How Will the World Look After the US-China Trade War?

Even a full decoupling from China would merely shift the trade deficit to other countries

For the last two years, the conflict between the United States and China has dominated the economic and financial-market debate – with good reason. After threats and accusations that long predate US President Donald Trump’s election, rhetoric has given way to action.

Over the past 17 months, the world’s two largest economies have become embroiled in the most serious tariff war since the early 1930s. And the weaponization of US trade policy to target perceived company-specific threats such as Huawei has broadened the front in this battle.

I am as guilty as anyone of fixating on every twist and turn of this epic struggle between the world’s two economic heavyweights. From the start, it has been a political conflict fought with economic weapons and is likely to remain so for the foreseeable future. What that means, of course, is that the economic and financial-market outlook basically hinges on the political dynamic between the United States and China.

In that vein, the so-called phase one “skinny” trade deal announced with great fanfare on October 11 may be an important political signal. While the deal, if ever consummated, will have next to no material economic impact, it provides a strong hint that Trump has finally had enough of this trade war. Consumed by domestic political concerns – especially impeachment and the looming 2020 election – it is in Trump’s interest to declare victory and attempt to capitalize on it to counter his problems at home.

China, for its part, would also like nothing more than to end the trade war. Politics is obviously very different in a one-party state, but the Chinese leadership is not about to capitulate on its core principles of sovereignty and its aspirational mid-century goals of rejuvenation, growth, and development. At the same time, there can be no mistaking downward pressures on the economy. But with Chinese policymakers determined to stay the course of their three-year deleveraging campaign – an important self-inflicted source of the current slowdown – they should be all the more eager to address the trade-related pressures brought about by the conflict with the US.

Consequently, the political calculus of both countries is coming into closer alignment, with each looking for some face-saving truce. There is always a risk that other complications will arise — recent events in Hong Kong and revelations of developments in China’s Xinjiang Province come to mind. But, at least for the time being, the politics of the trade war are now pointing more toward de-escalation rather than a renewed ratcheting up of tensions.

If that is the case, and if a phase one accord is reached, it behooves us to ponder what the world will look like after the trade war.

  • Deglobalization is unlikely. Like the first wave of globalization that ended ignominiously between World War I and the Great Depression, the current wave has generated a mounting backlash. Populism is rearing its ugly head around the world, and tensions over income and wealth inequality – aggravated by fears that technological innovations such as artificial intelligence will undermine job security – are dominating the political discourse.
    Yet the climactic event that underscored the demise of the first wave of globalization was a 60% collapse in world trade in the early 1930s. Notwithstanding the current political dysfunction, the odds of a similar outcome today are extremely low.
  • Global decoupling is also unlikely. Reflecting the explosive growth in global value chains (GVCs) over the past 25 years, the world is woven together more tightly than ever before. That has transformed global competition away from the country-specific paradigm of the past to a far more fragmented competition between widely distributed platforms of inputs, components, design, and assembly functions. A recent IMF study found that GVCs accounted for fully 73% of the rapid growth in global trade that occurred over the 20-year period from 1993 to 2013. Enabled by irreversible trends of plunging transportation costs and technological breakthroughs in logistics and sourcing, the GVC linkages that have come to underpin global economic integration are at little risk of decoupling.
  • Trade diversion is another matter altogether. As I have long argued, bilateral trade conflicts – even a bilateral decoupling – can do nothing to resolve multilateral imbalances. Putting pressure on one of many trading partners – precisely what the US is doing when it squeezes China in an effort to reduce its merchandise trade deficits with 102 countries – is likely to backfire.
    That’s because America’s multilateral trade deficit reflects a profound shortfall of domestic saving that will only get worse as the federal budget deficit now veers out of control. Without addressing this chronic saving problem, targeting China will mean pushing the Chinese piece of the multilateral deficit on to America’s other trading partners. Such diversion will shift trade to higher-cost foreign sourcing – the functional equivalent of a tax hike on US consumers.

Trade truce or not, a protracted economic struggle between the US and China has already begun.

A cease-fire in the current battle is nothing more than a politically expedient pause in what is likely to be an enduring Cold War-like conflictThat should worry the US, which is devoid of a long-term strategic framework. China is not. That is certainly the message from Sun Tzu in The Art of War: “When your strategy is deep and far-reaching … you can win before you even fight.”

Source: Project Syndicate

  1. CHUCKMAN says

    Quite an insightful little article.

