20 February 2019

The Next Steps in the US-China Trade Dispute

There are many issues that are bedeviling the global economy as it heads into a period of what is likely to be a much higher level of volatility and uncertainty.  However, one issue stands head and shoulders above all of the others when it comes to its potential impact on the world economy.  Of course, that issue is the rising trade tensions, sometimes referred to as the trade war, between the world’s two largest economies, the United States and China.  As these two countries account for 40% of the world’s total economic output, any major dispute between them is sure to have ramifications far beyond their borders.   

As a reminder, the United States imposed tariffs on $250 billion worth of imports from China last year.  In retaliation, China slapped tariffs on a range of imports from the United States worth as much as $110 billion.  As this trade dispute escalated, the Trump Administration threatened to raise the tariffs on the initial $250 billion worth of impacted imports from 10% to 25%, and to impose tariffs on a further $267 billion worth of Chinese imports.  Wary of the impact that this dispute was having on their countries’ economies, US President Donald Trump and Chinese President Xi Jinping agreed to a three-month truce at last December’s G20 summit in Argentina.  This truce has thus far held, but there are worries that it might not be extended when it expires next month. 

So far, there have been mixed signals, mostly from Washington, with regards to the future trade relationship between the United States and China.  Sometimes, Trump Administration officials will express their satisfaction with China’s adherence to the terms of the truce and suggest that the differences between the two countries can be overcome.  At other times, President Trump or members of his administration will suggest that China is not meeting the terms of the truce and threaten to impose additional tariffs on Chinese imports.  As this truce expires in just four weeks, these mixed signals have led to a great deal of uncertainty for businesses and investors in both countries, as well as around the world. 

Without a doubt, this trade dispute has had a much greater impact on the Chinese economy than on the US economy. For example, this dispute has played a key role in the economic slowdown underway in China.  While China’s official rate of GDP growth fell to 6.4% in the fourth quarter of 2018, the actual rate of GDP growth was estimated to be somewhere between 1% and 2%.  Meanwhile, Chinese exports and imports declined in recent months as these trade barriers in the US coincided with weaker demand in other key export markets. Worse, this deteriorating external situation has coincided with a sharper-than-expected decline in consumer spending growth in China.  Given this turbulence facing the Chinese economy, it is increasingly likely that Beijing will be forced to make even more concessions to the United States in order to avoid a full-blown trade war that could cause even more pain for Chinese consumers and businesses.

Thus far, this trade standoff with China has had a lesser impact on the United States economy.  This reflects the fact that the United States is less dependent upon export markets to generate economic growth than any other large economy in the world.  Still, some sectors of the US economy have suffered significantly as a result of the trade barriers erected by China.  For example, the US’ agricultural sector has been hit hard by this dispute, particularly soybean farmers in the Midwest, as China is, by a wide margin, the largest export market for US soybeans.  The US automotive sector has also been adversely impacted, even after China agreed, as part of last December’s truce, to reduce tariffs on automotive imports from the United States.  Many US tech and telecommunications companies, most notably Apple, have also been adversely impacted by this trade dispute.  In short, even if this trade dispute has had a lesser impact on the US economy, China is the key growth market for many US exporters, so this trade dispute is jeopardizing their access to that vital market. 

As the March deadline for this trade truce between the United States and China approaches, the world will be watching to see if this highly-dangerous dispute can be brought to an end. However, it appears unlikely that the Trump Administration will be willing to ease the pressure that it has placed on China, particularly as it has been China that has suffered much more thus far. In fact, the most likely scenario at this moment appears to be the extension of the terms of the truce, but no lifting of the sanctions that were put in place last year.  There are two reasons for this.  One, the United States realizes that China is much more vulnerable to external pressure than the US.  Second, an increasing number of US allies in Asia and Europe are calling on the US to maintain the pressure on Beijing, viewing this as an opportunity for China to be forced into concessions on a range of issues such as trade and intellectual property protection.  Nevertheless, a further escalation of this trade dispute cannot be ruled out, and that would be a dangerous development for a global economy that is looking increasingly vulnerable as the US and China remain the world’s leading trading powers.