Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Stocks, Bitcoin and Crypto Markets Breaking Bad on Donald Trump Pump - 21st Nov 24
Gold Price To Re-Test $2,700 - 21st Nov 24
Stock Market Sentiment Speaks: This Is My Strong Warning To You - 21st Nov 24
Financial Crisis 2025 - This is Going to Shock People! - 21st Nov 24
Dubai Deluge - AI Tech Stocks Earnings Correction Opportunities - 18th Nov 24
Why President Trump Has NO Real Power - Deep State Military Industrial Complex - 8th Nov 24
Social Grant Increases and Serge Belamant Amid South Africa's New Political Landscape - 8th Nov 24
Is Forex Worth It? - 8th Nov 24
Nvidia Numero Uno in Count Down to President Donald Pump Election Victory - 5th Nov 24
Trump or Harris - Who Wins US Presidential Election 2024 Forecast Prediction - 5th Nov 24
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 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