China, EU to fight protectionism
There’s risk of meaningful slowing in an otherwise vibrant economy
BEIJING: Chinese and European Union (EU) officials both agreed to oppose unilateralism and trade protectionism during talks here on a bilateral investment agreement, taking a swipe at US President Donald Trump’s campaign of punitive tariffs. But a top EU official made it clear that Europe is not fully on the same page as China, calling on Beijing to do more to make market access more fair and reduce overcapacity in steel and other sectors, including hi-tech. Hosting the talks, vice-premier Liu He stressed China and the EU had a common interest in defending the global multilateral trading system. “Both sides believe that we must resolutely oppose unilateralism and trade protectionism and prevent such behaviour from causing volatility and recession in the global economy,” Lieu told a media briefing after the talks.
The two sides expect to exchange lists of proposals for the bilateral investment agreement at a China-EU summit in Beijing next month, according to Liu.
EU Commission vice-president Jyrki Katainen said, however, that areas of disagreement also need to be addressed if China and the EU are to develop their economic, trade and investment relationship.
“It is essential that we work together to tackle overcapacity in sectors such as steel and aluminium,” Katainen said, specifically identifying the industries that Trump first took aim at when he embarked on a tariff war in March.
He also urged China to prevent overcapacity in other industries, including high-tech sectors covered by the ”Made in China 2025” strategy.
WASHINGTON: The escalating trade battle between the United States and the rest of the world is raising the risk of a meaningful slowing in an otherwise vibrant American economy.
While the tariffs already in place and set to be implemented will barely dent US growth, economists say the panoply of additional measures being considered would take a perceptible bite out of gross domestic product if they go ahead.
“It’s going to be more noticeably painful,” said Peter Hooper, chief economist at Deutsche Bank AG in New York.
Hooper, who expects the economy to expand 3% this year, said the steps already taken or in the works would clip just 0.1 percentage point off GDP growth.
Throw in President Donald Trump’s threat to slap a 10% tariff on an additional US$200bil of Chinese imports and a 20% levy on car shipments from the European Union and the impact grows to 0.3 point to 0.4 point, he said. And the fallout could even be greater if heightened tensions begin to infect consumer, business and investor confidence.
“It really dings the economy but certainly doesn’t undermine it,” said Mark Zandi, chief economist at Moody’s Analytics Inc, who agreed with Hooper’s estimate of a roughly 0.3 percentage point impact from the accumulated trade actions.
Even though markets have taken the contretemps largely in stride – perhaps in the belief that Trump’s latest threats are more of a negotiating tactic than a concrete plan – US equity futures followed Asian shares lower early Monday after an escalation of tensions over the weekend.
Central bankers though are taking notice. Federal Reserve chairman Jerome Powell said on June 20 that officials are beginning to hear that companies are postponing investment and hiring due to uncertainty about what comes next.
“Changes in trade policy could cause us to have to question the outlook,” he said during a panel discussion at a European Central Bank conference in Portugal.
The increasing tariff strife poses particular problems for the central bank because it’s likely to both raise inflation and depress growth.
Trump administration officials have played down the economic impact of the trade battle.
“Anyone who thinks the economy is being wrecked doesn’t know what they’re talking about,” Commerce secretary Wilbur Ross said in a June 21 Bloomberg Television interview.
The worsening trade friction comes at a time when the US economy is, in the words of Powell, “performing very well.”
Growth in the second quarter is on track to clock in at 4.5%, according to IHS Markit’s Macroeconomic Advisers, as tax cuts power both consumer and company spending. That would be the strongest in almost four years and twice as fast as the first quarter’s annualised advance of 2.2%.
The tariffs though will put a crimp in activity going forward by raising costs for households and businesses.
“It’s starting to chip away at the tax cut,” said Nariman Behravesh, chief economist at IHS Markit.
“If they keep down this path, all the positive effects of the tax cut will be gone.”
Thanks in part to the tax cuts, the United States does look to be in better shape than its trading rivals to weather any fallout.
“The United States can afford a trade war relatively more than Europe, China” and other countries because its economy is more domestically driven, said Christian Keller, head of economic research for Barclays Plc.
Exports amounted to almost 12% of US GDP in 2016, compared with close to 20% for China and 43% for the EU, World Bank data show.
While China has policy levers it can pull to try to offset the impact from trade struggles, Europe is more vulnerable, Zandi said. The ECB’s benchmark interest rate is already at zero.
Of course, Europe’s troubles could redound back on the United States if the euro weakens against the dollar, as seems likely, he said.
It “would be a tipping point” for the global economy if Trump goes ahead with tariffs on US$200bil more of Chinese goods and a 25% tax on all car imports, said Ellen Zentner, chief US economist for Morgan Stanley.