Unpredictability of US-China trade tensions likely to weigh on global economy

Date: Monday, July 1, 2019
Source: South China Morning Post

  • Given large gaps between US and Chinese positions, deal ending trade war may not be possible before the end of the year, analysts say
  • Uncertainty is causing businesses to postpone decisions, hurting investment and consumption

Unpredictable trade policies, mainly from the United States, are likely to continue to cast a long shadow over the global economy even after China and the United States agreed to resume their trade talks, analysts said.

The deal agreed by US President Donald Trump and his Chinese counterpart Xi Jinping on Saturday in Osaka included a promise from the US to not levy any new tariffs on Chinese goods and to ease the ban on US companies selling equipment and components to Chinese telecoms giant Huawei.

However, the existing US tariffs on US$250 billion of Chinese imports will remain in place, as will those already imposed by Beijing on US goods.

It is still too early to tell how trade and political tensions will evolve, but they are likely to continue to depress investment and economic activity for years to come, according to a report by the Bank for International Settlements, which has its headquarters in Basel, Switzerland.

Historically, it is not unusual to see surges of “sound and fury” from trade conflicts and the associated uncertainty that comes in the wake of the major economic shock waves the conflicts create, the report said.

“For the past two years we have seen different actions in terms of trade policies, mostly by the US, and they basically affect established arrangements with China, Mexico and other latitudes,” Agustín Carstens, the bank’s general manager said.

“The political dimension is important because it is hard to predict what will happen next, so this has generated an environment of uncertainty, delaying important corporate decisions, and is throwing sand into the wheels of economic growth.”

Raymond Yeung, Greater China chief economist at ANZ Bank in Hong Kong, said the US might have agreed to hold off on any new tariffs as a way to get China to buy more of its goods, as it did when the leaders last met, at the G20 summit in Buenos Aires, Argentina in December.

At that time, the US agreed not to raise the tariff rate on US$200 billion worth of Chinese goods to 25 per cent, as Trump had threatened, while China agreed to import more US agricultural products. When the trade talks subsequently collapsed in early May, the US went ahead with the rate increase and effectively banned American companies from selling hardware and software to Huawei.

This time around, the US has agreed to hold off on imposing new tariffs – of up to 25 per cent on the US$300 billion worth of Chinese goods not yet subject to such duties – but made no promises it would not reverse that decision in the future, with Trump saying he had “the ability to put [tariffs) on if I want to”.

Yeung said that Trump’s stance on the multilateral trading system – the president called the decision to let China join the World Trade Organisation in 2001 a “terrible deal” – had not changed.

Andy Rothman, who spent 17 years in the US foreign service focusing on China and is now an investment strategist at Matthews Asia, said both the US and China wanted to reach a deal to end the trade war.

Trump believes a good deal will help him win re-election next year, while Xi wants to avoid a full-blown trade war that would lead to restrictions on China’s access to US technology – from semiconductors to research collaboration.

Trump said there would be a meeting on Tuesday to discuss taking Huawei off the US commerce department’s “entity list” of organisations deemed to pose a security risk. US restrictions on China’s access to US tech would be a medium-term setback to China’s economic growth.

Even before they faltered, the trade negotiations had made little progress in addressing the US side’s demands for China to make structural changes, like providing proper intellectual property protection and ending forced technology transfers.

China was also resisting the US’s demands for an enforcement mechanism to be set up to ensure Beijing stuck to any promises it made.

Given the gaps still to be bridged, it remains uncertain whether a trade deal can be reached by the end of the year, meaning the trade war will continue to weigh on the global growth outlook, analysts said.

And away from the Trump-Xi meeting, trade tensions between China and the US continue to grow.

Last week, the US commerce department added five Chinese supercomputer companies to its entity list.

Also, a US judge found three large Chinese banks in contempt for refusing to comply with investigations into violations of its sanctions on North Korea. The lenders were not identified, but are believed to be the Bank of Communications, China Merchants Bank and Shanghai Pudong Development Bank, according to details of the court ruling that align with a 2017 civil forfeiture action.

While the resumption of trade negotiations is a positive step, analysts said that tensions between the two countries were likely to remain high.

Stephen Innes, managing partner at Vanguard Markets, said: “The trade talks are set to reset … but it is well short of a tight trade policy embrace, especially with neither leader carrying a blueprint [to end the conflict] in hand.”

Carstens said the US-China trade conflict could generate financial risks at firms that had accumulated high levels of debt and were deeply engaged in global value chains, which could undermine global growth in the longer term.

“Global value chains are very intensive in financing. The growth and prevalence of global value chains has accentuated the increase in debt,” he said.

“The risk is that if firms and lenders are not prudent and facilitate over-indebtedness, then when they see a downward shock in growth or there is a snap back in interest rates, that might generate financial difficulty among some of these firms and there might be some disruption in the markets.”

 

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