Parsing the US-China trade war
BEN KRITZ
THE impact of the US-China trade war on the rest of the world has become a popular discussion topic among the subset of the human population described as “people whose primary function is to discuss business and economic topics.”
This is in spite of the fact that nobody has any idea what will actually happen. There is no precedent for the current conditions. The conflict is between the US, which is currently being governed by complete lunatics, and China, which is inscrutable and hardly does anything according to a familiar economic model anyway.
Thus any prognosis that emphatically suggests the trade war “will be” bad or good for any particular country or regional economy, or even for the world as a whole, should be regarded with a great deal of skepticism. The possible outcomes of the trade conflict lie along a continuum extending from “little to no discernible effect” to “utter catastrophe”. The best anyone can do is to perhaps identify certain broad probabilities.
After reading dozens of often contradictory analyses and other commentaries on the trade war over the weekend—I have a rather unimaginative social life—I believe there are three underlying factors that, if properly understood by policymakers and businesses, will allow at least some economies to benefit from the present circumstances…or at least understand what exactly went terribly wrong when or if a general economic collapse occurs:
1. This trade war, like most “trade wars,” isn’t really about trade: Paul Gambles, who is the managing director of Bangkok-based MBMG Investment Advisory, pointed out in a recent newsletter that the trade war is occurring against the backdrop of some shaky economic conditions in the developed world, particularly the US. Fueled by central bank activism in the form of low interest rates and quantitative easing, private debt is skyrocketing and equity markets are massively overvalued, yet economic growth on the whole is rather tepid.
These conditions are complicated and difficult to address in a simple fashion, so from a political perspective, finding a bad guy to blame for things that seem out of kilter is an easier choice – particularly when the leader responsible for managing the situation is not exactly an economic genius, and draws his authority from a political base whose thought processes lie even closer to the surface than he does. In some respects, the American economy is running full-tilt, yet the results in major indicators and standards of living do not reflect the amount of energy being expended. What’s holding America back? Why, it must be those dastardly Chinese and their aggressive trade policies! That is not really the case. Thus the imposition of punitive tariffs is not going to have any positive effect, and might actually be enough to trigger a bigger collapse.
America faced a similar situation last century. We learned in high school—or in our freshman-level economics classes, depending on where one went to school—that the passage of the Hawley-Smoot Tariff Act in late 1929 (it was signed into law in 1930) coincided with the stock market crash and the beginning of the Great Depression.
The American economy at that time bore an eerie resemblance to the economy today: Massive private debt in part due to stock speculation, which resulted in an overinflated stock market, but at the same time, the value of industrial and agricultural output was far lower than the level that would fairly correspond to the debt level and stock prices. The negative connotation of the Tariff Act was just enough to tip over the whole rotten edifice.
2. China will put a stop to the trade war in fairly short order…Even if the US and its dangerously unstable president are barking up the wrong tree when it comes to a cause for its own unsatisfying economic conditions, and even if the Chinese are unpredictable in some ways, their character and political circumstances suggest that they will find a way to compartmentalize and deescalate the trade war fairly soon. Xi Jinping is working hard to establish himself as one of China’s great historic leaders. The last thing he needs is a situation that puts pressure on the domestic Chinese economy, and he needs a situation that makes China look weak in a global context even less than that.
Fortunately for China’s leaders, there are or will be enough negative effects of the trade conflict on the American economy that they can prod the US into a compromise without losing face. It will take a great deal of agility on their part to do so, but again, they are not exactly dealing with intellectually formidable opponents. It would be more surprising than not if the trade dispute did not start winding down over the next few months.
3. …But will pay a fairly stiff price for it in other ways: The trade war has provided a justification for some businesses to decouple themselves from China, according to a lengthy Bloomberg analysis from about two weeks ago. A survey of about 430 businesses conducted by the American Chambers of Commerce of China and of Shanghai published on September 13 found that about a third of them were considering or already had made plans to move their manufacturing out of China due to the ongoing tensions. About a third of those were considering locations in Southeast Asia although, somewhat disappointingly, the Philippines was not mentioned among them. The preferred destinations are Thailand, Vietnam, Cambodia, and to a lesser extent, Indonesia.
The impact of foreign manufacturing moving out of China is multiplied. Not only does China lose the employment and demand for local supply chains, it loses the export capacity as well. And to some degree, the export boost China’s Southeast Asian trading partners gain will add insult to injury by coming at China’s expense. Some of what was formerly produced in China will now be imported.
Granted, the Chinese economy is large and diverse enough that it will not be seriously damaged, but it will be a bit of an embarrassment to the leadership, and put additional pressure on its policy actions aimed at boosting domestic production and consumption.
ben.kritz@manilatimes.net
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