china-US trade war escalates threat to the global economy
PETER S. GOODMAN
May 16, 2019
Port of Tacoma, Tacoma, Washington. The growing conflict between the United States and China, the two largest economies on the planet, has become the greatest threat to global wealth.
Port of Tacoma, Tacoma, Washington. The growing conflict between the United States and China, the two largest economies on the planet, has become the greatest threat to global wealth. TED S. WARREN/ASSOCIATED PRESS
In normal times, concerns about the health of the global economy often lead leaders in the world's largest countries to unite to find security.
But now is not the usual period.
The growing conflict between the United States and China, the two largest economies on the planet, has become the greatest threat to global wealth. As the leaders of the two countries openly consider how to persuade the other side, other countries in the world are now worried that they will suffer collateral damage in an escalating trade war.
Just a week ago, China and the United States seemed to be moving in the direction of easing hostility, and the global economic outlook is improving. Concerns about the global economic slowdown have faded in the good hopes of economic expansion.
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As President Trump is about to sign a trade agreement, concerns about China’s economic weakness are easing. This has made the outlook for Asian economies that depend on global trade such as Japan, South Korea and Taiwan more optimistic. Europe, which has always been worrying, has also shown signs of recovery. The US economy continues to maintain rapid growth despite its lack of optimism.
But as Trump raised its tariffs on Chinese goods by 200 billion U.S. dollars last weekend, the world saw a situation in which the trade war might consume a lot of wealth. With Beijing’s announcement of retaliatory measures on Monday, the Trump administration’s detailed plan to impose a 25% tariff on almost all of China’s exports to the United States is also growing.
For businesses and consumers, this has increased the likelihood that they will soon pay a higher price for the goods, a reality that is not conducive to trade.
“The situation with upgrades is bad for everyone,” said Gabriel Sterne, head of global macro research at Oxford Economics in London. “The huge negative impact on trade flows will be detrimental to global economic growth in the coming years. This is bad news for almost everyone.”
According to the Oxford Economic Research Institute, if both China and the United States put their respective tariff threats into action, China’s annual gross economic output will fall by 0.8%, while the United States will reduce by 0.3%.
Although these figures are small in macro terms, the pain may be extremely strong in industries that are particularly vulnerable to trade wars, such as US agriculture and Chinese electronics manufacturers.
The damage done to the countries most dependent on trade may be particularly serious, such as Singapore, Malaysia, Mexico and Japan.
Asian stock markets generally fell on Monday after trade negotiations between the US and China ended on Friday, but no agreement was reached.
Asian stock markets generally fell on Monday after trade negotiations between the US and China ended on Friday, but no agreement was reached. ANDY WONG/ASSOCIATED PRESS
At the center of trouble is China, the most populous country in the world. China's rapid development in recent decades has added hundreds of millions of consumers to the global market, while providing a huge number of low-cost products.
Considering that China contributes about one-third of the world's economic growth, any disruption to China's trade will rise to a global event.
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Trump's practice of collecting tariffs is to harm China, trying to force Chinese leaders to agree to stop subsidizing state-owned enterprises, stop requiring US companies to hand over intellectual property rights, and open markets to foreign competitors. The president has been insisting until last week that he will soon reach a trade agreement with China. However, he suddenly accused China of violating its commitments and chose to raise tariffs.
This sudden escalation occurred at a time when the world economic situation was particularly severe, which was detrimental to the Chinese economy, which appeared to be stabilizing but gradually slowing down.
According to data analysis by UBS, a global investment bank, China’s import shipments soared in April. According to the International Air Transport Association, the volume of air cargo in March increased worldwide compared to the same period last year.
But these trends are not strong. Air cargo traffic has fallen by nearly 4% from its peak in 2017. Asian manufacturing outside of China has been slowing for most of the past two years. The trade war between China and the United States will almost certainly aggravate this slowdown, because the economies of the two countries together account for about 40% of the world economy.
According to the Oxford School of Economics, in the past year, Japan, Taiwan, South Korea, Thailand and Vietnam's exports to China fell by about 14%, or about $6.3 billion.
These countries have seen similar percentage increases in exports to the United States. But because the United States is not such an important trading partner, the trade volume between these countries and the United States has grown by less than $2 billion.
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At a time when the European economy experienced a weak recovery, the Sino-US trade war brought another worry.
With London and Brussels agreeing to extend the thorny negotiations between the two sides on the UK's departure from the EU until the end of October, concerns about Britain's unregulated Brexit would hurt trade across the continent – at least in the short term.
Germany, Europe's largest economy, has been alleviating concerns about its economic weakness, with data showing that German factory orders and exports have grown. Germany’s exports to China in March this year increased by more than 5% compared with the same period last year.
But a large part of Germany's exports to China are parts for industrial production – auto parts, engines, motors, and other equipment needed for factory production. If China's factory production slows down due to US tariff increases, its demand for German goods is likely to weaken.
Huawei's production base in Dongguan.
Huawei's production base in Dongguan. KEVIN FRAYER/GETTY IMAGES
Industrial activities in Italy and France have been weakening in recent months.
“For Europe, the trade war took place at a very delicate moment,” said Kjersti Haugland, chief economist at Norwegian investment bank DNB Markets. “Economic growth has once again become very weak.”
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The trade war has shocked the global stock market, causing the stock price to plummet, although it rebounded slightly on Tuesday.
If investors' fears intensify, funds will almost certainly flow into the safest safe haven dollars. It is likely that at the same time, the withdrawal of funds from so-called emerging markets has exacerbated the crisis in Argentina and Turkey, while at the same time bringing currency depreciation in a wider region such as Brazil, South Africa and India.
The depreciation of the currency has made the imports of these countries more expensive, forcing the poor to pay more for food, fuel and transportation.
Emerging market currencies and stock prices have fallen sharply in recent weeks after they gained strength earlier this year.
The key question now is how long the trade hostilities will last.
This is a question with no clear answer.
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The mighty US economy seems to be making Trump determined that he is willing to withstand the pressure of a protracted trade war with China. The unemployment rate in the United States is now only 3.6%, the lowest in half a century. The economy grew at an annual rate of 3.2% in the first three months of this year.
Trump announced that as long as the United States persists, it will win the trade war. However, he also complained on Twitter that the Fed does not cut interest rates, and Chinese leaders are using credit injection to stimulate the Chinese economy.
Maybe this is his lobbying to lower interest rates. But it can also be interpreted as a kind of recognition that Trump lacks and is eager to get the tools that his opponents in Beijing have, that is, the right to control policy leverage.
Trump’s strategy seems to be inciting nationalist indignation in China, and the propaganda of the Chinese government relies heavily on nationalist sentiment. This sentiment will enhance China’s willingness to maintain its position because Chinese leaders are worried about surrendering to the consequences of US leaders’ attacks.
This is not a good way to expand global trade. Global trade grew by about 4% in 2017, and last year's growth slowed to 2%, and this year may shrink.
“Once the volume of trade turns negative, it will make us all have to pay closer attention to a recession scenario,” said Geneva's first global economics of Indosuez Wealth Management. Marie Owens Thomsen said. “Things seem to be more disturbing. The downside risks are increasing.”
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