NEW HAVEN, Connecticut: 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 Trumps election, rhetoric has given way to action. Over the past 17 months, the worlds two largest economies have become embroiled in the most serious tariff war since the early 1930s.
And the weaponisation of US trade policy to target perceived company-specific threats such as Huawei has broadened the front in this battle.
A POLITICAL FIGHT WITH ECONOMIC WEAPONS
I am as guilty as anyone of fixating on every twist and turn of this epic struggle between the worlds 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 Oct 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 Trumps interest to declare victory and attempt to capitalise 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 Chinas 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.
WHAT NEXT AFTER THE TRADE WAR?
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. Several possibilities are at the top of my list: Deglobalisation, decoupling and trade diversion.
Deglobalisation is unlikely. Like the first wave of globalisation 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 globalisation was a 60 per cent 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 per cent of the rapid growth in global trade that occurred over the 20-year period from 1993 to 2013.
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