The irony is striking. While Donald Trump and Joe Biden have been busy bashing Beijing ahead of the presidential election, the Chinese economy has rebounded vigorously. Amid the coronavirus pandemic, China is emerging as the engine of global growth.
China is the only major economy expected to post positive growth this year, along with IMF projecting growth of 1.9%, followed by 8.2% in 2021. Yet persistent trade frictions between the world’s two largest economies mean that the United States will not benefit from this expansion as it did from it. China’s huge fiscal and monetary pump after the 2007-08 Great Financial Crisis.
Chad Bown of the Washington-based Peterson Institute for International Economics points out Chinese imports from the United States of goods covered by the January trade agreement have not recovered to pre-trade war levels, down 16% from the same period in 2017. On the other hand , Chinese imports of like goods from the rest of the country in the world are 20 percent higher during the same period.
At the same time, Bown said, China’s commitment to purchase an additional $ 200 billion in US-made goods and services as part of President Trump’s self-proclaimed “landmark” deal falls far short of the mark. ” reach only 53% of the purchase target expected at the end of September.
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Perhaps the most telling verdict on the trade war for this president who sees the stock market as the ultimate judge of his performance comes from a study by economists at the Federal Reserve of New York and Columbia University. They estimate that the trade war reduced the market capitalization of listed US companies by $ 1.7 billion, which equates to a 6% drop in the value of the S&P 500 components. This reflects how the new tariff announcements reduced earnings expectations of exposed companies. The study found no beneficial effects for companies benefiting from tariff protection.
The reality is that Chinese retaliation has wreaked havoc on US exports. As Ryan Hass and Abraham Denmark note in a paper For the Brookings Institution, US tariffs have forced US companies to accept lower profit margins, cut wages and jobs for American workers, and raise prices for American consumers. While the bilateral trade deficit with China has narrowed, they add, the overall trade deficit has not narrowed because US tariffs on China have diverted trade flows, causing US deficits to increase with Europe, Mexico, Japan, South Korea and Taiwan.
If the performance of US equities has been remarkable despite the trade wars and the pandemic, it is due to an ultra-flexible policy and high-performing Big Techs, and not to mainstream activities. Also note that the tariffs did not bring much revenue to the US Treasury because the government had to distribute most of the money in the form of subsidies to appease farmers angry at the loss of exports to China.
The paradox in all of this is that friction is largely absent in the US-China financial relationship, the one area where market access for US companies has improved. As Beijing’s leaders pursue gradual liberalization, US banks are now starting to take majority stakes in existing partnerships. At the same time, China is attracting more and more portfolio capital from the developed world. As index providers incorporate more Chinese stocks and bonds into their indexes, passive funds in the US and elsewhere will increase that flow.
Interestingly, here is that the Chinese government bond market, the second largest in the world, offers positive real interest income after accounting for inflation, which is no longer the case with government bonds. US Treasury or major European bond markets. At the same time, the Chinese equity market is the only one outside the United States to offer serious Big Tech exposure.
As a result, China provides US pension funds and other developed countries with real income from which to pay pension obligations, subject to currency and regulatory risk. As China overtakes the United States and the United States pursues an ultra-loose and even more expansionary monetary policy, a persistently weak renminbi hardly seems unduly threatening.
As for regulatory risk, there are historical grounds for concern about arbitrary intervention by Chinese authorities. The price of more secure retirement income for the elderly thanks to China should be an incentive for Western policymakers to foster stable and peaceful financial interdependence. Under a new Trump administration, this will not happen. Whether, in the context of aggressive strategic competition between the United States and China, Joe Biden could choose such an option is debatable.