Trade war a symptom of changing relationship between China and the US

The changing relationship between the US and China is set to be one of the key issues of our time, believes Keyu Jin, associate professor of economics at the London School of Economic.

Speaking at the inaugural FT Wealth Management Summit, held in London on November 7, where she delivered the keynote address, Ms Jin explained how the Chinese authorities think they have entered into a new era, one where the strategic partnerships and mutual respect of the past has now transformed into outright rivalry.

“What we see as a trade war, in the short-run, is simply a manifestation of a rivalry that is becoming more intense over time,” she said. “It is about Chinese aspirations, the Chinese development model, and about Chinese technological leadership. We are in for a long battle.”

Peaceful resolution

Ms Jin, who grew up in China before moving to the US as a high school exchange student, does not believe that a showdown between the two nations is inevitable.

“China wants to play out its own historical destiny of a peaceful rise and to flourish on its own terms. It has no particular desire to impose its system and values on others,” she said, contrasting this approach with the post-war US, which was all about exporting moral universalism and a certain set of values. “The Chinese are not interested in that at all.”

Ms Jin argued that some of the concerns about how China will wield its growing influence have been misinterpreted, giving the example of its Belt and Road project, which could be interpreted as a political move, but is really about economic pragmatism.

Indeed, at a time when the US, which has long acted at a global policeman and underwriter of the financial system, appears to be looking to scale back on some of its overseas commitments, China is looking to take on some of these responsibilities. That could lead to common ground between the two, argued Ms Jin.

The trade war between the US and China has caught a lot of people’s attention, but a direct consequence of the new situation is that it will actually make China stronger, she claimed.

“China is now saying: ‘We have no way out, we can’t rely on the external economy as in the past. We can’t rely on foreign technology. We need to promote indigenous innovation.’ Moreover, long-delayed domestic reforms are now being accelerated. Because there is now political unity.”

This is likely to mean the Chinese economy shifting inwards, boosting household consumption and potentially cutting taxes, and further promoting an innovation-led economy in which the technology sector is already expanding at breakneck speed.

Not going away soon

There is no question that this trade war will go on for quite a while, predicts emerging markets guru Mark Mobius, once of Franklin Templeton and now running his own asset management firm, Mobius Capital Partners. “The Trump administration will continue to put pressure on China and continue to raise tariffs, and make other accusations against China. Of meddling in elections and so forth. And that will get China’s back up, because they don’t like to be accused of these things.”

The bottom line is that there is a $300bn trade deficit between the US and China, he says, dwarfing that with any other country, so the US president is unlikely to ease up on the pressure. “Indeed, I expect things to probably get a little more nasty in the short term.”

But in the longer term the two will come to an agreement, predicts Mr Mobius. “The Chinese take a long term view. In the 1950s, Mao was talking about a 100-year march to overtake America, so that is the goal. Whereas the US is always thinking short-term, with election cycles and so on. So I am sure they will reach some agreement that will make everyone feel comfortable.”

Ms Jin echoed this sentiment in her talk at the Wealth Management Summit, saying that China can afford to give Mr Trump want he wants in the short-term. “The Chinese communist party is calling this round of trade wars a war of endurance. They can handle that. They can tolerate short-term pain so long as he doesn’t cross the line, and as long as they are able to grow and flourish on their own terms.”

Investment impact

In the face of US trade tariffs, Patrick Zweifel, chief economist  at Pictet Asset Management, expects China’s fiscal and monetary policies to become more growth supportive. “This could  provide a lift to GDP growth by some 0.5 per cent next year. Yet, we think Beijing’s stimulus is likely to take longer to work and be less impactful than in previous easing cycles.”

While China has already hiked tariffs up to 25 per cent on US-imported goods, it has cut the import duties it charges to Chinese importers, corporates and consumers, and is planning for further moves, he says, easing the burden on those facing higher US tariffs by lowering duties charged on other countries' imports. Meanwhile reducing taxes in the country, including income tax, should also provide a stimulus.

“So far, these measures seem to be working and investor confidence in China remains high,” says Mr Zweifel.

Official negotiations between the US and China appear to have stalled in recent months. All eyes will be on the G20 summit in Buenos Aires in late November/early December, when much could be decided on the outcome of a face-to-face meeting between the two countries’ leaders.