China Economy

3 scenarios about the end of the US trade war and China

When the commercial conflict between the two largest economies on the planet broke out in July 2018, many observers expressed their surprise.

It was known that the US (and other Western powers) had been complaining about certain economic imbalances and the disadvantages of companies in these countries when trying to integrate the Chinese market.

However, no one expected President Trump’s detonanting initiative.

Currently, the USA has significantly increased the tariffs on a wide range of Chinese products and has threatened to include more items on this already long list.

China has responded with comparable actions, but, given the US trade deficit, the extent is more limited and its response could be extended in to other areas.

Regardless of whether trade war is  justified or not (in part we think so), you don’t have to be a big fan of the free market to understand that the damage is also (potentially) huge.

Therefore, we should look to the future and imagine  how this conflict could possibly end. In other words, what are the possible scenarios?, what would the  respective consequences be? and, above all, what is the probability of each scenario?

We see the following options on the table:

1)  Scenario 1: complete trade war

Neither Trump nor Xi want to negotiate, or tariffs and other non-tariff barriers to rise to the point that Chinese companies cannot act in / with the US. and vice versa. The cost for the two economies (and the world economy) would be very high: prices rise, production and profits fall, companies close and employment plummets.

Big changes worldwide take place in the supply chains of countless industries →  Is it likely? No, because the cost for everyone involved would be disproportionately high →  How do we see it happening? Both leaders show signs of not wanting to seek negotiation, but instead, look for confrontation, such as in international forums like the G20.

2)  Scenario 2: a new status quo

The conflict is over, temporary tariffs are eliminated and everything returns to normal but with a clear winner: Southeast Asia, where a large part of the industries that constitute the global supply chains have moved. China, for its part, continues to invest in improving its competitiveness to avoid relying on Western suppliers; especially in terms of technology.

→  Is it probable? It is quite possible that it could materialize, especially in the short term, because the damage from the commercial war is being noticed in both countries and there are more and more voices calling for an end. →  How do we see it happening? Indications in speeches, appointments / dismissals in the respective negotiating teams, changes in tone in general … everything will indicate if we are heading down this route (or not).

3)  Scenario 3: a new commercial framework

There is a negotiated agreement, with concessions on both sides and changes in intellectual property rights, market access and greater regulatory transparency. →  Is it probable? It is possible, but not very likely in the short term, at least not during Trump’s Presidency. China will also want to make sure it doesn’t leave a bad impression, by creating a precedent. →  How do we see it happening? Greater negotiations at many levels and in many areas, which indicates that countries are in constant conversations and that there is a willingness to reach commitments

Source: China Briefing