Strong economy lowers chance of US-China trade deal

May 15, 2019 12:35
Both the US and Chinese economies are not overly reliant on trade. Photo: Reuters

The US-China trade war has escalated with Washington raising to 25 percent the tariff on US$200 billion of Chinese goods and announcing the same tariff will be imposed on another US$300 billion of Chinese goods within one month. Beijing has hit back, saying it will slap higher tariffs on US$60 billion worth of US goods.

It’s almost certain that the US would further tighten restrictions on technology exports to China, including semiconductors, artificial intelligence, robots, and biotechnology.

The way I see it, the stronger both economies are, the less likely a trade deal will be reached.

The US economy expanded by 3.2 percent in the first quarter, while unemployment tumbled to a 50-year low of 3.6 percent. US stocks set a new high earlier this month. That provided backing for Trump to take a tougher stance.

Meanwhile, China’s first-quarter growth beat market expectations. And the nation's 2 trillion yuan (US$291 billion) of tax cuts may partially offset the impact of the trade war.

As such, we should not be overly optimistic about a trade deal being reached soon.

If both nations maintain a 25 percent tariff on imports for 12 months, the US may see its economic growth slow by 0.3 to 0.5 percentage point. China’s GDP growth, on the other hand, may be reduced by 0.6 to 1.5 percentage points.

If both economies remain strong, the trade war may drag on for a long time. But if China’s economic growth falters, or the US experiences a stock market crash, a truce is more likely.

Both the US and China enjoy a massive domestic economy. Trade accounts for 27 percent of the US economy, while it represents 37 percent of China’s GDP. That means both nations are not overly reliant on trade. Again this suggests that the trade war could be a lengthy one.

Meanwhile, studies show only 10 percent of US manufacturers have decided to move one-tenth of their production away from China to dodge the tariff uncertainty.

With the tariff now raised to 25 percent, it’s likely that more of them will step up efforts to restructure their supply chains.

The full article appeared in the Hong Kong Economic Journal on May 14

Translation by Julie Zhu

[Chinese version 中文版]

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Eddie Tam is the founder and CEO of Central Asset Investments.