US-China trade war, where is it heading?

• The escalating US-China trade war affects the entire global economy
• Decoupling of the two biggest economies means ripping the global economy apart
• The importers and consumers are the one's shouldering the weight of added tarrifs

The Asian Banker Financial Summit session on the fallout of a US-China trade war saw a heated debate between members of the panel, who are economists, trade-experts, political appointees and professionals from the finance industry.

Although divergent in their views, the panellists, who have in-depth experience dealing with issues relating to China and the US, agree there are incentives for both countries to come to a truce. If they fail, both countries will fall at the expense of not only their local economies but the global economy.

Panellists were divided on which of the two countries has the upper hand in the conflict but in consensus that a zero-sum game is an unrealistic expectation.

The panellists noted the reality on the ground: the battle between the two powerhouses has heightened, raising concerns of a point of no return or a “Thucydides Trap”, a term coined by Havard professor Graham Allison to capture the idea that the rivalry between an established power and a rising nation often ends up in war.

Jiong Gong, professor of economics at the University of International Business and Economics in Beijing said, “The US-China relationship has gone beyond the trade war to be adversaries in the future”. He further pointed out that successful negotiations between US and China are heavily dependent on the countries’ respective leaders.Tod Burwell, CEO of BAFT-IFSA and moderator of the session commented, “Politics got us into this, it will get us out”, adding that tensions should reduce as the US draws closer to its 2020 Presidential elections.

Conflicts heighten China’s retaliation

US diplomats have accused China of turning its back on a draft agreement to end the trade war that was nearly completed. China, in turn, hit back, accusing the US of making unreasonable demands.

President Trump in a statement released by the White House on 2 August 2019 said, “I think President Xi, who’s somebody I like a lot, I think he wants to make a deal. But frankly, he’s not going fast enough. He said he was going to be buying from our farmers; he didn’t do that. ”

The political fallout forced President Trump’s hand on 10 May into raising tariffs on $200 billion of Chinese imports, ratcheting up tariffs from 10% to 25%.

China, on the other hand, has devalued its renminbi (RMB) and analysts believe it will continue to manipulate the currency over the next few months to hurt the US economy.

Experts like Victor Gao, vice chairman of Sino-Europe United Investment Corporation, believes China would strengthen its RMB position as a global currency.

“If we assume the trade war gets more intense, China will promote the real extensive internationalisation of RMB to the hilt.

“As the largest importer of crude oil, liquefied natural gas that are mostly traded in US dollars, China can talk to exporters to settle in RMB,” he adds.

China is also seen toning down its reliance on the US as its leading trading partner and is already facilitating bilateral trades with other nations, for instance, on 2 August, China’s Ministry of Commerce (MOC) confirmed that the state wants to tap further into the soy trade with Russia over the long term.

The panellists also briefly discussed the Belt and Road Initiative (BRI), a global development strategy adopted by the Chinese government involving infrastructure development and investments in 152 countries and international organisations in Asia. On 4 August, a statement from the MOC stated it saw “pragmatic results” with its cooperation with Singapore, inking more than 160 projects worth over $26 billion.

However, Trump can turn the BRI around and create its version to its advantage, said Harvey Dzodin, senior fellow at Centre China and Globalisation and a former political appointee of President Jimmy Carter.

With one superpower trying to outrank the other, are we moving closer into a Thucydides trap?

Is managing China the solution?

Panellists debated on th possible outcome of the trade war, in the, including a stronger US and a weakened China. Another question, however was asked: If American companies had full access to Chinese markets, would there be that much to gain?

Welch answered that perhaps a solution lies in how not only the US, but the world, is learning how to “manage China” in globalised and free world trade.

“In 2001, when the world welcomed China to the World Trade Organisation, the big idea was they should rise and bring them multilateral rule order. Help them with free trade. The hope is to be a bit like the west.

“That has happened to a certain extent. The serious thing is that it started a trade dispute, morphing into major new great power conflict. We need to resolve this thing intelligently and peacefully.”

Christopher Balding, associate professor at Fullbright University in Vietnam, said while the Trump administration’s ultimate point is to weaken China, trade is not likely going back to the US.

Furthermore, he said China had been an expensive producer for many years. “Foreign direct investment (FDI) was at 3% in China this (past) decade; it is not a country that is getting a lot of FDI and has been expensive in the process.

“It is not about the size of the market, but the rules of the Chinese market.”

Gong said China also is seeing a tougher economy ahead with the ongoing trade conflict.

He expects China’s economy to grow closer to 6% this year, after a slower quarter on quarter gross domestic product growth. China’s official target is between 6 and 6.6%.

Decoupling of the two biggest economies unrealistic

Panelists agree that both sides are suffering in this trade-conflict, and realistically, decoupling of the two biggest economies means ripping the global economy apart.

Welch said it is in Trump’s interest to make things work in China as the trade conflict is hurting ordinary Americans, especially the farmers who voted for him.

Gao agrees with Welch that the current tariffs will only hurt the Americans and to a large extent the tariffs – Trump’s weapon in the war – may trigger a significant recession in the US.

“Trade tariff is not paid by China. It is paid by American importers by a large extent, and absorbed by the American consumers. I hope someone has the decency to tell the Americans the truth that the tariffs are eventually paid by American companies and consumers,” he adds.

He added that given what’s at stake, Chinese are ready to negotiate with the US despite the tensions: “I don’t see anyone is a diehard enemy of US in China. I hope this will be reciprocated.”

Indeed Gao’s statement resonates the stance of China.

A spokesperson from China’s Ministry of Commerce shared a statement on 25 July: “We hope that some people in the US will drop the zero-sum mentality and look at the development of China and China-US relations in a proper way, and stop smearing and blaming China. Instead, win-win cooperation should prevail over confrontation and supremacy, as it serves the common interests of the two countries and the two peoples.”

“The attempt by a smattering of people in the US to decouple the two economies is simply irrational, unrealistic, and unworkable” the spokesperson added.

Realistically, tensions should ease as Xi Jinping looks to maintains his unwavering public image and President Trump contends with his 2020 Presidential campaign. Failing which, will it bring us to the point of no return, and perhaps a new world order?