4998570.
[8] The US and EU still treats China as a non-market economy, a status that China has objected to and sought dispute settlement before the World Trade Organization (WTO) since 2016. See, https://fas.org/sgp/crs/row/IF10385.pdf.
[9] These include the arrest of Huawei’s CFO, Meng Wangzhou by Canadian authorities, and the subsequent detention of a Canadian ex-diplomat, Michael Kovring and Michael Spavor by the Chinese. The Canadians, for their part, were seen by the Chinese as cooperating with the US in the unfolding rift. See, https://www.scmp.com/week-asia/geopolitics/article/2181566/chinas-arrest-kovrig-spavor-sends-chill-through-us-academics.
