Who is winning the US-China trade war?

Ahead of the planned meeting between President Trump and President Xi Jinping at the G20 summit in Buenos Aires at the end of this week, it is time to ask: who’s winning the trade war that kicked off in June, and could the two presidents reach a deal?

Contrary to what Trump asserts, no one wins a trade war. The objective is to inflict more damage on your counterpart than they do on you. Trade wars lower output and dynamism and raise prices for consumers and firms. The OECD recently released a report showing who will lose and how losses might be distributed. To me, it looks as though China has more at risk than the US.

So far this year, Trump’s “trade deficit with China” fetish is looking foolish. The bilateral deficit in the year to October was over $300bn, about $25bn bigger than in the year to October 2017, so despite Trump’s protestations it is actually getting worse.

To better gauge how the trade conflict is playing out, however, we should look at the wider economy.

The US economy has fared much better than China this year, having been on fire for much of the last nine months. Yet, it is now predicted to slow to about 2.5 per cent, and as the Fed raises interest rates, and this year’s tax cuts fade, some analysts think the US will end up in a recession in late 2019, or 2020, admittedly after the longest economic expansion ever recorded, dating from June 2009. We can already see softness in housing, and investment spending, and there are growing concerns about corporate earnings and debt. The S&P index has dropped 10 per cent since its year high in September.

Trade is important for many US industries, company earnings, and the life of communities. But still, in broad macro terms, it’s not that critical.

China has had a much more torrid time. The Shanghai Composite stock index has fallen by 25 per cent this year, and the Renminbi, though tightly controlled by the People’s Bank of China, has dropped by 8 per cent since June. In spite of the massaged official GDP data, all is not well in the economy. Investment, especially in infrastructure, is by some measures now weaker than at any time since 2003. Credit expansion has slumped. Consumption has also been soft, especially of big ticket items like cars. The head of the National Institution for Finance and Development, an influential state-backed think tank, said two weeks ago that China’s economic expansion may be entering a “long-term downward spiral.”

The effect of the trade war on China so far may be little more than 0.2-0.3 per cent of GDP, easily outweighed by the policy easing measures the government has taken this year, designed to head off the domestic downturn that’s settling in. Yet, if the trade conflict persists, and the tariff on the latest $200bn of imports into the US rises from 10 to 25 per cent on 1st January as planned, the GDP damage in 2019 might be more like 1 per cent, raising the stakes considerably for the government, which is pursuing conflicted and even incoherent policy objectives. It will be worse if Trump extends tariffs to the other half of imports from China. Beijing faces the prospect of a protracted period of low and inadequate growth, and so this trade war—for the world’s biggest export nation—is untimely and bad news.

The US certainly wants to pressure China to make concessions regarding its technology strategies, expressed in both the Made in China 2025, and subsequent AI and high tech programmes. And also to change tack regarding rules and regulations governing technology transfer, intellectual property protection (or theft), and subsidies and other privileges reserved for local and state enterprises. The recent APEC (Association of Pacific Exporting Countries) summit in Papua New Guinea ended last week without a communique for the first time because the Chinese allegedly would not agree to wording backed by the US to oppose “protectionism and unfair trade practices”—a phrase aimed at Beijing. Judging by the 50-page report released by the US Trade Representative Office on 20th November, called “Update Concerning China’s Acts, Policies, and Practices, Related to Technology Transfer, Intellectual Property and Innovation,” the US position is that China has not only made no progress in meeting US demands, but moved even further away.

Presidents Trump and Xi are not going to resolve these sensitive issues in Buenos Aires, or indeed, any time soon. If there is to be a meaningful compromise, the US would have to concede it can’t press China on its tech policies, and the optics would have to allow China to relax its industrial policy rules and regulations without being seen to succumb to US demands, assuming it were willing to do so in the first place. Beijing would need not just to talk about opening up its markets and sectors, but to actually do it. The key for Xi’s China is to win back the support of the US business sector (and EU), which it lost finally in 2017-18 as hubris and policy errors were allowed free rein.

The reality is that China and the US, and the west in fact, are locked into an existential conflict over trade, behind which is a struggle for primacy in the technology, industry and military arenas. Buenos Aires may at best mark a ceasefire and perhaps a commitment to further talks, but this trade conflict looks set to continue, and probably intensify before any material re-engagement starts.

The hope for Buenos Aires is a possible outbreak of goodwill resulting in a trade ceasefire, and commitment to further talks, which is more likely if President Trump gets rattled by any further drop in the US stock market. But this would be noise. Rightly or wrongly, Trump probably thinks that in a war of losers, he has his opponent on the back foot.