Money Heist

How the U.S.-China trade war is slowing global growth

At the end of last week, President Donald Trump literally blew up world markets. The shaky truce in the trade war with China, in which the two sides had seemingly reached an agreement at the Group of 20 summit of leading rich and developing nations in Japan at the end of June, proved abortive. In his beloved style of Twitter diplomacy, Trump announced his intention to impose a new 10% tariff on $300 billion of Chinese imports to the U.S. per year beginning Sept. 1. (Some $250 billion of imports are already under a 25% tariff.) In justifying his intentions, Trump said that China had been planning to purchase a large volume of American agricultural products but didn’t do so.

The markets clearly didn’t like Trump’s announcement. A significant correction, which has continued this week, started immediately. It’s understandable. Optimism regarding the prospects of U.S.-China negotiations had evaporated. But then came the realization that a new round in the trade war might drive the world economy into a recession.

Thus, Morgan Stanley analysts anticipate the start of a global recession in the event that Trump “blows his top”* and imposes a 25% tariff on the aforementioned $300 billion of imports. In that case, global gross domestic product growth in 2020 would fall below 2.5%. (The current International Monetary Fund forecast is 3.2%.) A 10% tariff is not so toxic; global growth would decline to 2.8-3%. But that’s also not good enough. It would be the worst rate in the 10 years that have elapsed since the global financial crisis.

The reaction of the Chinese side was to devalue the yuan. The symbolic level of seven yuans to a dollar was breached already on Monday, Aug. 5. China’s central bank held the course of the yuan close to, but below, this level for a long time, evidently not least because of superstition: in Chinese numerology, the number seven is not very lucky, unlike the harmonious number eight. (It’s no coincidence that the Beijing Olympics began on Aug. 8, 2008.)

However, in an economic sense, it wasn’t a big deal. The devaluation against the dollar was only about 1.5%. At the same time, China’s central bank issued a press release in which it reassured everyone and declared its readiness to maintain the course of the yuan at a stable and reasonable level.

But the markets didn’t calm down. The fact is that China’s actions were interpreted as an attempt to weaken the effect of America’s restrictive measures. If the tariffs increase the costs of goods for the American end consumer, a weaker yuan makes them cheaper, and for all importers at that, not just for those living in the U.S. But such a reaction by the Chinese couldn’t help but provoke a response from Washington.

And one followed right away. Almost immediately after the devaluation of the yuan, Trump tweeted about currency manipulation on China’s part. The Treasury got involved instantly and officially declared China a currency manipulator. In an economic sense, the designation of China as a currency manipulator seems rather dubious in the current conditions of a nearly balanced balance of payments (a surplus of .5% of GDP, according to an IMF forecast) and the virtual absence of intervention by China’s central bank. Simply put, it can’t be said that the Chinese currency is undervalued or that the authorities are intentionally checking its rise. But Trump is hardly interested in such subtleties.

Nevertheless, one may also consider this step to be among the more symbolic. In a legal sense, the 1988 Omnibus Trade and Competitiveness Act, which defines “currency manipulator,” doesn’t contemplate any clearly prescribed sanctions other than “to initiate negotiations with such countries on an expedited basis, in the International Monetary Fund or bilaterally.” Therefore, the status doesn’t create any additional threat (other than Trump’s already announced intention to raise a 10% tariff on remaining Chinese imports to the U.S.). Nor is it possible to scare China with negotiations. Yet, the very fact that China has been designated a currency manipulator suggests that the conflict between Washington and Beijing is growing, and the chances of increased tariffs in September are increasing.

On another front, the political one, things are also tense. On Monday, Vice President Mike Pence announced a readiness to apply sanctions under the Global Magnitsky Act against high-level Chinese officials for China’s actions in the Xinjiang Uyghur Autonomous Region, where the rights of the Muslim minority are being violated. Alas, this is yet one more confirmation that the confrontation between the U.S. and China is serious and long term.

*Editor’s note: This quote, accurately translated, cannot be verified.