US China Trade War, Winners and Losers, and Implications for the Global Economy

- By Chinedu Okoye 

 

Summary:

• Winners and losers in this conflict can't be measured in monetary terms as both sides lose in that regard. The real differentiation lies in long-term economic positioning.

• The Trump administration seems to miss the transition of the US economy, and this moves could actually stall and take way the focus from long-term sustainability to short-term (political) gains.

• Ironically the US needs these deficits to maintain the balance of payments surplus it runs from gigantic inflows it receives from foreign investors into private and government securities.

• The trade war and threats to "isolate China" has sever implications for US position and influence in the global economy as it is basically strongarming allies, and giving China more leverage.

 

Introductory Remarks:

Trump is going aggressive as China is gently forging ties, whilst issuing stern warnings of US collusion. Both countries though with a lot to lose show no signs of letting back —save for the 90 day pause on the new tarriffs—and the objective of the US has shifted to isolating China.

As always, China's objective ultimately is to protect it's economic interests with other trading partners, rather than unsit the US. Though in reality a more favorable Chinese trade relative to the US in goods/services they both export, by any country would have the same effect, albeit indirectly.

Both countries are expected to leverage in their strengths, advantages and standing in the global economy, in the tussle for economic supremacy.

The Economic and Labor Market Structural Transition:

The US economy has evolved from analogous manufacturing to a Hi-Tech manufacturing and services hub, which require specialized skill for which there are no shortage of jobs.

As a consequence of this transition, the US naturally runs deficits to countries specialized in the manufacturing of hardware and finished goods, the economy is tilting away from.

By enforcing protectionist trade policies on the most industrially advanced trade partner, to reverse this, the White House is missing the big picture, and ignoring the real problem—a labor maket in need of skill enhancements.

At near full employment, and relatively adequate local capacity for times of emergency, there simply is no basis, for trying to impose restrictions on trade. Especially when operating an balance of payment surplus.

Deficit Funding Investment Surplus, and the Isolation Risks posed to US Assets:

The US runs deficits to the world, in return for capital account surpluses, as these dollars paid out are reinvested into the American stock market. The US also runs a trade surplus in the services sector especially to China.

The deficit funded investment surplus is threatened by the hostility in trade, the more countries are forced to produce for and trade more with each other, the lesser need for the USD to settle international trade transactions.

Also, the link between American and Chinese business is still very much alive—it would however just be underused or abandoned.

With over 80% domestic manufacturing companies with Chinese exposure —and with a shortage of alternatives that could compare in scale efficiency and quality—American local businesses could take direct and indirect hit to profit margins.

This would negate any positive effects of tax cuts, and make American securities less desirable, and affordable as foreign investors take a hit to their bottom line as well.

The Chinese Leverage:

Economic Leverage:

China has leverage with its USD cash and Treasuries holdings. One which is already being pulled gradually—for the past four years the People's Bank of China has been offloading US Treasuries and stocking up in gold—, and could destabilize or cause mutual destruction to the US Economy.

China also has more leverage than the US is pricing in with bilateral and Multilateral relations with other countries, especially Sub Saharan Africa, as the Paris Club (The West and US really) support has declined over the last two decades, with the Chinese share of African debt and financial support incressimg in the time period.

Political Leverage:

Countries know this is a four year affair, for the US, a timeline in which nothing can be achieved that is desired —i.e., bringing back factory jobs. But for leadership in China, the years could span into decades. 

Whilst Xi is looking to forge new relationships, and diversify away from the US market, Trump is essentially making imports more expensive for the American consumer, with plans to cut welfare programs in healthcare and others that currently help alleviate burdens in incomes, boating aggregate demand.

CNBC's Evelyn Cheng reported yesterday April 20th that;

The Chinese warned that "it will retaliate against countries that cooperate with the U.S. in ways that compromise Beijing’s interests". This is "as U.S. President Donald Trump’s administration is reportedly planning to use tariff negotiations to pressure U.S. partners to limit their dealings with China"

In a show of strength and resolve, the Chinese Ministry of Commerce Spokesperson stated that "If this happens, China will not accept it and will resolutely take reciprocal countermeasure".

Because of China's economic prowess, and it's strong alignment and leverage with strategic economies (BRICS and their candidate countries), this levels the playing field, neutralizing Trump's intentions as nations would be wary of a Chinese boycott.

Outcome and Implications:

From the debacle, we predict the following;

US Inflation and Chinese Industrial slowdown:

Inflation in the US either resurfaces, or declines at a slower rate, as demand tanks leading to a decline in aggregate demand and a change in future expectations that guide demand.

Unemployment also resurfaces, asset prices tanks, and overall output falls— a recipe for a recession.

This would obviously have economic implications for countries exposed to China and the US. Both country's industries would take a hit, and China would have to scout for a wealthy 350 million population market, to run a $294 billion trade surplus to, as the US exporters would also scramble to find alternative $143 billion market.

Implications and Opportunities for Resource Rich and Dependent African Countries: 

Resource dependent economies would struggle, as the market enters risk-on mode, private and government securities upon which these countries depend on for FX, become less attractive, and more costly. This is as key industries —say Oil in Nigeria—suffer price declines.

But there is an opportunity in China, for agricultural producers, like Soybean, with market size of 2.79 million tonnes; meat and offal, $2.54 billion market size; Cotton $1.49 billion and wheat; $600 million. But these require scale, efficiency and quality not readily available to these countries, today. Argentina and Brazil however could be expected to gain from this.

Opportunity and Necessity for Deep Economic Partnerships:

Only FDI could bridge the gap, and so we recommend that counties strive to attract foreign investments in these industries, forging long-term relationships

This is something Chinese companies would be inclined to but might have political backlash for participating countries. The best option for SSA countries is to do nothing to retaliate as they are charged with the smallest % tariffs and run relatively negligible deficits to the US.

Because their main export is commodities, they are already susceptible or exposed to lower commodity prices (eg Oil in Nigeria which has dipped drastically in the past 6 weeks), so the tarrifs won't matter as much. However the non-retaliation gives them future bargaining power with the US, and freedom to partner with whoever.

The nature of this partnership is of utmost importance. You can't sell what you don't have, so foreign direct investment and economic cooperation should be of utmost importance, when negotiating economic agreements.

Expected Outcomes for both Countries and Implications for International Trade Alliances:

Washington is expected to dial back on its tone regarding isolating China, most probably disguised as a win, through a switch in negotiations strategy with partner countries, from Chinese isolation as the goal, to a US favorable trade agreement with no implications for China.

Beijing on the other hand will most likely leverage it's established economic alliances, to consolidate and strengthen economic partnerships that extend beyond trade to investment partnerships and economic cooperation. BRICS (and candidate countries), and Sub Saharan Africa will be the target, with Europe in their sights as well.