The impact of the trade war between the world’s two biggest superpowers is starting to bite internally
One of the US’ biggest corporations has put its head above the parapet when it comes to the state of China’s economy. In an article, investment bank and financial services firm Morgan Stanley argues that economic stimulation efforts from the East Asian superpower may bear fruit quicker than investors anticipate.
In the piece, the company debunks two theories from sceptics when it comes to the topic of easing. The first is that recent easing efforts have not worked: the bank says that investors should consider the fact that China has been focused on supporting financial stability for the last two years. As for the idea that too much easing could backfire, Morgan Stanley says that although the fear is valid, the Chinese government is now making a determined attempt to prioritise growth quality over quantity, therefore avoiding the huge infrastructure and credit stimulus it previously depended on.
According to the company’s global head of economics and chief China economist, Chetan Ahya and Robin Xing respectively, Q1 growth is anticipated to be 6.1%. However, this should mark the bottom of the growth cycle, with an annualised growth trend improving in Q2 and hitting 6.4% by the end of 2019. The article claims that in a recent report, Mr Ahya and his team say that China will aid emerging markets with retaking the lead as the world’s economic growth engine. Pessimism, the bank says, often reaches its greatest pitch just prior to the turning of the cycle. The company also says that although there are still downside risks — policy measures could take longer than anticipated to translate into economic activity, and weakening trade growth, or an adverse trade talks outcome, could drag on overall growth — there is now less chance of tariff increase beyond March 1.
Discussing its World Economic Situation and Prospects 2019 report, the United Nations Conference on Trade and Development (UNCTAD) says that amid the increase in world trade tensions, direct subsidies and stimulus measures have thus far offset a lot of the direct economic effects on the US and China. Yet, the world’s economy could be greatly disrupted by a lengthy trade tensions-escalation, the intergovernmental body adds.
“Directly-impacted sectors have already witnessed rising input prices and delayed investment decisions,” it says. “These impacts can be expected to spread through global value chains, particularly in East Asia. Slower growth in China and the US could also reduce the demand for commodities, affecting commodity-exporters from Africa and Latin America.”
A separate report from the organisation estimates that around 82% of the $250bn of Chinese exports subject to US taxes will be captured by businesses in nations other than China and the US. Additionally, around 85% of the approximately $85bn in US exports subject to Chinese levies will be taken by companies in other countries. Bilateral tariffs change world competitiveness, to the benefit of businesses operating in countries not directly affected by them, UNCTAD says, and Europe will benefit the most.
However, the study says that even for nations whose exports are due to go up thanks to the trade dispute, the outcomes will not be unanimously positive.
Speaking on American business news channel CNBC, the former Morgan Stanley Asia chairman Stephen Roach said in February, not long after the Morgan Stanley article was published, that he didn’t believe China will “give” on its key structural issues of industrial policy and innovation in response to cyclical economic pressures.
“There’s a cyclical story and there’s a structural set of issues,” he said. “A cyclical story, by definition, means that the economy will slow for a relatively-short period of time. The structural issues are lasting issues that really depict many of China’s core economic priorities. So the mismatch between the cyclical pressures on the economy and the structural imperatives that China faces is not likely to be resolved in the form of a Chinese capitulation due to the temporary weakness in its economy.”
The maritime effect
As for the shipping impact itself, a new report from shipowner association BIMCO lays bare the reality of the US-China trade war for the shipping world. A figure from the document shows that the shipping sector hit most by the conflict is dry bulk: according to data from 2017, over 100m tonnes of dry bulk goods involved in the trade war are traded by sea, with the great majority of the goods being Chinese imports. Additionally, more than 30m tonnes of container goods implicated in the conflict are traded by sea, though here, the great majority of the products are US imports.
“The shipping industry feels the impact of this trade war, especially in the dry bulk market,” says BIMCO. “While there were high container volumes on the front-haul eastbound transpacific trade lane in Q4 2018, this is unlikely to continue into 2019, given that companies have filled up their inventories and there is uncertainty over future tariffs.”
The report explains that although growth in China is still high, and well above the world average, its direction is evidently downwards, as a monetary policy and financial markets-tightening, combined with the trade dispute, have led to slowing growth. According to the International Monetary Fund, growth in 2017 was 6.9%, but last year, it was 6.6%, and this year and next year, it is 6.2%. BIMCO says that the Chinese authorities have begun, and are anticipated to carry on, putting in place fiscal policies to stimulate the economy and ease the slowdown’s pace. The organisation explains that China and the US agreed to suspend tariff-increases in a period of three months, in the hope of coming to a satisfactory agreement and halting the trade war, but no agreement means that levies on $200bn of US imports from China will go up to 25% in March, and retaliation from China is likely.
“Any escalation of the trade war will further harm the shipping industry, at a time when it is already struggling,” BIMCO says.
Looks like it’s time to call a truce.