Consumers will decide the winner in trade war

know is that in a world of surplus goods and services, the buyer has the upper hand.

Both sides are under considerable pressure to reach a deal. President Donald Trump faces re-election next year, and the longer the trade disruptions drag on, the bigger the potential for a steep stock market sell-off and the deeper the recession. Xi Jinping, China’s de facto president-for-life, is strapped with a slowing economy, with the 6.2 per cent rate of expansion reported for the second quarter probably double the truth.

The basic issue is China’s challenge to the US for global supremacy and the importance of technology in this struggle. China’s growth has depended on Western equipment and cheap local labour to produce inexpensive goods that could be freely exported to North America and Europe. With slower growth in the West and muted demand for everything, that game is over.

So China must turn to domestic growth, but with the earlier one child-per-couple policy, the labour force will be shrinking for decades. Hence the need for technology-driven productivity.

China needs West’s help

But China is only starting on domestic technology development and therefore desperately needs help from the West. For years it has been demanding the transfer of technology as the price of Western firms doing business in China. Trump seems well aware of China’s long-run game plan and determined to retard it.

Meanwhile, the slide in China’s economy will intensify as Chinese and foreign producers accelerate their shift to evenlower-cost Asian countries that are out of the line of the USChina trade war fire.

US imports from Vietnam leapt 33 per cent in the first half. In June, exports to the US from South Korea, Taiwan, Japan and Singapore rose by a combined 9 per cent from a year earlier.

But despite Trump’s hopes, manufacturing is not returning to the high-cost US. Manufacturing output dropped 1.1 per cent in June from its December peak, and the Institute for Supply Management’s manufacturing index fell again in July, this time to its lowest level since 2016.

So, while China suffers from the departure of high margin production, the US will still enjoy low-cost imports from other Asian countries — and emerge from the trade war on top.

But the long-term gain to American consumers that follows the short-term pain of the trade war may be limited by China’s determined challenge for world domination.