Destructive trade fights put all at risk

THE trade fights seem to be getting out of hand, and increasingly chaotic, uprooting consumers and producers.

Those that may benefit from relocations out of the US and China may likely lose out in the end, as global growth and trade get impacted.

A big question is how sustainable would these plans be in this frothy situation?

China’s latest strategies to boost domestic consumption may provide some offsetting measures to its slowdown but the way ahead is still uncertain.

Irked by China’s retaliatory stance and continuous record US trade deficits with China, President Donald Trump has ratcheted up US tariffs of 10% initially to cover an additional US$200bil of Chinese imports.

There are threats of 25% tariffs next year, possible tariffs on an additional US$267bil of Chinese goods, and “great and fast retaliation” if China targets US farmers, ranchers and/or industrial workers.

China, said to have cancelled trade talks for this week, retaliated with just 5% to 10% tariffs on US$60bil on US imports but this does not mean they have lost their bullets.

To further increase imports, China plans to lower the average tariff rate on goods from most of its trading partners, for a second time since July.

China’s holdings of US Treasuries dropped to their lowest level since January, a modest change, but still a closely tracked development.

Although devaluation is currently not a trade weapon, the level of the yuan will be closely monitored; there are predictions for the yuan to go past 7.0 per dollar.

The yuan’s daily reference rate was fixed at a three-week low at 6.8554 per dollar, a day after fresh US tariffs were announced but has remained stable.

China markets, which are already down by US$5 trillion, had gushed down further on the latest US salvo, but improved on reports of shoring up by their Plunge Protection Team.

Global markets may have turned sanguine on the lower-than-expected tariffs on both sides, and even blasé on their impact on global growth.

Still providing confidence is the trend of the purchasing managers index, an indicator of the health of the manufacturing sector, for developed and regional countries for the past three months.

“Without any clear sign of weakness due to trade disputes, this still looks like a short-term sentiment-driven condition,” said Danny Wong, CEO, Areca Capital.

Long term, things can go either way; resolution of the tariff dispute (there may be fresh talks after the US mid-terms) or escalation into something else, as levels beyond tariffs are hit.

It may even turn out to be a personality clash between a temperamental US leader and an unbudging Chinese one for whom this issue is also a matter of pride.

Both countries have sensitive technologies; the US has some that cannot be found elsewhere.

The US may think China has more to lose; Chinese markets are collapsing while US markets are holding up.

China’s economy is slowing, while huge tax cuts are boosting the US economy.

China, which has endured tougher times, may think the US has more to lose; in the case of a hard landing, could China have more ammunition in its huge reserves, array of fiscal and monetary tools and domestic retail spending?

“Do not underestimate China,” said Nor Zahidi Alias, chief economist, Malaysian Rating Corporation. “Minor belt-tightening measures are nothing to the Chinese compared to what they have experienced in the past few decades.’’

The Chinese can play the waiting game; Eastern culture teaches them to be patient and willing to sacrifice to safeguard their pride.

Dire warnings should not be overlooked amidst upheavals of US consumers being hit with higher prices, manufacturers scrambling for alternative supply chains and production bases, and US companies operating in China being forced to accept potentially lower earnings.

“Destructive,” “deepening and escalating with elevated risks to world growth,” are warnings from Vincent Khoo, head of research, UOBKayhian, and Lee Heng Guie, executive director, Socio Economic Research Centre.

Within the US$20 trillion and US$14 trillion economies of the US and China respectively, these tariffs may not seem very large but the effects can spiral.

A “significant jump in fears” over the impact of the trade war was revealed in the CNBC Global CFO survey; 75% of respondents expect some negative impact and 38% have incurred higher input costs.

Without roadmaps and negotiations on the next plan of action, this trade fiasco gets onto slippery slopes, as announcements are suddenly thrown out and companies have to hastily draw out “strategies for survival.”

Overall, “it is unclear where we’re going to get to,” said Jamie Dimon, chairman and CEO of JP Morgan Chase.