Ungated Post | 26 Apr 2019

Sizing up the US-China showdown as trade talks reach crunch point

Louis Kuijs, chief Asia economist, discusses the implications in a podcast for the San Francisco Fed.

With US-China talks to agree a truce in the economic superpowers’ trade war reaching an imminent crunch point, Louis Kuijs, our chief Asia economist recently talked to the Pacific Exchanges podcast from the Federal Reserve Bank of San Francisco.

Louis talked about his thoughts on regional economic and structural developments in trade, China’s path to further integrating into the global financial system, and consequences for the broader U.S.-China relationship from the trade dispute. 

In his discussion, Louis notes that the mood in the US-China trade talks has seen some improvement as progress is being made. More broadly, the ongoing trade dispute reflects the change in American mentality; in the US the narrative on Sino-American relations has shifted from cooperation to rivalry.

When measuring the near-term effects of the US-China trade tiff, Louis argues that the impact on business confidence is often overlooked. Indeed, the effect of uncertainty could be larger than the direct impact of the tariffs via weaker exports and higher prices. Over the medium term, however, the trade dispute may have much larger effects via a global reconfiguration of supply chains and growing underlying tension between the US and China centered on intensifying and fierce competition on technology.

Louis observes that while China serves as a well-known Asia hub in the global supply chain, Chinese demand and China’s rapidly growing role as a destination for imports have been major drivers for regional trade. Higher tariffs will ultimately result in a net loss for regional trade partners by reducing Chinese growth and demand, he notes. Gains in trade for partner countries associated with receiving relocated production facilities, for example, will likely be overwhelmed by slower growth.

Despite the US-China dispute, appetite for free trade agreements in Asia remains strong, Louis says. The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which came into effect on 1 January, and includes greater flexibility in several provisions relative to the failed TPP version. Another regional agreement, RCEP, can potentially add an additional layer or extension of trade liberalization that compliments CPTPP.

Over the longer term, Louis argues that China’s stated economic liberalisation objectives have implicit contradictions. On the one hand, policymakers plan to continue taking steps to open up the country, further integrating China into the global economy and financial system. On the other hand, policymakers have underscored their commitment to maintain China’s current model, whereby the Party remains at the heart of economic decisions and state-owned enterprises have a central role.

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