The US-China trade war has always been serious.
Now it’s starting to get scary.
China allowed its currency to drop sharply on Monday to the weakest level in more than a decade. And China announced its companies have halted purchases of American agricultural goods.
The Trump administration escalated tensions even further late Monday by taking the historic step of labelling China a currency manipulator. This comes after US President Donald Trump vowed last week to impose tariffs for the first time on a wide swath of US consumer goods from China. The news prompted further selling in global financial markets and raised speculation that China could take even more aggressive steps to devalue its currency.
The trade conflict has reached a new level of seriousness that will be difficult to reverse. The risk is that the trade war is approaching the point at which it causes a severe economic slowdown or even a recession.
By digging into their positions, both the United States and China increase the risk of breaking an economy that is already starting to crack. Each round of escalation gets them closer to a recession — and to a point of no return.
If Mr Trump and China’s president, Xi Jinping, miscalculate, as all the signs suggest that they might, the upshot will be a full-blown trade and currency war that will shred business confidence, close factories and increase unemployment.
While the direct impact of Mr Trump’s latest tariffs will be relatively small – knocking perhaps a tenth of a percentage point off Chinese growth – the collateral damage will be far more severe.
Investors around the world are spooked. Asian markets slumped in morning trade Tuesday, tracking global losses after Wall Street suffered its worst sell-off of the year.
The Dow plunged 767 points, or 2.9%, on Monday. The Nasdaq tumbled 3.5%, suffering its longest daily losing streak since just before Trump’s 2016 election. This morning, the FTSE Bursa Malaysia KLCI (FBM KLCI) declined 18.37 points to 1,592.04, after opening 17.57 points weaker at 1,592.84.
The outlook remained grim in Asia on Tuesday, when Tokyo opened nearly three percent lower before recovering to end the morning two percent down.
Hong Kong fell 2.4 percent while Shanghai and Sydney shed 2.6 percent. Manila and Wellington were also down around two percent.
However, there is growing concern about Trump’s use of tariffs as a way of getting concessions.
Mr Trump thinks his trade measures are hurting China’s economy and that this will force Mr Xi to bow to the main US demands: greater market access and an end to Chinese piracy of American intellectual property. The White House is right in the first of these assumptions, but not in the second.
China’s economy is growing at its slowest rate in almost three decades and US tariffs are certainly one of the reasons for that. But Beijing tends to play things long, which makes its willingness to allow the yuan to rise above seven to the dollar both significant and worrying.
China has until now been keen to avoid the accusation by Mr Trump that it is using an under-valued currency to secure an unfair advantage for its exporters, so has been intervening heavily to prevent a depreciation of the yuan against the dollar. The fact that Mr Xi is now prepared to be branded by Mr Trump as a currency manipulator suggests that he may have given up hope of a deal.
The fact that China decided not to defend its currency further suggests Beijing is digging in for a longer trade war. Officials are no longer trying to avoid Trump’s currency wrath.
“China is taking a darker and more cynical view of Trump’s objectives with China,” said Michael Hirson, Eurasia Group’s practice head of China and Northeast Asia. “They’re becoming increasingly pessimistic about their ability to steer Trump away from further escalation.”
China’s currency move raised the spectre of a currency war, where major countries race to devalue their respective currencies.
China is “not weaponising its currency.” Rather, officials in Beijing are trying to take ownership for a decision they would have needed to make eventually.
And there are powerful incentives preventing China from allowing its currency to sharply devalue. Such a move would panic investors, destabilise financial markets and trigger a wave of foreign capital that Beijing has been desperately trying to attract.
Can the Fed offset the trade war?
“As a small open economy, Malaysia will not be insulated by the escalating trade tensions. Based on Bank Negara’s (BNM) estimation, a 25% tariff on remaining trade with China (note that the proposed rate is at 10%) and a blanket auto tariff would lead to a reduction of Malaysia’s GDP growth by 0.9 to 1.1 points,” says Hong Leong Investment Bank Bhd
The impact of the US-China trade war will account for half of that decline.
Malaysia’s benchmark FTSE Bursa Malaysia KLCI declined 16.35 points to 1,610.41 yesterday, while the ringgit extended its losses to close at RM4.177 against the greenback.
As the trade tensions highlight the scope for protectionism to weigh on growth, Malaysian Rating Corp Bhd (MARC) said the government needs to up spending as private investment growth has slowed significantly in the first half of the year.
It does not help that public investment by both the federal government and public corporations has fallen due to fiscal consolidation efforts.
“It is important that the government steps in to provide the necessary investment support to prevent growth falling below the 4% level if global risks continue to rise. We believe the government will provide the necessary support. The question is to what degree, and it remains a sensitive one due to Malaysia’s fiscal health,” MARC stated in a release yesterday.
MARC said monetary policy has a supporting role and BNM’s monetary policy stance is to “maintain price stability, while remaining supportive of growth”.
Talks between US and Chinese officials might pave the way for a compromise that allows both sides to save face. The US president might look at the panic on Wall Street and decide that it is time to do a deal.But that’s not the way things currently look.
Mr Trump is right when he says China has played fast and loose with the rules of the global trading system. He is right too in his assessment that China would come off worse in a prolonged protectionist battle. No question, the US could win a trade war. But it would be the dictionary definition of a pyrrhic victory.
– CNN/TheMalaysianReserve/TheGuardian | photo/AsiaTimes