How likely is a US-China trade war?
25 Jun 2019
A full-blown US-China trade war would result in a "global stagflationary shock" and so a resolution to the escalating tensions is highly likely given the importance of the relationship to global growth, which has already been significantly weakened by the spat.
Basically, the paradigm has shifted. It's no longer the US that dictates global economic trends. Today, if China – the world's second largest economy – sneezes, the world catches a cold.
Going in hot
“Twelve months ago I was unambiguously bullish about China, with no caveats,” states John Haynes, Head of Research and Chairman of the Global Investment Strategy Group at Investec Wealth & Investment. “However, given how the US chose to initially engage China over their trade agreements and the rapid escalation in the US-China trade war, a few caveats now apply.”
With trade negotiations between China and the US having unraveled in May and President Trump raising tariffs on $200 billion worth of Chinese goods, the trade war continues to spook world markets.
Investec's Global Investment View Q2 2019 report warns that a favourable resolution of the trade war is "critical, because the the imposition of the full slate of threatened US tariffs upon China would be a global stagflationary shock."
“Given the relative importance of trade between the two countries, I would've expected the Trump administration to handle its engagements with China more conservatively,” continues Haynes.
The bull in the China shop
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Playing political power games
“Some of China's growth has come off the back of non-traditional and aggressive trade practices and intellectual property assimilation; whether that’s through theft or forced transfer. These practices caused resentment within numerous countries, not just the US, and President Trump is leveraging that reality to cleverly pursue his agenda.”
In the wake of the trade war, the global economy is left counting the costs of the retrograde steps taken, which have had a material economic impact.
In response to Trump’s May 10 decision to more than double tariffs on certain Chinese imports including clothing, fish and handbags, China responded by increasing tariffs on US$60 billion worth of US goods from 1 June 2019.
While I don't expect China to kowtow to US demands as the country holds a strong position and remains largely in control of its own destiny, I think that a deal will ultimately be struck.
John Haynes, Chairman of the Global Investment Strategy Group, Investec Wealth & Investment
Working towards a mutually-beneficial agreement
As such, Haynes remains optimistic about China’s path. “However, the major caveat is that for the first time in over a decade, the country finds itself in a position where outside threats and influences could damage their economy.
"It, therefore, needs to tread carefully to ensure the country sustains the growth needed to appease the Chinese people who, in my opinion, accept autocratic rule as a trade-off for the significant economic growth that has boosted prosperity and living standards in the country. If that were to stop, the Chinese government could face rising social challenges.”
"China needs to tread carefully to ensure the country sustains the growth needed to appease the Chinese people who, in my opinion, accept autocratic rule as a trade-off for the significant economic growth."Prof Brian Kantor, Chief Strategist and Economist at Investec Wealth & Investment SA, agrees with this analysis. “China needs to maintain its growth rate to satisfy expectations and keep control. As such, a favourable outcome in the trade war is vital because the US market is an important source of demand for the Chinese economy. Trump, therefore, has bargaining power. Whether that bodes well for global economic growth remains to be seen.” Let's hope China doesn't catch a cold in the wake of a possible fallout.
About the author
Lead digital content producer
Ingrid Booth is a consumer magazine journalist who made the successful transition to corporate PR and back into digital publishing. As part of Investec's Brand Centre digital content team, her role entails coordinating and producing multi-media content from across the Group for Investec's publishing platform, Focus.
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