How US, China can defuse the trade war and boost global growth
- If the renminbi continues to falter, Washington and Beijing could join forces with official intervention to ensure exchange rate stability is maintained
- Opening up China’s markets to more US exports to encourage faster bilateral trade flows would also help
It’s time to bring the US-China trade war to an end. A trade deal between the world’s biggest economic superpowers was never so dearly needed as it is now. Rather than settling scores, the US and China need to come together and set the world on the path to stronger trade growth and more sustainable global economic recovery.
Right now, there are too many risks to global growth from the Ukraine war, the hangover from the Covid-19 pandemic and the threat posed by rising global inflation.
The world is crying out for help and there is so much more the US and China can accomplish by coming together with a speedy resolution to their dispute. Without effective intervention, global recession could be on the cards.
Long-term trend growth above 4 per cent for the world economy is still possible but only with the right policies in place. A much bigger global fiscal stimulus push and a detente over trade can definitely help.
The big bone of contention has been the ever-widening trade deficit, which the US has run up with China since the 1980s. Moving from close to balance in 1985, it has been on a one-way trend, apart from a temporary pullback following the start of the trade war in 2018 and the impact of global recession in 2020 sparked by the pandemic.
In 2018, the US-China trade deficit had reached a record US$418 billion, even after the imposition of trade sanctions by former US president Donald Trump in January that year. There was a brief respite with the trade gap narrowing to US$310 billion in 2020 due to the pandemic, but with world trade flows returning to normal in 2021, the deficit is rising again – hitting US$355 billion last year.
Based on current trends, the deficit could be heading back towards an annualised US$400 billion this year without significant changes on either side.
The trade deficit is not going to disappear without a commitment from both Washington and Beijing to rein it in. In the meantime, it will only get worse while the US dollar continues to appreciate against a weaker renminbi.
Market penetration into China will be much harder for US exporters while cheaper imports from China will only appear more attractive for US consumers and businesses.
Over the past few weeks, the renminbi has slipped by around 4 per cent against the dollar as confidence in the currency has been overshadowed by Covid-affected lockdowns in Shanghai and Beijing, while investors continue to fret about the risks of a tougher interest rate response by the US Federal Reserve.
At the outset of the US-China trade war, Trump accused Beijing of being a “currency manipulator”, deliberately keeping the renminbi artificially low to gain a competitive advantage in global export markets.
If the renminbi continues to falter, there might be a unique opportunity for Washington and Beijing to join forces with official intervention to ensure exchange rate stability is maintained between the two currencies. That might be seen as an important first step towards joint policy co-ordination and an opening for closer economic cooperation.
Washington and Beijing need to keep channels of communication open to consider ways to close the trade gap. The US needs better demand management policies to promote more home-produced goods for domestic consumption.
Beijing is already taking the right steps by switching the emphasis of China’s growth towards more domestic-driven economic expansion under its dual circulation strategy, lessening its dependence on international markets.
One option might be to open up China’s markets to more US exports, to encourage faster bilateral trade flows between the two countries. The emergence of closer cooperation would provide a much-needed boost to global economic confidence.
Global growth is expected to slow to 3.6 per cent this year, according to the International Monetary Fund, with world trade growth set to halve, from 10.1 per cent in 2021 to 5 per cent in 2022. China and the US have it in their power to stop it slipping further. They need to build bridges over trade, and soon.
Author: David Brown is the chief executive of New View Economics, SCMP