US-China trade war to intensify after mid-term elections

The trade war between China and the US is likely to escalate again once the American mid-term elections are out of the way as the real battle lines between the two countries start to come into sharper focus, economists have warned.

S&P Global Ratings global chief economist Paul Gruenwald told GlobalMarkets that the war was not really about trade at all, at least as far as the US was concerned. “The US could reduce its trade deficit by getting consumers to save more,” he said. “In our view, the real issue is the structure of the Chinese economy.”

Gruenwald said the world was now starting to get a more coherent picture about what America was seeking from Chinese president Xi Jinping, which appeared to be a level playing field for its companies, less state-owned enterprises and even fewer subsidies for sensitive sectors such as tech.

He added that since these issues formed the lynchpin of China’s economic model, “it’s not clear that Beijing will make the concessions the US wants”.

Fitch’s global chief economist, Brian Coulton, agreed. “If you look at the list of US demands it’s not just limited to China’s trade policy, but the way it manages its economy,” he told GlobalMarkets.

He believes the Sino-US dispute is a very different animal from the one that led to the re-configuration of the North American Free Trade Agreement (Nafta). Then the US negotiators typically played good cop with the Canadians and Mexicans, while the US president played bad cop.

“I don’t think the US is playing a tactical game with China to gain more leverage,” Coulton continued. “I think distrust of China’s trade tactics runs quite deep within the current administration and they’re looking for some quite significant concessions.”

NEW TARIFFS

Coulton said that it would be harder for the two sides to make a breakthrough when they were not even talking to each other, something he noted had never happened when Nafta was being re-negotiated.

He also concluded that “a world run by global strong men isn’t one that’s conducive to dealing with the world’s macro, strategic or structural challenges in a co-ordinated way”.

But a Strategic Economic Dialogue 2.0 is exactly what China and the US need, according to Gruenwald. He feared the US would not re-open the formal communication channels, which the Bush administration set up a decade ago with a very different Chinese president, Hu Jintao, who was keen to promote China’s “peaceful rise”.

Rather, he thinks the current administration may be waiting until the mid-terms are gone before it slaps a new round of tariffs on the kind of imported electronic goods and toys which will hit US consumers directly in their wallets.