US-China trade war is not quite deglobalisation

Globalisation may have stalled amid the fiery geopolitical posturing of recent years, but many doubt it’s in reverse yet given that supply chains have been rerouted rather than returned home and overall trade volumes less disturbed than first feared.

Direct bilateral trade between the US and China has clearly fractured during six years of tit-for-tat tariffs, postCovid insecurities and all the political and investment rivalries that hardened since Russia invaded Ukraine.

And since former US president Donald Trump launched a tariff trade war on Chinese imports in early 2018, China’s export market share in the US has indeed plunged from a high watermark of 21.6% in 2017 to just 14% in 2023.

Joe Biden’s administration has merely reinforced China trade aversion with a “de-risking” strategy of its own as geopolitics worsened around Taiwan and Ukraine.

That breakdown can be seen most clearly in the fact that after 16 years as the biggest single exporter of goods to the US, China ceded that crown to Mexico in 2023.

if Trump succeeds in his bid to return to the White House in the 2024 election, his promise of more of the same — mooting tariffs of 60% on Chinese goods — means any repair of direct trade links is a distant prospect.

Boston Consulting Group’s (BCG) annual world trade study expects that rift between the world’s two biggest economies to deepen and sees the value of bilateral trade between them dropping by almost $200bn over the coming decade — more than three times the 10-year hit they forecast in 2023.

And yet fears that the broken relationship would seed a wider “deglobalisation” of trade have not yet been borne out.

According to analysis this week by Stephen Jen and Joana Freire at Eurizon SLJ Capital, total cross-border trade as a share of global output has barely changed and the current 22% share of non-oil trade to GDP is well within 20-year ranges.

What’s more, China’s 15% share of world exports remains unchanged — it is still the largest exporter in the world by some distance.

“While we cannot rule out deglobalisation in the years ahead, so far at least there has been scant evidence supporting this widely held view of deglobalisation,” Jen and Freire say in their analysis.

THIRD WAY

Jen and Freire argue that China has succeeded in overcoming US tariffs by heavy direct investment in third countries such as Mexico and Vietnam that the US is still happy to import from, exporting intermediate goods to these third countries for final assembly to avoid US trade barriers.

The BCG analysis bears that out too, showing how familiar routes that defined the world trade map are being redrawn, blocs are playing a greater role and third countries are acting as go-betweens for those at loggerheads or global companies trying to navigate between the two.

However, it forecast that world trade growth over the next decade would indeed be slower than global GDP growth amid a “fundamental shift away from the trend of trade-led globalism that has been prevalent since the end of the Cold War”.

It sees the world of “reshoring” or ‘friend-shoring” of supply chains containing a number of features over the next 10 years. There will be a solidifying of the North America “stronghold” between the US, Canada and Mexico — with US trade growing by almost half-atrillion dollars with these neighbours by 2032.

Another trend will probably see Southeast Asian nations become the biggest winners, with cumulative Asean trade forecast to grow $1.2-trillion over the next decade — due largely

“China + to” 1 diversification companies adopting strategies in what is seen as generally unaligned countries. India is seen as a major beneficiary, with a $393bn trade expansion to 2032 that includes a $180bn increase with the US and $124bn rise in trade with China.

Jen and Freire say that the relative stability of overall global trade amid this geopolitical shakeout has other potential consequences — one being that a much-feared inflation pulse from “reshored” supply chains may be wide of the mark.

If production is merely being shifted away from China to other cheaper-cost developing countries and not back to expensive rich economies as some assumed, then goods inflation may continue to subside.

But there are some exceptions to the relative benign scenario for both China and the US.

First is damage to China’s ability to climb the value chain of production as a result of the recent collapse in foreign direct investment. That source of overseas know-how and research is still seen as badly needed for its development.

For the US, any realisation of Trump’s mooted 60% tariff threat could unavoidably spur inflation at home.

“China has so far managed to retain their dominant position as the world’s pre-eminent manufacturing base,” Jen and Freire conclude. “However, we suspect that foreign investors’ retreat from China — a change in financial globalisation — may prove to be much more damaging to China’s long-term growth outlook.”

TS Lombard’s Davide Oneglia delved deeper into that “financial reshoring” or capital flight from China and reckoned it was only in its infancy and probably had further to run.

Even with all the masking of trade in goods, the financial unwind may just be beginning.