Brief easing of tensions in the trade dispute

An article by guest author Dr Jörg Zeuner, Chief Economist and Head of Research & Investment Strategy at Union Investment

The trade dispute between the US and China is keeping the capital markets on tenterhooks, although there have been recent signs of rapprochement. Are we heading for a solution? This is unlikely, and Europe may find itself in a tricky situation. That is why we need a European growth agenda.

The US and China have been imposing tariffs on each other for the past 18 months or so, and the spiral of tit-for-tat has been escalating at an ever-faster rate. New US tariffs on Chinese imports have been in force since 1 September. By the end of this year, all imports from China – with a total volume of US$ 550 billion – could be subject to tariffs of up to 30 per cent.

However, there have been recent signs of rapprochement. In mid-September, China suspended the tariffs on some US agricultural goods, including pork and soya beans. Just before that, US President Donald Trump postponed the introduction of punitive tariffs on Chinese imports for two weeks that had been due to come into force at the start of October. Moreover, the US and Japan may reach a trade agreement in the next few weeks. Trump has told Congress that they are in the final stages of the negotiations.

Irrespective of the easing of tensions, the trade dispute is already having a very visible impact on the real economy. This year, global trade is likely to expand by 1.5 per cent in the best-case scenario, compared with around 3.5 per cent in 2018. The slowing of global trade is having the greatest effect on countries that are the biggest international players, such as China and Germany. The consequences are weakening growth in China and a global industrial recession. A project such as the liberalisation of global trade has created such high welfare gains that it should come as no surprise when setbacks have a countervailing effect. Unfortunately, the gains and losses are again not arising where they originated. This is the challenge for economic policy.

Whereas China has been suffering for some time, the US has so far continued to do well thanks to the strong domestic focus of its economy. But the discourse on the faltering US economy’s future performance shows that customs tariffs are not simply a complex technical device but also a welcome geopolitical tool. If US tariffs were extended to all Chinese imports in the months ahead, it would almost certainly have a significant impact on US consumers because mobile phones, laptops and games consoles imported from China would also be subject to punitive tariffs.

The uncertainty about what will happen next in the dispute is very palpable. Company bosses are holding back with their capital expenditure plans due to the lack of clarity, which means that industrial firms have fewer orders on their books. The longer this uncertainty continues, the more damaging it will be. And that is why Europe is also being hurt: the threat of car tariffs have been hanging over the European economy, especially German firms, like the sword of Damocles.

There is little indication that a breakthrough will be achieved at the talks between the US and China that are due to take place in October. One of the main reasons for this is that the dispute is about more than just trade. It is about securing political and military interests, about security matters and even about spheres of technological influence, especially in Asia. The US election campaign is also just around the corner. It is very possible that President Trump wants to impress potential voters by taking a firm stance against China. On the other side, China is unlikely to be interested in making concessions that would show Trump in a good light.

The uncertainty that European companies face will not go away if European economic policy does not tackle the global challenges. The power to leverage new growth lies in the hands of the EU member states themselves. Much higher net government spending on updating our economy is the first step. If we want more investment in electric vehicles, for example, the new European Commission will have to introduce industry-wide standards and attempt to create a more modern and consistent operating environment for businesses. Ultimately, the euro area countries must put in place a framework that strengthens the currency union from a structural standpoint. There is no better time to do this, because the eurozone has the lowest level of debt of the G3 economies (eurozone, US and Japan). And the negative interest rates will only be an advantage if we invest.

 

Unless otherwise noted, all information and illustrations are as at 1 Oktober 2019