This week analysts were looking forward to the new round of negotiations between the United States and China regarding trade. Though there was not too much hope that the talks would lead anywhere, their existence alone was enough to shake off trade war pressures from the financial markets at least for a couple of days. However, with the talks now concluding with no positive results, it is time to once again look at the situation with sober eyes and see how the trade war issue is affecting the markets currently.
Why have all of the negotiations between the United States and China failed so far? The two leading economies in the world don’t see eye to eye. They have entered into dialogues on trade several times in 2018 but it seems to always nowhere. This is likely because the United States have many demands of China, while China is satisfied with the current state of affairs (or at least, the state of affairs before tariffs were first introduced). The points that the States want addressed are ways to reduce their negative trade balance with China (by making China import more American goods such as cars) and resolving the issue of intellectual property problems. US companies claim that in order to do business in China, which has the most attractive labor market in the world, they have to relinquish a lot of their IP, which later gets recycled by Chinese manufacturers to produce competitive goods. This is why the States are calling for a large-scale reform of the Chinese economy that would change the way international business is conducted.
On the other hand, China has consistently stated that all of its regulations are in line with the requirements of the World Trade Organization, and that the demands of the United States are a form of bullying. They did agree on some smaller steps to open up their economy to more international investment earlier this year, but it is unlikely they would budge further than that. Even after tariffs were introduced by Trump, they barely made a dent in the Chinese economy. In other words, right now the United States simply lack the leverage to force China to change.
This week’s talks went by quietly, as both sides chose to wait for the conclusion of the negotiations before publicizing any results. However, in the meantime another round of tariffs came into effect from both sides this Thursday. Trump has threatened that even more fees might be underway unless China complies with the American demands. Potentially all of the Chinese exports to the United States could come under fire. While this may finally success at getting China’s cooperation, economists also warn that it would seriously harm global economic growth.
So far the effects of the trade war have been slight but are still there: China’s economy (which was already in a relative slowdown over the past few years) is slowing. The Asian stock markets have also registered multiple losses over the past few months. According to the latest estimation, a drop of 0.5% in global growth is expected for every $100 billion worth of tariffed goods. The expected decreases in growth apply to China, the United States, and other countries involved in trading with both of them, which is most of the world.
Moreover, some manufacturing agencies have warned that US companies would be hit particularly hard because they export a lot of their products to China, where they are used to make other goods which then become Chinese exports to the United States.
Meanwhile, the Chinese Minister of Finance stated that China will not be rash in their decisions regarding retaliatory measures because they want to shield businesses from harm as much as possible. They are also very concerned for their labor market and are taking steps to cushion the blow caused by lost jobs. So far there hasn’t been any similar rhetoric from the United States, where jobs will also be lost in the near future if the trade dispute continues.