US-China trade dispute and global growth

Muhammad Mahmood | Published: June 02, 2018 21:28:48 | Updated: June 04, 2018 21:15:54

The US-China trade dispute continues to be ramped up despite occasional mixed messages from President Trump and his advisers. Trump's Economic Adviser Larry Cudlow, the "free trader'', in a television interview told that tariffs on Chinese imports remained very much on the Trump agenda but it would hopefully involve mostly negotiations, but he would not rule out that stuff (i.e. tariffs). This is the message also coming from Treasury Secretary Steven Mnuchin, Commerce Secretary Wilbur Ross and Trade Adviser Peter Navarro -that the US and China are trying to negotiate a compromise solution. But the Chinese officials are telling a very different story that nothing like trade talks are taking place in the face of Trump's tariff threats. Many observers of the slowly unfolding trade confrontation believe that the Trump administration is flip-flopping in sending its message to China. Despite Treasury Secretary Steven Mnuchin declaring a "trade truce'' with China about two weeks ago and  the scheduled trip to Beijing by Commerce Secretary Wilbur Ross, the Trump administration has now set out a timetable for the imposition of tariffs on Chinese imports and restrictions on Chinese investments in the USA.

Trump is blaming China also for currency manipulation (the same complaint against Russia, a bizarre allegation). In fact, the Yuan has been rising against the dollar over the last year. There is also no evidence that China is buying large quantities of dollars which could cause the dollar to appreciate. But China has a vast amount of foreign reserve holding along with its sovereign fund totalling close to US$5.0 trillion. Such a huge amount of asset holdings causes downward pressure on the Yuan. Strangely enough, Trump never did mention the issue of currency devaluation in the context of his proposed tariffs on Chinese imports.

China has been casting about for a better understanding of Trump's trade retaliation threats and better prepare itself to respond to a very combative US posturing on trade relations with China. Chinese leaders have been having meetings with US business leaders and consulting people with expertise on the US-China relations including trade relations. But the situation still remains very unclear on both sides.

Despite the looming trade row, China's economy grew a slightly faster than expected pace at 6.8 per cent in the first quarter of this year. This growth was spurred by stronger domestic consumer demand, investment in property and strong export demand. The resilience of the Chinese economy in the face of rising trade disruption threats from the USA will contribute to global economic recovery underway for the moment but if the stalemate continues, that could affect flow of trade and investment negatively. Despite such good growth performance in the first quarter, the prediction for growth over the year for China is 6.5 per cent. This slowdown is largely, but not wholly, attributed to risks arising from the trade dispute with the USA.

The US-initiated trade dispute runs parallel with the US targeting China as a "strategic competitor'' practising "economic aggression'' against the USA. The US National Defence Strategy (NDS) document clearly designated China and Russia as "revisionist powers'' seeking to create a world consistent with their "authoritarian models''. US Defence Secretary Jim Mattis declared  that great power competition is now the primary concern  of US national security rather than terrorism.

The Trump administration is in the process of rewriting international trade rules threatening tariffs. It is simultaneously trying to strengthen its position by attempting to build a "trade coalition of the willing'' to line up against China for what it calls unfair trade practices. Trump's Economic Adviser Larry Kudlow holds the view that a deal on tariffs could be realised if the US could convince other major economies call out China for unfair trading practices. In this respect the EU is the major front to build that coalition but for the EU at stake is the metal tariffs which threatens trans-Atlantic trade. There is yet no indication that the European Union (EU) will walk away from its commitment to WTO rules.

Strangely enough, Fareed Zakaria of CNN and the Washington Post,  who is a great proponent of free trade and globalisation and can not be considered as a friend of Trump, came out in favour of Trump's tariffs declaring "China is a trade cheat''. But his ire against China  emanates more from China having a mixed economy with a strong public sector than anything to do with any alleged trade distortions caused by China. He wants China to dismantle its public sector and privatise which will enable foreign investors to own them. This is also the line currently being pursued by the US Department of Treasury which expressed its concern over non-market direction of China's economic policy. This is a reference to China's "Made in China 2025'' policy.

Zakaria does not seem to be much conversant with the Chinese history from the 18th century to 1949, the year when the country was liberated from foreign economic and political domination. That experience makes China very sensitive about foreign economic domination.

China has become a scapegoat for everything going wrong in the USA and in this respect the right, the centre and the liberal in the USA have joined together in projecting China as enemy. And China is definitely a very convenient target.

The latest International Monetary Fund's (IMF's) World Economic Outlook (April 09, 2018) indicated that the economic upswing that began in 2016 has become broader and stronger. The report predicts that the global economy is expected to achieve a growth rate of 3.9 per cent for 2018 as well as for 2019 but the current favourable growth rates will not last. It asked member countries to equip themselves to be able to better manage when the downturn comes. The report added that recent trade restriction announced by the USA and corresponding retaliatory actions by China and potential retaliation by  other countries were causes for concern as they would threaten to damage global economic activity and sentiment.

Maurice Obsstfeld, IMF's Chief Economist, was quite upbeat about the growth prospect, but was also very wary of looming trade conflicts. He added if the situation got into a cycle of widespread actions and counteractions, that would result in significant economic effects. He found the current global economic environment rather "paradoxical'' - leading economies in the world were "flirting with trade war'' at a time of economic expansion "especially when that expansion is so reliant on investment and trade''.  Obstfeld pointed out that the IMF did not have a definition of trade war. But he thought that was the case while negotiations were taking place largely on a bilateral basis. Obstfeld called for strengthening the existing global multilateral system instead of fragmenting the system through bilateral arrangements.

In fact, the last meeting of the IMF   held in Washington in April, 2018 was dominated by threats of trade war. US Treasury Secretary Steve Mnuchin asked IMF to support US drive against what he claimed to be "unfair global trade practices'' that impede stronger US economic growth. IMF Managing Director, Christine Legarde tried to reassure the US on its demand and said that her key concern was to resolve those issues before they could lead to hamper growth and stability. From the current economic upturn, if the global economy starts to slow down, the trade conflict could further intensify.

The fallout from the intensification of US-China trade conflict will have serious consequences not only for developed economies, in particular for the EU, but, more importantly, also for developing economies like Bangladesh. This will further add on to the economic woes created by the 2007-08 global financial crisis.

Muhammad Mahmood is an independent economic and political analyst.

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