An end to the US-China trade war is the world’s best hope for long-term pandemic recovery

  • As global growth slows, the US must increase government spending and taxation, while China can pick up the remaining slack through heavier investment spending
  • Most importantly, though, a return to strong US-China bilateral trade would do much to restore economic confidence

With global growth expected to lose momentum this year as many of the world’s central banks wind down monetary super-stimulus and step up their fight against inflation, the US and China will need to find new resources to sustain confidence.

But with US President Joe Biden’s US$1.8 trillion economic regeneration programme still stalled in Congress and the US Federal Reserve leaning towards tougher monetary policy, will it fall to China to be the saviour for global growth in 2022?

With China’s stellar export performance starting to cool and consumer morale lacking gusto, an investment-led approach might be the answer for ramping up mainland recovery.

One solution which would have immediate effect for global growth this year would be for the US and China to settle their differences over trade and clear the way for faster bilateral export flows. With clear signs that world trade is slowing, a breakthrough is needed soon.

The world still needs to get past the worst of the pandemic before global economic confidence is fully restored. The US outlook continues to improve after a reasonably positive non-farm payrolls report for December, spelling more good news for consumer confidence as more Americans head back to work.

Headline payrolls only rose by 199,000 in December but overall net gains were boosted by upward revisions of a further 141,000 jobs to the previous two months.

With the headline jobless rate dropping to 3.9 per cent, from 4.2 per cent in November, the US economy is heading back to full strength, leaving the Fed on track to raise interest rates in March against a backdrop of headline inflation running too high for comfort.

The Fed’s median expectation is for US gross domestic product growth to rise by 4 per cent this year, slowing thereafter to 2.2 per cent in 2023 and 2 per cent in 2024. The US economy ought to be doing a better job longer term and might risk dragging on global growth at a time when the recovery needs extra zest.

With the Fed signalling its intention to raise official interest rates up to a central tendency of 2.5 per cent over the longer term beyond 2024, it will be up to the US government to compensate with a much bigger fiscal policy push over the next few years to give the economy extra lift. If Biden fails to get his full US$1.8 trillion economic regeneration package back on track, growth might stall in the future.

If the global economy stands any chance of hitting 4.9 per cent growth, which the International Monetary Fund has forecast for this year, then China needs to take up the slack.

Even though the market consensus is for China’s 2022 growth rate to slow to 5.5 per cent from a likely 8 per cent for 2021, with the right policies in place, 6 per cent GDP growth might still be possible this year.

The bias towards easier monetary policy should help, but Beijing will need to rely on more deficit spending on public investment to carry the extra burden. Added investment spending will mean more pressure on government bonds and higher yields, but it will be good news for global investors seeking to diversify into higher fixed-income returns in China.

China has been fortunate to enjoy strong export-led recovery since July 2020 but there are signs that this is beginning to ebb. The year-on-year growth rate for exports slowed to 22 per cent in November from 27.1 per cent in October, still underpinned by strong global demand for manufactured industrial and consumer goods.

But as the world restocks and finally catches up with the backlog of unfilled orders, the boost to global trade will wane and require a fresh boost. World trade growth had already slowed to around 6 per cent year on year by last October and more deceleration seems likely. This is where the US and China finding a resolution to the trade war could be vital.

Former US president Donald Trump dealt a severe blow to global economic activity when he imposed punitive trade sanctions on China in January 2018, forcing Beijing to respond in kind. The US$350 billion US trade deficit with China clearly needs to be sorted, but a detente is long overdue.

Once stronger trade flows are restored, the world stands a better chance of stability and sustainable recovery in the future.

Author: Cheryl Heng, SCMP

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