The Chief Economist’s Note

Three thoughts on the US-China trade dispute

The trade talks between the US and China dominated the news last week. At the risk of adding to the considerable ink that’s already been spilled on the subject, I think that three points have either been overlooked or overplayed in most of the commentary.

The first is that, while President Trump announced a “phase one deal”, the terms of the agreement are as yet unspecified. It seems that China has agreed to step up its purchases of US agricultural goods and the US has agreed to postpone tariffs that were due to come into force tomorrow. But in the absence of an actual text it is difficult to judge the significance of all this. Indeed, it is perhaps notable that so far the official line from Beijing has been couched in terms of “progress” rather than an actual “deal”.

More fundamentally, the fact that the talks shifted towards a “first phase” covering narrow issues around trade only reveals how difficult the deeper issues around intellectual property, technology transfer and industrial strategy will be to resolve. As things stand there is no obvious path to a “phase two” deal covering these broader concerns.

The second point to note is that policymakers (and most economists) are probably overplaying the economic effects of the trade war so far. Jerome Powell made an oblique reference to the trade war in a speech last Tuesday and it’s become increasingly common for central banks to cite it as a key drag on growth over the past six months. But while the trade war has clearly been a headwind to growth, it has been one of several factors weighing on the global economy.

We reckon that it has been responsible for perhaps one-quarter of the slowdown in global GDP over the past couple of years. The lagged effects of earlier policy tightening in the US and China, problems in the European auto sector and the unwinding of a particularly large inventory cycle in the electronics sector have been bigger drag on growth.

The third and final point is that – despite the headlines – the dispute over trade and tariffs is actually something of a sideshow. In the background a much bigger issue is playing out – namely that China’s rapid rise is starting to destabilise the global order. This is being felt in areas beyond just trade and tariffs. Last week saw a decision by the US Commerce Department to blacklist several Chinese firms over human rights violations, a decision by the State Department to impose visa restrictions on several Chinese officials, a threat (later walked back) to limit the ability of Chinese firms to list in the US and a spat between the NBA and China. These are, in and of themselves, relatively minor issues. But taken together they represent a slow and steady shift towards a more antagonistic relationship between the US and China.

As things stand, it’s unclear how this broader shift will develop, but one plausible outcome is that aspects of the global economy start to splinter into US and Chinese-led spheres. We’ll have more to say about this in forthcoming research (see here). Suffice it to say that, while this will play out over years and decades rather than months and quarters, it has the potential to cause much greater damage to the global economy than the current trade dispute.

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