7 Feb 2019 06:37pm

How the US-China trade war can reach settlement

The US-China trade war is adding to a slowdown of growth. But in each country it will produce pressure on the leaders to keep growth going – and those pressures may yet pave the way for a settlement

Global stock markets may have risen at the start of 2019, a reprieve from the turmoil at the end of last year. But the upset was justified. There are serious signs of economic slowdown in the US and China, the twin engines of last year’s growth.

Their prospects will determine the outcome for this year. It is clear now that the trade war the US has instigated with China is taking its toll. The Chinese leadership has made light of the impact of new tariffs on about $200bn of Chinese imports to the US which the Trump Administration has now imposed. But Apple sounded a clear alarm, saying that its sales were sharply down, sending its shares down by 10% – a symbol of how closely linked the two economies are.

If new talks to break the year-long impasse fail, and the US imposes tariffs in March on another $300bn of imports including cars, as the White House has threatened to do, then that clearly could have a much more serious impact on China’s growth. Already, the conflict is taking on nationalist tones. China has been outraged by Canada’s arrest (at the behest of the US) of Meng Wanzhou, chief financial officer of Huawei. The US has said it is because of evasion of Iran sanctions, but China has seen it as politically motivated and as part of the trade war.

In the US, manufacturing companies (not just Apple) are already reporting the effects of a squeeze on one of their fastest-growing markets. That comes as the effect of the 2017 tax cuts, one of President Trump’s signature policies, which had been driving economic growth and the rise of the markets, begins to fade. But the consequences of the trade war are as much political as economic. President Trump has chosen to equate his performance – in part – with the height of the stock markets.

Until October, that sounded good; now, less so. He will argue that in taking the fight to China over its abuse of intellectual property and failure to comply with the terms of World Trade Organization membership he is only keeping one of his campaign promises. It is, too, a fight that many other governments are quietly glad the US has chosen to wage. But jitteriness in the markets will hit US business confidence and many voters’ retirement savings, too; it is unlikely that they will rush to thank Trump.

The partial US government shutdown had already begun to affect his approval rating among voters in January. The consequences for China’s leadership are more complex, and potentially more severe. The immediate brunt of the trade war is falling on the new tech and consumer goods companies, particularly in the great export regions of Shenzhen and Guangzhou. They had already been feeling the effects of a global slowdown.

But the implications go further. China’s leadership, acknowledging that burgeoning debt was a weak point of the economy, and concerned about a property bubble, had been attempting two years ago to curb the debts of state-owned enterprises and banks. Yet it has now reversed course, trying to head off a slowdown. Already this year, its central bank has again cut the reserves that it requires banks to hold – the fifth time within a year – to allow more room for lending. It has changed the rules to enable more small businesses to qualify for loans.

China’s leadership fears that if economic growth slows, public unrest will rise. Its 40-year-long project of opening itself up to the world economy has transformed the lives of its people and made it one of the world’s great economic powers. But for all the free-market elements, central planning has remained at the heart, coupled increasingly with more authoritarian control of many aspects of ordinary life.

The coming year will see a battle between two political systems as well as two economies. As attention in the US turns to the 2020 election Donald Trump may feel he needs to ease up on the trade war to protect growth. China’s leadership in turn may yet soften its stance towards the US in order to protect growth and stability. In two different political systems, the pressure to deliver growth may yet produce a truce.