China vs. US: Trade war or war of words?
What the sabre rattling is all about?
China’s tit-for-tat reprisals clearly caught markets by surprise last week. With Chinese exports to the US being 4 times bigger than US exports to China, China seems to have the most at stake in a quid-pro-quo process. Still, we think the most likely outcome is that both parties will start a prolonged negotiation process, not an outright trade war. Keep in mind that very little has happened yet in terms of concrete action–it is still a war of words. Although president Xi offered little in terms of genuine news in his widely followed Boao speech on 10 April, China’s more conciliatory tone recently might be an early indication that this war of words will not transform into a trade war.
That said, when it comes to goods, trade uncertainties are unlikely to fade before the US mid-term election. Longer term, however, the core of the matter is not the rust belt, it is the protection of intellectual property. This particular issue is more structural in nature as it relates to China’s ambition to become a world leader in tech, e.g. artificial intelligence. Tech stocks have been leading equities higher in the current bull markets, and many believe that whoever wins the technology race will also win global economic leadership. Therefore, the transfer of intellectual property from the US to China is taking centre stage. Ultimately, it is about who will be the world’s leading economy in 10 years’ time.
How does this affect the bigger macro picture?
The hay days of fast-growing trade are over and a more hawkish tone on trade policy in general is here to stay, we believe. The most important take-away is that yesterday’s globalisation winners will not be in the driving seat in the future. It is important to note that global trade intensity (trade/gdp) already peaked a few years ago. Protectionist measures were on the rise way before the recent trade tensions escalated. On top of this, technological progress (robotics) is making insourcing of production more favourable. So a less trade-friendly environment is not new in itself. But for many years, trade has contributed to strong global growth; in the same way “peak trade” is now contributing to the low growth environment we are in.
Figure 1: Global growth becoming less trade-intense