The fate of the global economy is dependent on the actions Donald Trump takes as the new US president and on the reactions of China’s President, Xi Jinping.
The most capitalist nation on Earth is creating trade barriers, while the world’s largest Communist nation is championing the cause of free trade. This was the takeaway from the World Economic Forum (WEF) at Davos, Switzerland, this week.
In the weeks leading up to Davos, President Trump pledged “America First” while sending protectionist signals to America’s international trade partners, especially China. The Trump government, for its part, is threatening to leave the Transpacific Partnership (TPP) as well as NATO and NAFTA. Trump has threatened China with high tariffs, and China has pushed back. The BBC reported that Chinese officials had warned Trump about “nativism” and moves that would start a trade war and harm global economic growth.
While the US retreats into protectionism, China expands. At Davos, China was pushing its global initiatives, including the Asia Infrastructure Investment Bank, to rival the US dominated World Bank and The New Silk Road, China’s massive infrastructure development plan which will link China’s North Western city of Kashgar with Central Asia, South Asia, and the oil fields of the Middle East. Xi Jinping argued at Davos that globalization has made the world richer. Globalization has certainly made China richer through its slew of investments and acquisitions across the globe.
To make matters worse, a US Fed rate hike in the fourth quarter of 2016, combined with an already strong dollar will make US exports even less competitive, causing the US trade deficit to increase. This may in turn encourage Donald Trump to increase trade barriers. It will also make loan service more expensive for countries outside of the US who have borrowed in US dollars.
The global economic climate is somewhere between uncertain and hostile with the world caught between the two giants, the US and China. The other roughly 200 nations of the world watch helplessly as their own economic well-being hangs in the balance.
President Trump did not attend the Davos conference because it coincided with his inauguration. Instead, US interests were represented by the president’s chosen advisor, former hedge fund boss Anthony Scaramucci. Given the current global dynamic, it was no wonder that Xi Jinping, the first Chinese president to attend Davos, was at center stage and that the US China dynamic was the primary topic of discussion. His entourage was the largest Chinese delegation in history and included prominent Chinese millionaires including Alibaba founder Jack Ma and property magnate Wang Jianlin, from Dalian Wanda. At Davos, President Xi pledged to lead the world in a return to free trade. In recent years, China has been participating more and more in the world economy by establishing the Asian Infrastructure Investment Bank, as an alternative to the U.S.-led World Bank. Additionally, China has volunteered to fill the vacant seat if the US withdraws from the TPP.
Reuters research discovered that the most common concerns among global economists were a U.S.-China trade war, as well as economic tensions caused by an adversarial Trump administration. Davos attendees shared worries about a more protectionist US, in the face of Trump’s new advisory team, particularly Dr. Peter Navarro, who has been calling for increased barriers against China for years.
China, on the other hand, has portrayed itself as the champion of free trade and the US as a protectionist nation that will disrupt global commerce. As is true of any argument, there is some truth on both sides. US president Trump wants to increase trade barriers because he feels current trade arrangements are unfair.
The US runs a trade deficit with China and most of its other trading partners. The Chinese currency is in steady decline, and yet, China levies tariffs against US products which are a multiple of the tariffs the US levies against Chinese goods. US markets are still essentially open, with Chinese companies free to invest in nearly any sector and to own 100% of their US subsidiaries. The reverse is not true, however, as there are countless rules in China, restricting US or foreign countries as to where, how, and how much they can invest.
For example, foreign companies cannot own land in China, but Chinese companies can own land in the US. On the Chinese side, there is a list of strategic sectors, including entertainment and the construction of villas, which foreign companies are prohibited from investing in. The US maintains no such list. Chinese state owned enterprises are effectively subsidized by Chinese state owned banks, making it nearly impossible for US companies to compete in open markets. And of course, one of the terms of doing business in China is that US companies must agree to transfer technology to their hosts. Once again, mandatory technology transfer is not one of the terms of doing business in the United States.
President Trump’s reaction to the lack of reciprocity in trade agreements is to raise tariffs against Chinese imports and to withdraw from what he sees as imbalanced international trade deals. China, on the other hand, is dependent on exports, with the US accounting for about 18% of the country’s total exports. Recent economic slowdowns, increasing public debt, and a dropping Yuan have caused China to fret about the direction it is heading. The last thing China needs is a trade war with the US. And this was the message, which President Xi gave at Davos, that no one can win a trade war.
According to a BBC news story Anthony Scaramucci disagrees. He believes the US could win a trade war against China. Some experts agree, based on the fact that the US runs a trade deficit with China and the country with the trade surplus would be hurt worse by a trade war. Donald Trump has said words to the effect of, they need us more than we need them. Other experts disagree, suggesting that a trade war between the US and China would be destructive to both countries. At Davos, Scaramucci took a somewhat less confrontational stance, referred to the current trade environment as unfair, and stating that President Trump demanding a renegotiation of the status quo is not an act of protectionism.
A professor of international business at Georgetown University, Dr. Pietra Rivoli, told the New York Times that the U.S. was one of the least trade dependent countries in the world—the implication being that if a trade war erupted the US would be able to function. According to The World Bank data, in 2015, only 12.6% of the US GDP was derived from exports. China’s exports, on the other hand, accounted for 22.1% of GDP.
Dr. Pietra Rivoli, went on to say, “You can be opposed to trade agreements and be in favor of trade.” And this statement seems to be an accurate depiction of Donald Trump. The new American president has definitely put himself out to the public as a pro-trade president, but this doesn’t mean that he likes all of the US current trade deals.
President Trump was inaugurated in Washington D.C. on January 20, 2017. On the same day, The World Economic Forum at Davos ended, with no resolution for the current animosity between the US and China. All the world can do is wait. The fate of the global economy is dependent on the actions Donald Trump takes and the reactions of China’s President, Xi Jinping.