    Trump must be hearing from many sources what a risky thing he has done, and at a time of many world economic weaknesses.

    Even this man of so very little understanding is likely looking for something of a peaceful retreat. Nothing affects him more than the ego-driven fear over re-election, something that has motivated him to give away half of the Middle East, and any substantial economic downturn does just that.

    It is a Trump pattern already well-established in many failed or incomplete efforts: a big explosion of words and acts gradually followed by a retreat into something quieter and vaguer, even undefined – what we saw with North Korea, Iran, you name it.

    I very much hope the author is right about de-globalization not being a major risk, as it was in the 1930s. In the short term I mean. That has immensely destructive potential. In the long term, I have no doubt, no matter what the noise coming from the nationalist-populist-patriot crowd, globalization is the world’s inevitable and increasing future trend. It is just as certain as the approaching dominance of Artificial Intelligence and all that that that implies for employment and careers and professions and even higher education.

    Saying anything else puts you squarely with the Luddites who tried to stop the effects of the Industrial Revolution by smashing its new machines. It is easy to laugh at the Luddites now, but Trump’s sad MAGA crowd represents much the same thing, trying to put Humpty Dumpty together again. Only their numbers, many millions, make them momentarily seem something they are not.

    World trade and migration are only going to grow long-term, and all parties need accepted agreements and rules and international organizations for conducting affairs. Trump’s attacks on many international organizations and practices represent an effort to please this crowd, but in the end, it is a politics going nowhere, rushing towards a dead end, because this is a crowd with no meaningful future.

    Humility is not a style in America, but if the average demanding person of very limited skills and education and native intelligence could consider a moment the millions in, say, just India with humble jobs today, not having been born into the lucky lottery America was after WWII, but sometimes people of remarkable skills and talent, they would know the future does not belong to MAGA, not at all.

    Several times in my life, I have met remarkable people from Third World countries, people doing the humblest jobs imaginable, but people, as a few moments conversation revealed, with great innate talent, greater than considerable numbers of our ordinary college graduates. A competitive economy tends to provide opportunity for such talent, and a competitive economy is what makes our total society better off. Arguing against globalism is much like arguing in favor of anti-completive industries.

    China already has done a great deal to release this immense human force, and it will do more as its middle class swells into hundreds of millions, but then there are a number of other countries coming along in waves of development.

    Globalization has contributed to this possibility offering new opportunities and lives to countless millions. It has nothing to do with anyone “taking,” something from someone else, jobs or technology or anything else. It represents competition on a vast scale, competition with huge rewards. It is opportunity. It is the future.

    The bellowing of the Trump crowd in the United States I think represents a last gasp for people with no understanding but a lot of attitude. The nationalist, populist events we’ve seen are going to remain just that, events, not foundations for our new reality. They have no substance to provide foundations for anything.

    A sense of exceptionalism, unwarranted by any facts, but existing owing to years of just extraordinary good fortune for Americans after WWII, permeates both America’s privileged classes and ordinary people. They each have demands and expectations based on little more than the fact of being American. That is going to have to fade a good deal before America can comfortably slot itself into the world’s new realities, the multi-polar world.

    That is why the international political difficulties are not going to go away for a while, but they do not have to take the form of self-destructive economic warfare. Almost every claim made by Trump about China as a world economic force and world trader is simply incorrect, and if you pursue sweeping policies based on false premises, it gets you nowhere except somewhere you really don’t want to be.

    Trump does in all such matters remain a kind of joker in the deck however. Because, as many close observers have told us in books and articles, he simply does not listen to anyone.

  2. JustPassingThrough says

    The one element that seems to be missing in an analysis like this one is the effect of actions by the US in the foreign policy arena.

    For example:
    The effects of the US congress with its Hong Kong resolution.
    The effects of Pompeo’s recent vilification of CN.

    Statements like “Consequently, the political calculus of both countries is coming into closer alignment, with each looking for some face-saving truce.” are it bit over the top. You don’t give someone a chance to save face when you constantly insult them. It’s a losing strategy but the knuckle-draggers in the US State Dept. are a bit short on couth.

    CN is going to take this down to the wire. The wire being the 2020 election. IMO, D.T. should be looking at the office of Sec’y of State and the congress and asking himself why these 2 bodies are in the process of sabotaging his chances for re-election. The Senate and Pompeo should be on his side. Just sayin’

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