If Trump’s interest in the US-China trade war is flagging and a deal is near, what will the future look like?
- The US president, preoccupied by domestic politics, and China, determined to persist in its deleveraging campaign, both seem ready for a trade-war truce
- While fears of deglobalisation and global decoupling are overblown, the US may still divert trade away from China, at a cost to American consumers
For the past two years, the conflict between the US and China has dominated the economic and financial-market debate – with good reason. After threats and accusations that long predate US President Donald Trump’s election, rhetoric has given way to action.
I am as guilty as anyone of fixating on every twist and turn of this epic struggle between the world’s two economic heavyweights. From the start, it has been a political conflict fought with economic weapons and is likely to remain so for the foreseeable future. What that means, of course, is that the economic and financial-market outlook basically hinges on the political dynamic between the United States and China.
Consequently, the political calculus of both countries is coming into closer alignment, with each looking for some face-saving truce.
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If that is the case, and if a phase one accord is reached, it behoves us to ponder what the world will look like after the trade war. Several possibilities are at the top of my list: deglobalisation, decoupling and trade diversion.
Yet the climactic event that underscored the demise of the first wave of globalisation was a 60 per cent collapse in world trade in the early 1930s. Notwithstanding the current political dysfunction, the odds of a similar outcome today are extremely low.
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Global decoupling is also unlikely. Reflecting the explosive growth in global value chains over the past 25 years, the world is woven together more tightly than ever before.
That has transformed global competition away from the country-specific paradigm of the past to a far more fragmented competition between widely distributed platforms of inputs, components, design and assembly functions.
A recent IMF study found that global value chains accounted for fully 73 per cent of the rapid growth in global trade that occurred over the 20-year period from 1993 to 2013.
Enabled by irreversible trends of plunging transport costs and technological breakthroughs in logistics and sourcing, the global value chain linkages that have come to underpin global economic integration are at little risk of decoupling.
That’s because America’s multilateral trade deficit reflects a profound shortfall of domestic saving that will only get worse as the federal budget deficit now veers out of control.
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Trade truce or not, a protracted economic struggle between the US and China has already begun. A ceasefire in the current battle is nothing more than a politically expedient pause in what is likely to be an enduring cold-war-like conflict. That should worry the US, which is devoid of a long-term strategic framework. China is not.
That is certainly the message from Sun Tzu in The Art of War: “When your strategy is deep and far-reaching … you can win before you even fight.”