There has been a lot of talk recently of a ‘trade war’ between the US and China. The US President, Donald Trump, has spoken bullishly about how they are ‘easy to win’, and has made it clear that he intends to make US interests a priority in any fresh negotiations he goes into with China. It’s also clear that he feels the relationship is currently unequal, and he built much of his presidential campaign on promises to reshape the world’s current economic agreements in ways that benefit the US above all else. Of course, whether any of this actually happens is a different matter: the campaign trail is a very different place to the negotiation rooms where the real talking will ultimately take place. And as a businessman who prides himself on his ability to close deals, it’s likely that Trump will take a personal interest in the ongoing negotiations – but once again he may find that the political world and the business one offer very different challenges.
I’ve been thinking a lot recently about this threat of a trade war. Of course, any phrase that contains the word ‘war’ is always unnerving – for individuals and for markets – but what are the real potential consequences of any major falling out between China and the US? As someone living in Hong Kong, we’re on the front line of any conflict – trade or otherwise – so what could the impact be?
It’s worth looking at what form a trade war could take. Traditionally they involve increasingly punitive tariffs being imposed on each other’s goods ostensibly to favour domestic businesses while punishing your opponent’s. You impose tariffs on steel, I impose tariffs on circuit boards and so on. These kinds of moves have an immediate impact on everyone but in particular those industries who rely on these raw materials for their own products. Imported steel for US cars becomes more expensive, the manufacturers have higher production costs, and those costs are soon passed on to the customer who wants to buy a bigger car for their growing family. That family then has less money than they did before to spend on other products and services, or they don’t buy the car in the first place and the car industry takes a hit. So, these kind of tit-for-tat moves have an impact that spreads far and wide, throughout the whole global economy.
A problem for free trade
There are other, wide-ranging consequences of a trade war between two economies as large as the US and China. One of these is simply the damage it does to the basic concept of free trade, that is a crucial part of making the global economy tick along. The undermining of this idea – essentially by imposing restrictions on certain kinds of trade between countries, is potentially hugely damaging, not just for China, the US or South East Asia, but the entire world economy. Putting any barriers on trade could disrupt the global supply chain – and ultimately cost consumers of end products even more.
Yet another aspect to bear in mind is simply the interdependence of the different parts of the global economy. It’s clear that today no country acts in isolation, rather that everything that they do economically is intrinsically linked to other countries as well. Products that the US might claim are ‘Made In China’ might actually be made from components that are produced in many other countries, so punitive actions intended to harm the Chinese may in fact end up having far broader consequences and serious implications for manufacturers in those places.
The stated aim behind any trade war between the US and China is to open up the Chinese markets and to protect each country’s respective interests. But for me, it’s hard to see how this kind of conflict can bring about the desired results. There are potentially so many negative consequences – in terms of free trade, geopolitical tensions, the knock-on effects on other economies and the unsettling effect any trade war would have on the global financial markets – that it seems to me essential that both sides do their best to come to an agreement. Positive noises coming out of recent talks between the US and China are encouraging so let’s hope this continues.