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What will the world look like after trade war?

By Stephen S. Roach | China Daily | Updated: 2019-11-30 06:26

For the last two years, the trade conflict between the United States and China has dominated the economic and financial-market debate-with good reason. After threats and accusations that long predated the 2016 US presidential election, rhetoric has given way to action.

Over the past 17 months, the world's two largest economies have become embroiled in the most serious tariff war since the early 1930s. And the weaponization of US trade policy to target perceived company-specific threats such as Chinese telecommunications equipment giant Huawei has broadened the front in this battle.

From the start, it has been a political conflict fought with economic weapons and could remain so in the foreseeable future. What that means, of course, is that the economic and financial-market outlook basically hinges on the political dynamics between the US and China.

Has White House had enough of trade war?

In that vein, the so-called phase-one "skinny" trade deal announced with great fanfare on Oct 11 may be an important political signal. While the deal, if ever consummated, will have next to no material economic impact, it provides a strong hint that the White House has finally had enough of this trade war. Consumed by domestic political concerns-especially impeachment hearings against the US president and the looming 2020 election-it is in the White House's interest to declare victory and attempt to capitalize on it to counter the domestic problems.

China, for its part, would also like nothing more than to end the trade war. Politics may be very different in China, but the Chinese leadership is not about to capitulate on its core principles of sovereignty and its aspirational mid-century goals of national rejuvenation, growth, and development. At the same time, there can be no mistaking downward pressures on the economy. But with Chinese policymakers determined to stay the course of their three-year deleveraging campaign-an important reason for the current slowdown-they should be all the more eager to address the trade-related pressures brought about by the US-triggered trade war.

Consequently, the political calculus of both countries is coming into closer alignment, with each looking for an end to the conflict. There is always a risk that other complications will arise. But, at least for the time being, the politics of the trade war are now pointing more toward de-escalation rather than a renewed ratcheting up of tensions.

Deglobalization can be ruled out

If that is the case, and if a "phase-one" accord is reached, it behoves us to ponder what the world will look like after the trade war. Several possibilities are at the top of my list: deglobalization, decoupling and trade diversion.

Deglobalization is unlikely. Like the first wave of globalization that ended ignominiously between World War I and the Great Depression, the current wave has generated a mounting backlash. Populism is rearing its ugly head around the world, and tensions over income and wealth inequality-aggravated by fears that technological innovations such as artificial intelligence will undermine job security-are dominating the political discourse. Yet the climactic event that underscored the demise of the first wave of globalization was a 60 percent collapse in world trade in the early 1930s. Notwithstanding the current political dysfunction, the odds of a similar outcome today are extremely low.

Global decoupling, too, is unlikely. Reflecting the explosive growth in global value chains (GVCs) over the past 25 years, the world is woven together more tightly than ever before. That has transformed global competition away from the country-specific paradigm of the past to a far more fragmented competition between widely distributed platforms of inputs, components, designs and assembly functions. A recent International Monetary Fund study found that GVCs accounted for fully 73 percent of the rapid growth in global trade that occurred over the 20-year period from 1993 to 2013. Enabled by irreversible trends of plunging transportation costs and technological breakthroughs in logistics and sourcing, the GVC linkages that have come to underpin global economic integration are at little risk of decoupling.

US trade deficit shows domestic savings low

Trade diversion is a different matter altogether. As I have long argued, bilateral trade conflicts-even bilateral decoupling-can do nothing to resolve multilateral imbalances. Putting pressure on one of many trading partners-precisely what the US is doing when it squeezes China in an effort to reduce its merchandise trade deficits with 102 countries-is likely to backfire. That's because America's multilateral trade deficit reflects a profound shortfall of domestic savings that will only get worse as the federal budget deficit now veers out of control.

So, without addressing this chronic savings problem, targeting China will mean pushing the Chinese piece of the multilateral deficit on to the US' other trading partners. Such diversion will shift trade to higher-cost foreign sourcing-the functional equivalent of a tax hike on US consumers.

Trade truce or not, a protracted economic struggle between the US and China has already begun. A cease-fire in the current battle could end up being a politically expedient pause in what is likely to be a long conflict. Which should worry the US, which is devoid of a long-term strategic framework. China is not. That is certainly the message from Sun Tzu in The Art of War: "When your strategy is deep and far-reaching… you can win before you even fight."

The writer, a faculty member at Yale University and former chairman of Morgan Stanley Asia, is the author of Unbalanced: The Codependency of America and China.

Project Syndicate

The views don't necessarily represent those of China Daily.

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