The USA - China trade war.

Wealth Management and Private Banking

20 November 2019

AsiaGeopoliticsGovernmentStrategyUSWealth Management and Private BankingWealth Management and Private Banking

  • The conversation was introduced, and a series of questions were posed as topics and a loose structure for the discussion. It was emphasised that we need to understand both sides’ views to understand the true issues, reasons and possible outcomes. Is it a trade war, or is China the new USSR and the western response is echoing 60’s sentiment? Is it that they don’t want primary global competition to come from China?
  • There are strongly opposing views on numerous aspects, particularly human rights. It was noted, although not confirmed, that people around the table for the discussion probably had greater exposure to US than to China. It was also commented on that Donald Trump decided to refer to a trade “war” rather than perhaps trade “negotiation” - similar to his approach in referring to “climate change” instead of “global warming” - to emphasise and facilitate his own viewpoint and positioning.
  •  The following comments and notes were made in relation to the topics/questions tabled.

     Why is there a trade war?

  • It is not just US vs China because, as highlighted below, 1-to-1 trade challenges can be circumvented.
  • Cheaper imported goods may benefit the consumer and the exporter but impact workers in the domestic industry thereby concentrating losses in affected manufacturing heartlands.
  • A government may attempt to protect their markets from cheap imports by placing tariffs at source on those imports, increasing the imports’ prices, lessening the competition and benefitting the local / domestic companies. Where such tariffs are implemented, the government of the exporter may similarly respond. Further, in the USA some so-called “swing states” may have a greater exposure to such imports and thus in times of elections this becomes a political/election focused ‘war’.
  •  Do single country tariffs work?

  • Direct effects of a trade war between two parties may not be as effective as first assessed. Countries can circumvent a direct TW - an example being when the USA banned imports of washing machines from Korea. Korea instead simply agreed with China to export parts to China who in turn assembled and exported machines to USA.
  • Trade can be merely rerouted to avoid the tariffs and bans, leading to a merry-go-round. US imports were broadly flat.
  • In such cases, there may be a need to escalate to a blanket tariff or a ban on all imports of the type of goods banned in a one-to-one tariff.
  •  Free trade – is China playing by the rules? Do we really have free trade in China?

  • China encourages overseas companies to set up and manufacture/trade in China, but it insists that it is done through a joint venture with 51% China owned.
  • The ultimate villain is probably the corporate sector, not China, as it is they that are deciding where to base themselves. USA / Trump are also encouraging corporates to set up / make their products in USA.
  • China can be seen as pro-corporate, and yet anti-employee. Profit margins are elevated at the moment. However, if protectionism leads to full-on de-globalisation, that may lead to inflation and possibly hikes in interest rates.
  • It is often really just about getting manufacturing jobs back. Trump is very vocal on this and yet so are the Democrats. And amongst all this, the WTO is, at best, slow and, at worst, ineffective as China takes little notice of its diktats.
  • Given the insistence on JV status with 51+% China owned, any patents/IP developed can thus be owned and subsequently developed independently by China. With 1.2bn people and significant tech prowess i.e. given such an advantage - should China be allowed to get away with this?
  • Examples:

  • High speed train was through a JV. China assimilated the tech and is now competing in other markets.
  • BIBO was a JV out of Google.
  • Smart phone was invented in the West, but China still uses western components in its sets.
  • However, this is not new as many countries have done this throughout history. The 1790 patent laws in USA enable the USA to do similar i.e. rip off foreign technology advances.
  •  Human rights and the impact on cheap workforce and thus products?

  • Historically, the week consisted of Sunday for church, the rest for work, and typically there are longer working hours in poorer countries. Approaches to human rights differ significantly.
  • In Western provinces of China, there is increasing evidence of the Muslim population being “re-educated” with bombings and other incidents in response to perceived terrorist threats.
  • All responses to terrorist approaches are difficult – China’s approach is typically heavy handed.
  • However, Hong Kong appears currently to be a bit of an exception. There is surprise in some quarters that the Chinese Government has let the perceived mishandling by HK Government go on for so long.
  • One thought is that perhaps its aim is to let HK implode further? There is no easy solution and yet it is unlikely to end peacefully. This is against a backdrop of HK becoming less important to mainland China 22 years after being returned and Mandarin becoming the primary language without which your ability to do business into China is limited. Further, the colonial HK flag is anathema to China. There is also pressure from central China on corporates – for example there is recent history of the Government summoning and calling to order the CEOs of major entities in the belief that they are conducting affairs contrary to the state’s desires.
  • China does not want a repeat of Tiannamen Square. The US HK status bill determines special trading status. If HK no longer has free rights, we will no longer trade. UK still has some moral responsibilities for protecting interest, given the “one country two systems” principle is not due to end for c28 years. But UK will probably have to rely on US should China go in with force. 
  •  Will China become rich before it gets old?

  • US/China tension is not going to go away. China may well overtake US as the primary economy in the long term, as implied by Ken Livingstone in the 1990’s. The US believed it had a right to lead the world and that China was seen as having the issues - his view was that in 35 years’ time, the Chinese economy would be on the rise. There is one generation to go and China owns a lot of long bond. If they sell it, US may be on its knees.
  • Rapid rise of China - 5% rise in GDP per cap. It could be seen that it is following Japan, Korea and Taiwan’s rise and going the same way… BUT they are all military allies of the West and trade relationships are reflective of that. China is not a military ally and is not showing a propensity to become one.
  •  Is China the new USSR?

  • Perhaps US does indeed see China as a threat. China has kept currency down has been and is building foreign exchange reserves.
  • Does China influence the boardrooms of corporates? There are a number of examples where that can be seen to be the case.
  • China is often keen to encourage boycotts and blockades. The direct effect is mostly quite limited, but if China increased its central command of the economy and for example, blocked particular products, that would be different.
  • Initially it seems odd that Mexico, Korea and the EU, for example, have not done better out of the US/China war. There should be winners out of such a situation. However, there has been a big decline in manufacturing e.g. Germany investment/ factory output is dropping. Global manufacturing growth has gone from 4% towards 0%. It is suggested that such circumstances are cyclical in nature and go in 15 month or so mini-cycles.
  •  What is Trump’s negotiating strategy?

  • ‘It pays to knock your opponent off balance’ appears to be the approach. If you shock them first, they are more likely to get things wrong. Trump’s negotiating strategy is so aggressive, it makes you more likely to agree a deal. This worked well against Mexico – an opponent who isn’t relatively strong.  Will that approach have as much impact on China? There is the issue of national pride - the sense that China has been humiliated by these powers – there is a past period of national humiliation that is in their psyche that may prevent China from folding in a fashion similar to Mexico.
  • There is a case that one can’t rely on the WTO to rule on things quickly. So, there can be seen to be some justification for why Trump does things the way he does.
  •  How does the 2020 presidential election change things?  Is there a deal to be made before the next election?

  • See above regarding the protectionism demands from swing states on the impact of cheap imports on manufacturing in their regions. Such demands may dictate the actions and attitude of those seeking office.
  •  Will trade war create a recession?

  • If nothing happens, the US economy is likely to continue to shrink as result of cheap imports with possible recessionary consequences.

Expert: James Carrick, Global Economist, LGIM

Facilitator: Paddy Lewis, Partner, Sionic