With each shot fired in the ongoing U.S.-China trade confrontation, the margin narrows for President Donald Trump and Chinese President Xi Jinping to not only save face by coming to a mutually beneficial resolution – but also to limit the collateral damage a clash of the world’s two largest economies is already starting to produce.
Analysts warn that the Sino-American conflict is not playing out in a vacuum and that economies around the world are suffering from investment volatility, supply chain uncertainty and currency fluctuations. And as both the United States and China strap in for what’s increasingly looking like a protracted trade war, a slowing global economy already saturated with uncertainty is bracing for impact.
“We are increasingly looking at significant damage to an international economy that was already starting to lose momentum in other ways,” says Louis Kuijs, the Hong Kong-based chief Asia economist at Oxford Economics. “There are so many other countries that are affected by such a slowdown.”
Kuijs points to trade-dependent and manufacturing-heavy economies, in particular, as being susceptible to currency fluctuations and the slower economic growth expected in the U.S. and China as a result of their ongoing conflict.
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“My European colleagues are especially freaked out. These economies like Germany that are very export-dependent, the German manufacturing sector has lost momentum in a scary fashion,” Kuijs says. “Hong Kong, Singapore, Vietnam, all of these countries are extremely sensitive to slowdowns in global trade momentum.”
Singapore’s gross domestic product has already showed signs of a slowdown, expanding just 0.1% in the second quarter from a year prior. Taiwanese exports have underwhelmed for months. And sluggish manufacturing indicators in Asia and around the world have led analysts to believe China and the U.S. are hardly the only economies feeling the strains of a trade war.
In that sense, the timing of the U.S.-China conflict is also considered to be poor for the global economy. Uncertainty still remains over how exactly Brexit will play out between the European Union and the United Kingdom. Lawmakers have yet to approve a revised North American trade agreement. International bond yields are signaling dark skies on the economic horizon – an especially problematic development considering the sheer number of central banks around the world that have yet to return monetary policy to levels seen prior to the global economic crisis of the late 2000s.
“Even before this escalation, we already had the weakest global growth basically in a decade. We will have to further turn down that projection,” Kuijs says.
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The International Monetary Fund in July predicted global growth would slow to just 3.2% this year – the world’s softest showing since 2009. Chetan Ahya, the chief economist and global head of economics at Morgan Stanley, warned earlier this week that a full-blown global recession is in the cards if the U.S.-China trade war continues to escalate.
“This is a headwind for global growth. It raises our conviction that we’ll see further stimulus from global central banks in the next few months,” says Bill Adams, a senior economist at The PNC Financial Services Group.
And from a global business perspective, international investment has slowed as companies await some sort of trade war resolution. A company that had planned to invest in China may hold off on moving operations to Vietnam, for example, if its executives believe a trade agreement between Washington and Beijing might still be on the horizon.
“We’ve created a risky situation where you might think, ‘OK, I’ll build a plant in Vietnam or increase my investment in Mexico.’ But if (the U.S. and China) reach an agreement a couple of months down the road, some of those may turn out to be bad investments,” says David Dollar, a senior fellow at the Brookings Institution’s John L. Thornton China Center. “That’s what’s holding back business. And that’s bad for the economy.”
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The U.S. and China for months have exchanged tit-for-tat duties and trade restrictions – with Trump last week threatening to slap 10% tariffs on roughly $300 billion of Chinese goods that experts believe would lead to higher prices for U.S. shoppers. These new duties stand in contrast to Trump’s existing tariffs, which mainly targeted intermediate products and allowed some companies to eat the brunt of the extra cost without passing on the bill to consumers.
“My fear is that the president got the wrong message from companies last year that they could absorb 10% tariffs without any pain,” says Dan Ujczo, an international trade and customs lawyer and practice group chair at Dickinson Wright law firm. “The global economy is just saturated right now. There is nowhere to push these costs.”
China’s response to Trump’s latest tariff threat – the suspension of U.S. agriculture purchases and a devaluation of its yuan currency, which on Monday fell to its lowest level against the U.S. dollar in more than a decade – also threw global markets for a loop. International stock indexes swooned in response to the currency devaluation, as Chinese products became relatively more affordable on the international stage, while imports into China became more cost-prohibitive to consumers.
Dollar notes that China was quick to bolster its currency on Tuesday, a move many interpreted to be reassurance that China is not trying to spark a global economic crisis in its feud with Washington. Dollar also notes that market forces had for months been pushing down on the yuan, meaning the strength of the currency was due for a reduction.
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“The Chinese were resisting (market pressure) for a long time. But they resisted it a little less strongly on Monday,” Dollar says. “The Chinese sent a message to President Trump, but it was also very modest.”
But the Trump administration nonetheless slapped China with a “currency manipulator” label, which on its face is mostly symbolic but could justify further tariffs and trade restrictions in the months ahead. Trump has also previously explored the possibility of weaponizing the value of the dollar – devaluing the currency to gain leverage with China in a move that would rock foreign exchange markets.
“Nobody wins from this. If Country A devalues China, then Country B devalues the United States, then pretty soon country C the EU – they’re defending themselves. And other countries are doing the same,” Alan Blinder, a former vice chairman at the Federal Reserve, said Monday during an interview on CNBC’s “Squawk Alley.” “It’s impossible for all countries to get less valuable at the same time, but they can try in a destructive currency war.”
The ongoing concern is that duties and restrictions continue to escalate between the U.S. and China. A de-escalation and a more certain outlook would likely bolster the global economy in the months and years ahead. But to this point, neither the U.S. nor China appears particularly eager to back down.
“It is becoming increasingly difficult for either side to backpedal without losing face. We are increasingly looking at significant damage to an international economy that was already starting to lose momentum in other ways,” Kuijs says.
Andrew Soergel, Senior Reporter
Andrew Soergel is a Senior Reporter at U.S. News. You can connect with him on LinkedIn, follow … Read more
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