Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

The First Casualty of Trade War Is Truth

Politics / Protectionism Oct 11, 2018 - 03:26 PM GMT

By: Dan_Steinbock

Politics As Trump tariffs continue to spread, an ideological war of words is redressing harsh protectionist realities. What is the state of Chinese growth amid the US tariffs? And what is the impact of the trade wars on global economic prospects?

Recently, US academic Yasheng Huang argued on Wall Street Journal that “Jack Ma is retiring. Is China’s economy losing steam?” By the same logic, Elon Musk’s forced resignation from Tesla would mean US slowdown.


Similarly, Bloomberg columnist Nisha Gopalan explains Ma’s retirement by claiming that the prosecution of corrupt business oligarchs in China signals economic weakness, despite corruption’s corrosive impact on private economy. In turn, Gordon F. Chang urges US tariffs against all Chinese imports as “necessary.” But these prophecies have a pathetic track record. In 2001, Chang published The Coming Collapse of China, even as Chinese economy was about to grow sixfold in a decade.

It is often said that the first casualty of war is truth. Trade war is no different. What is odd is not that times of peril offer opportunities to ideologists, or ideologies to opportunists. What’s odd is that, despite recurrent flawed predictions or prejudiced bias, partisan oracles continue to be given ample space in major global media.

Setting aside the hollow prophecies, where is Chinese economy today?

Chinese growth amid Trump's trade wars

As the People’s Bank of China (PBOC) recently cut banks’ reserve requirements, Reuters headlined: “Trade war imperils [China’s] growth.” Yet, analysts saw the cut as an affirmation of Chinese government’s commitment to support the domestic economy. In the new, more challenging status quo, accommodative monetary policy is likely to continue, along with further fiscal easing.

In the short-term, China is responding and adjusting to US tariff wars. In 2018, growth forecast is 6.5% to 6.6%, thanks to strong first half of the year. Moderation in the second half will reflect US tariff wars and consequent slower demand growth.

For now, solid service sector growth, supported by monetary and fiscal support, has kept the economy on track. Inflation is moderating and current account surplus could narrow more than expected. Trump tariffs are designed to hurt export growth and thus the growth of manufacturing investment. Further, the White House’s sharpened tone suggests US trade hawks hope to instigate capital outflows from China.

In the medium-term, China is deleveraging, while reducing poverty and pollution, to sustain higher-quality growth. A year ago, shadow banking still peaked at more than 15% year-on-year; now its growth has plunged. While substandard loans and actual bank losses have been relatively low, “special mention” loans - a category slightly above nonperforming loans - remains substantial, though they have been declining.

In the long-term, Chinese economy is rebalancing as the sources of growth are shifting from investment and exports to consumption and innovation. On the supply side, the economy continues to move away from industry and toward services. On the demand side, consumption is increasingly fueling growth. Meanwhile, global innovation hubs are expanding from Shenzhen to Shanghai and Beijing.

Obviously, Trump’s trade offenses complicate and defer Chinese reforms, but the direction of these reforms prevails. There are no winners in a trade war. If the White House will up tariffs on all Chinese imports, the stakes will soar to $500 billion. That could penalize China by 1% of its GDP; but US GDP would suffer a 2% hit.

However, global economic prospects could suffer even more.

Undermining global prospects

The International Monetary Fund (IMF) has now cut its forecast on global economic growth to 3.7% percent for 2018 and 2019, citing rising trade protection. But that is an optimistic projection because it downplays the full impact of the Trump administration’s effective tariffs, retaliations impact, the inclusion of new potential tariff targets and subsequent collateral damage. 

Following a sharp upswing in 2017, exports and imports in Asia have held up fairly well. But thanks to Trump’s new protectionism, world trade and investment are set to take severe hits. According to the World Trade Organization (WTO), merchandise trade volume growth was expected to increase 4.4% in 2018. But as tariffs escalate trade tensions, the outlook is likely to be penalized. In turn, world investment soared to $2 trillion before the 2008 global crisis. Last year, it fell to $1.5 trillion. As tariff wars spread, world investment is likely to languish even more.

Instead of confronting protectionism, Brussels and Tokyo still hope to gain exemptions to avoid Trump’s trade wrath. In the B20 Summit, the business voice of the G20, advanced economies have been pushing a policy proposal to address “state-related competitive distortions." In advanced economies, the share of state-owned enterprises (SOEs) in national employment is about 5% to 15%. In the early days of Chinese reforms, the comparable figure in the mainland was over 75%; today barely 20%. However, advanced economies have had two centuries to reduce the role of SOEs in their economies; China barely two decades.

If confrontational approaches are favored by G20, then why not start by reviewing the role of US and EU agricultural subsidies that have caused irreparable harm to developing economies in Asia, Latin America and Asia for decades?

What G20 and the world economy needs today is not more friction, but a united front of advanced, emerging and developing economies for global trade. As long as that front remains absent, Trump’s trade hawks can continue their bilateral ‘rule-and-divide’ tactics against individual economies - instead of having to cope with the multilateral force of the global economy.

Over time, the alternative is the kind of global depression that was barely avoided in 2008.

Dr Steinbock is the founder of the Difference Group and has served as the research director at the India, China, and America Institute (USA) and a visiting fellow at the Shanghai Institutes for International Studies (China) and the EU Center (Singapore). For more information, see http://www.differencegroup.net/

© 2018 Copyright Dan Steinbock - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Dan Steinbock Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in