Opinion - The US will lose badly in the trade war with China and imperil the world economy

The US will lose badly in the trade war with China and imperil the world economy

US imports into China are down much more dramatically than China’s exports to the US. China has also sold more Treasury bonds in March, putting pressure on the already large US fiscal deficit

By David Brown May 20, 2019 "Information Clearing House" - The world is taking leave of its senses and falling down the rabbit hole of a deepening global trade war, economic shocks and political instability. The post-war world order is breaking down, multilateralism is giving way to national self-interest and the political forums for peaceful debate are failing.

It’s time for someone to step forward and show stronger leadership before the world sinks back to where the 2008 financial crisis left off. Right now, the world is in self-harm mode and deeply vulnerable.

When two great superpowers go head to head, there’s normally serious injury felt on both sides. The world generally suffers greatly, too. But this is a trade war that the US will ultimately lose – and probably lose badly at that.

It’s not just the potential harm to America’s international status but damage that could also leave the US economy seriously exposed as well. America’s burgeoning trade and fiscal deficits underline deep deficiencies in the US economy, which ironically China can help to bridge. Critically, the US is more at risk than China right now.

Both economies are under the cosh from the trade war, but the US seems to be faring worse based on recent trade performance. According to China Customs data, the three-month moving average for US imports into China is down dramatically by 26 per cent year on year, compared with China’s exports to the US running 13 per cent below a year ago. The relative damage being wrought is roughly twice as bad for the US as it is for China.

America fails to produce much of the goods craved by domestic consumers and businesses and it’s
simplistic to think sanctions trade tariffs and import quotas can easily resurrect the manufacturing capacity the US has lost overseas thanks to decades of industrial decay and benign policy neglect. Imports from China help to satisfy the US demand gap inflated by decades of imprudent monetary and fiscal policies which have chronically ramped up domestic spending. Without the safety valve of import leakage, sharper capacity constraints and higher inflation would have followed.

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If Washington plays hardball with China, Beijing could hit back very hard. Recent US Treasury Department data shows China sold the most US Treasury bonds in almost 2½ years in March as trade frictions escalated between the two countries. China owns 17 per cent of all US Treasury securities held overseas and therefore holds a major trump card.

A buyer’s strike by China would hit the US economy hard, forcing interest rates and bond yields higher, hurting US growth even more. A major disinvestment by China from US stocks and bonds would trigger global financial mayhem.

Source: New View Economics

What’s worrying is that trade war contagion is spreading. Washington is bringing pressure to bear on European car imports, while accusing the European Union of treating the US worse than China does. German Chancellor Angela Merkel has lumped the US in with China and Russia as a European adversary. Attitudes are hardening and rifts deepening.

Meanwhile, tensions are building in the Persian Gulf between the US and Iran, a bad moment for major superpowers to be sinking into political hostility and military sabre-rattling. The world needs to take stock of the harm being inflicted on global economic confidence.

There’s an opportunity both for China and the US to step forward to show greater statesmanship. Defusing the trade war could be a huge boost to their international reputations and standing. China would be seen as a force for greater global stability, strengthening its position as a world power and building longer-term acceptance for the renminbi in world financial markets.

President Donald Trump’s “make America great again” crusade should be a banner for success, not a potential smokescreen for industrial failure. The US must invest more in manufacturing infrastructure and reshape its economy in a way which capitalises on success. It’s better to mend fences and boost trade flows than build walls and retreat into economic isolation.

The important lesson is that the US and China can help each other in a mutually beneficial way which enhances global prosperity without dragging the world into even more chaos.

David Brown is chief executive of New View Economics

This article was originally published by "South China Morning Post"-

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==See Also==

China ‘in no rush’ for another trade war talks: There is no point in further discussions until the United States is prepared to give some ground, Chinese analysts say

Chinese President Xi Jinping sounds Long March rallying call as trade war tensions rise with United States

China scrapped import shipment of American pork in the biggest cancellation in more than a year as US-China trade war escalated

Google suspends Huawei from Android services: The world’s second-largest smartphone maker is facing the prospect of being shut out of the world’s most popular smartphone operating system after being placed on a “banned entity” list by the White House

Amid trade war, Trump 2020 flags are being made in China

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