United States President Donald Trump (right) talks to Chinese President Xi Jinping. Photo / AP
In ordinary times, worries about the health of the global economy tend to prompt leaders of the largest countries to join forces in pursuit of safety.
These are not ordinary times.
The biggest threat to global fortunes has become the intensifying conflict between the two largest economies on earth, the United States and China. As their leaders openly contemplate how to inflict pain on each other, the rest of the world now frets about becoming collateral damage in an escalating trade war.
Only a week ago, China and the United States appeared to be moving toward cooling their hostilities, while global economic prospects were improving. Worries about a worldwide slowdown were giving way to burnished hopes for expansion.
Fears about the weakening of China's economy were easing as President Donald Trump advertised a soon-to-be-signed trade deal. That lifted the outlook for Asian economies dependent on global commerce like Japan, South Korea and Taiwan. Europe, a perpetual source of concern, was flashing signs of renewal. Defying skeptics, the US economy remained on a tear.
But late last week, as Trump sharply increased tariffs on US$200 billion ($304.8b) worth of Chinese goods, the world found itself grappling with the likelihood that the trade war will cost treasure. The concern mounted on Monday as Beijing retaliated and the Trump administration detailed plans to slap 25 per cent tariffs on virtually all goods that China sends to the United States.
For businesses and consumers alike, it all raised the prospect that they would soon be paying higher prices for goods, a reality that discourages commerce.
"An escalation scenario would be terrible all around," said Gabriel Sterne, head of global macro research at Oxford Economics in London. "A negative impact on trade flow is going to be bad for global growth for several years. It's bad news for almost everybody."
If both sides follow through on their threatened tariffs, China's annual economic output will be reduced by 0.8 per cent while the United States will see its annual growth reduced by 0.3 per cent, according to Oxford Economics.
Those numbers are small in the grand scheme of things, but the damage could be felt acutely within industries that are especially exposed to the trade war, such as American agriculture and Chinese electronics manufacturers. The weakness was underscored on Wednesday by the latest indications that China's economy is slowing and by lower-than-anticipated figures for retail sales and factory orders in the United States.
The harm could be especially severe for countries that are most dependent on trade, including Singapore, Malaysia, Mexico and Japan.
At the center of trouble sits China, the world's most populous country. Its breakneck development over recent decades has added hundreds of millions of consumers to the global marketplace while supplying a vast assemblage of low-cost goods.
Given that China is the source of roughly one-third of the world's economic growth, any disruption to its trade amounts to a global event.
Trump has designed his tariffs to wound China as he seeks to pressure its leaders to agree to cease subsidising state-owned companies, stop demanding intellectual property from US businesses and open its markets to foreign competitors. Until last week, the president was insisting that a trade deal with China was imminent. Then, he abruptly accused China of reneging on its commitments and opted to increase tariffs.
The sharp escalation comes at an especially fraught time for the world economy, jeopardising what had seemed to be a stabilising, if gradually slowing Chinese economy.
Volumes of freight imported by China surged in April, according to an analysis of data by UBS, the global investment bank. Worldwide, airfreight was up in March compared with a year earlier, according to the International Air Transport Association.
But these trends are fragile. Airfreight has declined nearly 4 per cent since its peak in 2017. Outside China, manufacturing in Asia has been slowing for much of the last two years. A trade war between the United States and China — two countries that collectively account for roughly 40 per cent of world economic output — would almost certainly aggravate the situation.
Exports to China from Japan, Taiwan, South Korea, Thailand and Vietnam have plunged by about 14 per cent over the past year, or about US$6.3b, according to analysis from Oxford Economics.
Those same countries have lifted their exports to the United States by a similar percentage. But the United States is a less important trading partner, and the increase amounts to less than US$2b.
In Europe, the trade war presents another unwanted source of concern at a time of tenuous progress.
Concerns that Britain's unruly departure from the European Union would damage trade across the continent had abated — at least in the immediate term — as London and Brussels agreed to extend their fractious divorce proceedings until the end of October.
Germany, the Continent's largest economy, had been moderating fears of weakness, with data showing an increase in factory orders and exports. Germany's exports to China were up by more than 5 per cent in March compared with a year earlier.
But much of what Germany sends China amounts to the piece parts of China's industrial apparatus — car parts, engines, electrical machinery and other gear folded into factory operations. If Chinese factory operations slow in the face of American tariffs, China's appetite for German goods will most likely wane.
In Italy and France, industrial activity has been weakening in recent months.
"For Europe, it's happening at a very delicate point in time," said Kjersti Haugland, chief economist at DNB Markets, an investment bank in Norway. "You have growth being very feeble again."
The trade war has already spooked global stock markets, prompting plunges in share prices in recent days.
If investor fear deepens, money will almost certainly flow into the ultimate safe haven, the US dollar. That would most likely be accompanied by money leaving emerging markets, exacerbating crises in Argentina and Turkey, while bringing down the value of currencies more broadly, from Brazil to South Africa to India.
Falling currencies make imported goods more expensive in those countries, forcing poor people to pay more for food, fuel and transportation.
After rising early this year, currencies and stock prices across emerging markets have dipped precipitously in recent weeks.
The key question now is how long trade hostilities will endure.
It is a question with no clear answer.
Trump appears to be taking resolve from a strong US economy as he declares a willingness to absorb the strains of a drawn-out battle with China. The unemployment rate sits at 3.6 per cent, its lowest level in half a century. The economy expanded at a 3.2 per cent annual clip during the first three months of the year.
Trump has declared that the United States can win a trade war if it stays the course. Yet he has also used Twitter to complain that the Federal Reserve is not cutting interest rates while China's leaders stimulate their economy with injections of credit.
Perhaps that represents his lobbying for lower rates. It can also be read as an admission that Trump lacks — and covets — tools possessed by his adversaries in Beijing, who enjoy domination of the levers of policy.
Trump's strategy appears to be stoking nationalist anger in China, where the Communist Party government leans heavily on such sentiments for propaganda purposes. That could harden China's willingness to hold its position, as its leaders fear the consequences of gratifying an attack from the American leader.
It is not a recipe for expanded global trade, which grew by about 4 per cent in 2017, then slowed to 2 per cent last year and may contract this year.
"Once growth in trade volumes turns negative, it makes us all have to take a closer look at some sort of recession scenario," said Marie Owens Thomsen, global chief economist at Indosuez Wealth Management in Geneva. "Things are looking more disconcerting for sure. The downside risks are increasing."
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Written by: Peter Goodman
Photographs by: Matthew Ryan Williams
© 2019 THE NEW YORK TIMES
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