From Neue Zürcher Zeitung's TheMarket.ch, April 18:
George Magnus, the former chief economist of UBS Investment Bank and author of the book «Red Flags», talks about the trade war between the US and China, the Trump administration’s approach and the question of what a more stable global economic system could look like.
US President Donald Trump is keeping the global financial markets on edge. His policies are unsettling investors, and a tremor in the bond market forced him to suspend the «reciprocal» import tariffs against most countries for 90 days on April 9. At the same time, Trump has escalated the conflict with China; Beijing is hitting back just as hard.
What's in store for the coming weeks, will Trump and President Xi Jinping be able to agree on a deal?
Economist and China expert George Magnus is not overly optimistic. «The rupture is so big now that it’s difficult to imagine peace breaking out in the traditional sense,» says the former chief economist at UBS Investment Bank in an in-depth conversation with The Market NZZ. Trump has caused a terrible mess with his actions, but Washington’s criticism has a point: «The philosophy behind China’s economic model is pure mercantilism. They make a virtue of export surpluses and accumulating foreign exchange reserves. That’s what’s wrong.»
«The confluence of rising bond yields and falling currency is definitely an ill wind. This is not supposed to happen. It speaks to fragile confidence, an expression of angst. If this happened persistently, it would tell you something horrible is going on.» George Magnus.The United States and China have entered a full-blown trade war. Who is in a better position to win this?
First of all, I think the term trade war understates the nature of what’s going on. Once you get to tariff levels that are so high as they are now, the exact percentage number doesn’t really mean anything anymore. In effect, this is a trade embargo. The US ships roughly $150bn worth of goods to China. At 125% tariff levels, those $150bn will dwindle very quickly. China ships $440bn worth of goods to the US, and I could see that dropping by up to 75% over the next 18 months. Normally this only happens when countries go to war with each other. That’s effectively what is happening here. They are driving towards a trade embargo. So I don’t think anybody can win this war. No one will be spared the effects. It’s just a question of who loses less.
Who loses less, then?
Both sides have enormous amounts at risk. The US economy may tip into a recession this summer. The leading indicators of consumer confidence, inflation, and capital spending are all flashing warning signs. Due to rising prices, the Fed will have to keep interest rates higher, so stagflation is the outcome. For America, the economic news is bad, and the political news is bad, because the allies of the US no longer feel they are allies, they don’t know how to deal with the Trump administration. Hence we see a big move by investors out of the dollar and out of US assets.
What’s for China to lose?
This trade war is distinctly unwelcome for the Chinese Communist Party, which only last month, at the National People’s Congress, revealed its alarm at the underlying fragility of China’s economy. The government can ill-afford a trade torpedo as it tries to stabilize its beleaguered property sector, along with debt and asset deflation in local governments. China’s economy is not healthy. People are losing jobs.
Couldn’t the central government just boost fiscal spending to soften the blow?
Sure, in theory, they could boost domestic demand. But that’s the problem. If China, with its 1.4 billion people, had an income and consumption structure like the US, the UK or Switzerland, then their economy wouldn’t be in the situation it’s in. But it doesn’t. Why? Because the CCP is wedded to mercantilism, industrial policy, and export promotion. They try to boost growth through exports. But who’s going to take China’s overproduction voluntarily? Many countries all over the world are raising trade barriers against China. They’ve reached the end of the road with their growth model.
The Party leadership vows to fight this trade war to the end. What gives?
I think maybe because the people in China have been through such enormous hardship in the past, the argument is that they can withstand a lot of pain, in a way that wouldn’t happen in the US. So you can make the point that the CCP is more immune to public pressure than the Trump administration. That is likely. But I don’t see China as a winner. Both sides have reasons to sit down and try to hammer out some kind of an agreement. Which I still think is likely.
How will the trade war evolve from here?
My hunch is that both sides have reached a peak in terms of hostility. They just have to try to find a way to pull back from that. A week ago, China’s Ministry of Commerce said they would not engage in a further escalation of tariffs. That was interesting, they didn’t have to say that, but they did. If they really wanted to wave a finger at the Americans, they could let their currency dive, say to 8.50 or 9 yuan per dollar. That would be a kind of a casus belli. But Beijing does not want to risk that. Or they could target American companies much more aggressively. Of course that’s all still possible, but right now we get more signals that they want to negotiate.
During the first Trump presidency, Washington and Beijing reached the so-called Phase One Deal, which was signed in January 2020. Could that be a starting point for further negotiations? Or are we past that?
My hunch is we’re past that. Both sides have moved on since then. China’s self-reliance shtick plus its diversification of markets since then mean that it’s much more difficult for the US and China to reach an agreement today. The rupture between them is so big now that it’s difficult to imagine peace breaking out in the traditional sense. What they still might be able to do is to reach a loose agreement to basically stop fighting each other commercially as aggressively as they are now. Perhaps China will buy more LNG from the US, perhaps there will be some agreement about TikTok or other areas of contention. Perhaps that will lead to both sides rolling back some of the extreme tariff increases. They still will end up with very high tariffs against each other, but maybe not quite as high as they are today. They might reach a modus vivendi agreement, rather than a solution to the trade problem....
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