The conflict will get worse before it gets betterby George Magnus / November 28, 2018 / Leave a comment
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…