How likely is a US-China trade war?

25 Jun 2019

Ingrid Booth

Digital content specialist, Investec

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. 

A slowdown in global growth remains a major concern for markets. For the past two decades, China has been the world's growth engine, but the rising US-China tensions and tempered GDP growth in the world's largest emerging economy has weakened global markets.

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

Transcript

John Haynes, Head of Research and Chairman of the Global Investment Strategy Group at Investec Wealth & Investment. 

  • 00.11: The bull in the china shop

    I'm frequently referred to as the bull in the china shop, so with that perspective and warning I will let you know what I think now. I think, whereas I would have been unambiguously bullish with no caveats 12 months ago, I have a few caveats now and it's really about how America has chosen to engage with China and then trying to anticipate China's reaction function, so at the moment we, these two great trading nations, the two largest economies in the world need to cooperate to have a, to produce a benign environment for the world economy in general. I had expected America's engagement with China under the Trump presidency to be more, gentler than it has been, I had thought it might be more theatre than reality, in terms of the hostility that had been evident before we got to the point where clearly the heat was turned up to a very different degree.  Now I believe I was mistaken in that assessment, that it is clearly a profoundly ideological journey that this Administration is on.

  • 01.34: What is the reaction from Europe?

    There is a genuine sympathy with some of the agenda that Mr. Trump has isolated from the trading partners, Europe and others have also felt the threat that China's rise, not entirely gently delivered, sometimes through non-traditional and aggressive trade practices and sometimes definitely through intellectual property assimilation whether that's theft or forced transfer.  All of these practices have caused resentment in not just America, so he's cleverly, rightly, isolated a real issue and the way he's pursuing that agenda now relies upon cooperation from the Chinese if we are not to reach a point whereby we have not mutually assured destruction, but definitely retrograde steps that have real material economic impact.

  • 02.42: How has China reacted?

    You have to judge the Chinese reaction function, currently it has been mature. They have recognized that their rise to the second largest economy in the world from a minnow on the global stage in 20 years, presents issues, they no longer deserve to trade on terms that were associated with an emerging economy and they are willing to give up some of the advantages that they have acquired.

  • 03.20: Can the US and China reach a deal?

    Do I think ultimately a deal will be struck that's good for both America and China? Yes, I do. Do I think China has actually quite a strong hand in negotiation? Yes, I think they do. Are they in control of their own destiny? Yes, I think they are. So I think all of these things mean that Donald Trump knows he has a negotiating counterparty of mass. So they both have something to gain from some form of accommodation and they both have a lot to lose from a lack of accommodation. So again, I'm still very optimistic about China's path, but I do think that they are in, for the first time, in a position whereby the outside world could damage them and in the, over the past decade I would never have said that was the case. I would have said they were purely in control of their own destiny and global conditions meant that their momentum forward was pretty well unstoppable.

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Playing political power games

Instead, a more hostile approach has created uncertainty in global markets. According to Haynes, President Trump's administration is on a profoundly ideological journey as they attempt to neutralise the growing threat posed by China's unrelenting rise.
 
“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.

John Haynes

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

“China has realised that it can no longer trade on terms offered to an emerging economy and they, therefore, seem willing to make concessions. 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 that benefits both America and China as both nations make concessions.”
 
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

Ingrid Booth image

Ingrid Booth

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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