Can the US and China stop the trade war from blowing up. Rumors and Threats of Trade Wars, in diverse places. If the trade war flares up, watch out for a chain reaction across much of the world.
By Tim Wallace. 8th May 2019, 1:27 pm. The Telegraph with a last minute deal?
Threats to the global economy do not come much bigger than a trade war. Tariffs helped turn a stock market crisis and recession into the Great Depression back in the 1930s, scarring the world economy for decades to come.
The key lesson for the best part of the past century was that prosperity flows when borders are open to trade.
So far the trade spat between the US and China has not tipped the world into crisis. That is not guaranteed to continue: IMF chief Christine Lagarde this week warned it is “a threat for the global economy.”
The trade war started at a time of strong economic growth, and central banks around the world have responded with economic stimulus measures, dampening the conflict’s impact.
However, global growth has weakened since then and the current fragile stability could let much of the world avoid a recession, if there are no more shocks.
Yet that could change this week. After months of negotiations, the US looks set to raise more tariffs on Chinese imports.
It took markets by surprise – investors had grown used to the idea a deal was on the table.
Donald Trump smashed that complacency with tweets promising the 10pc tax on $200m of imports will rise to 25pc on Friday.
“$325bn additional goods sent to us by China remain untaxed, but will be shortly, at a rate of 25%,” wrote the US President.
“The Tariffs paid to the USA have had little impact on product cost, mostly borne by China. The Trade Deal with China continues, but too slowly, as they attempt to renegotiate. No!”
This misses a key point: the tax is paid by American consumers of those imports, not by the Chinese. But nonetheless, the message was clear: negotiations have failed and taxes are going up.
Wall Street tumbled in response, while China’s stock markets also fell hard.
Perhaps it is a negotiating ruse designed the shake Beijing’s team, including Vice-Premier Liu He, into folding, but Trump’s threats could easily take effect on Friday.
Now leaks have emerged indicating the Chinese have also played hardball. It pulled back from prior commitments to address US concerns on intellectual property, technology transfers, competition policy, foreign exchange intervention and access to financial services, according to sources quoted by Reuters.
That indicates the two sides are far from a deal.
China warned it will retaliate on any extra tariffs in a sign an escalation of the trade war is a real possibility.
Economists are split on the chances of an agreement taking place to avert another big rise in taxes, indicating the extent of uncertainty over the next step in the trade war.
“Call us wishful thinkers, but evaluating Trump’s latest threat in the context of all the other facts on the table has left us exactly where we started – with the belief that the two sides are motivated to close a deal,” says David Woo at Bank of America Merrill Lynch.
He believes no “new deal-breakers” have emerged, with China’s flexibility a sign a deal can be done. He also sees Trump’s tough stance as a last-minute negotiating tactic designed to hasten a deal and prove to the public that it is as good an agreement as possible.
On top of that Woo sees China as vulnerable and so in need of a deal, while Nafta talks “provides some assurance to us that he [Trump] values a deal more than getting everything he wants”.
By contrast, Iris Pang at ING is much more sceptical: “I don’t think the US is going to accept China’s ‘new terms’ in any draft deal. So tariffs from US will increase and China will retaliate by imposing an additional 25pc tariffs on $200bn of goods.”
She foresees a longer-term negotiation kicking off. “The more interesting issue we are watching for is what are the ‘new terms’ that China wants from the US, and what are the ‘discussed terms’ that China wants to renegotiate. This information will be useful to evaluate how long further renegotiations will be needed, and how difficult an ongoing negotiation will be,” says Pang.
Jan Hatzius at Goldman Sachs is in the middle, giving a 40pc chance of the increase taking effect on Friday.
“This announcement clearly reintroduces the risk of further tariff escalation, which seemed very unlikely over the last couple of months,” but the arrival of a large delegation from China “would indicate that they believe a deal is still reasonably likely”.
He notes that the legislative process to hike tariffs is already complete. The President can raise or cut the taxes relatively quickly now, allowing the US more flexibility, showing the results of progress or impasse with ease.
The implications of a wave of new taxes are serious indeed if it becomes a long-term clash.
“Although there are risks … a sustained and/or intensified trade war that would lead to global financial implosion, we do not regard [this] risk as either imminent or systemic,” says Willem Buiter at Citi.
UBS estimates global growth would be hit by about 0.45 percentage points, with a potential fall in global stock markets of close to 10pc.
The US economy is relatively closed – exports amount to less than one-tenth of its GDP. In contrast, economies across Europe are much more open and therefore likely to be more vulnerable to trade disruption.
Germany, for example, is a key customer of China, selling industrial goods to the world’s second-largest economy. As China suffers, so does Germany, and then Germany’s trading partners.
German industry has only just escaped a recession caused in part by a dip in demand from China. It is no leap of the imagination to see a renewed trade war ramping up the pressure on the eurozone’s industrial powerhouse.
On top of the harm already caused, China’s response was to stimulate the economy with more debt and easier financial conditions.
The Bank of England fears those mounting debts are a threat to financial stability, which could become unsustainable if economic growth slows sharply.If the trade war flares up, watch out for a chain reaction across much of the world.
Categories: Rumors and Threats of Wars