The US-China trade dispute is seen as one of the greatest headwinds for the world economy with most of the focus on the trade numbers.
The US has imposed $250bn worth of tariffs on Chinese goods with another $267bn threatened, while China has retaliated with tariffs on US goods worth $110bn.
But amid the fire and fury of President Trump’s tweets, are we in danger of missing a more fundamental lesson – that the nature of global competition is shifting with huge implications for markets and investors as well?
The broader US critique
The president’s focus on the trade deficit has been met with a great deal of scepticism, even attracting the ire of the former chair of the Federal Reserve Janet Yellen. Amid other scathing remarks, she recently said: “I continually hear focus by the president and some of his advisers on remedying bilateral trade deficits with other trade partners. I think almost any economist would tell you that there’s no real meaning to bilateral trade deficits and it’s not an appropriate objective of policy.”
Yet the US critique is about more than trade numbers.
In the wake of the imposition of tariffs in the first half of 2018, US trade negotiators issued a list of demands of China in a document entitled “Balancing the trade relationship”.
The headline demand, unsurprisingly, was for a reduction in the trade deficit with ambitions for a $100bn reduction in 2018 and a further $100bn this year with China told to accept a huge influx of US exports. As the more sceptical observers had suggested, the US trade deficit with China has actually widened and continues to do so.
Fundamental demands
However, section two of the document demands the end of “market-distorting subsidies and other types of government support that can contribute to the creation or maintenance of excess capacity in the industries targeted by the Made in China 2025 industrial plan”.
The document also demands the elimination of many practices on technology transfer, an easing of restrictions on joint ventures with non-Chinese firms, an end to cyber-intrusions against US corporations and tougher intellectual property guarantees in the Chinese domestic market.
It is a long list and one that – in contrast to the blunt trade demands – has considerable corporate support. For example, the US tech thinktank the Information Technology and Innovation Centre (ITIC) has accused China of using the concept of “indigenous innovation” in terms of tech standards to highlight “China’s past adeptness in using laws and regulations to create a framework to discriminate against foreign firms and their products”.
The ITIC sees China’s stance as part of a new mercantilism that will frustrate world trade.
Of course, while US-China competition has the world’s attention, business in another economic and industrial giant, Germany, has published a quite remarkable document.
German business sees competing systems
The Bundesverband der Deutschen Industrie (BDI) or German Federation of Industries, has raised serious concerns about China’s model.
Earlier this year, the BDI made 54 demands to counter what it sees as the threat from this state-dominated, but aggressively competitive Chinese economy, partly because under President Xi the trajectory of its corporate sector has shifted dramatically.
The BDI report says: “For a long time it looked as if China would gradually move towards the liberal, open market economies of the West by integrating into the world economy and reshaping its economic system.
“This theory of convergence is no longer tenable. China is no longer developing structurally in the direction of a market economy and liberalism but is in the process of consolidating its own political, economic and social model. At the same time, China as an emerging economic power is shaping other markets and the international economic order. The Chinese model of an economy marked by substantial state control thus enters into systemic competition with liberal market economies.”
Yet given the integration of the German economy with China’s, the BDI is certainly not advocating any sort of rupture.
“China is of great importance for German industry. Family businesses, SMEs and listed companies have benefited greatly from China’s enormous economic rise and continue to do so today. In 2016, German direct investment in China amounted to around €76bn, or 6.8% of total German foreign investment. Approximately 5,200 German companies comprising over one million employees were active in China.
“Many companies have large sums of investment tied up in China and both SMEs and large German companies are continuing to expand their investments in the country. Due to the strongly integrated value creation networks and the current position of German industry in the Chinese market as well as the potential of business in China, an economic disengagement from China would entail enormous costs. German industry rejects this and is concerned that such a measure is increasingly being discussed in the USA.”
The BDI sees the answer resting with more European cooperation to compete not just with Chinese companies but its systemic state-controlled capitalism.
“The competition authorities in the EU only consider the European internal market as the relevant market for European mergers. Here, countermeasures should be taken and the market-driven formation of European champions should be permitted.”
It also wants more action on harmonising the digital economy and indeed on artificial intelligence, the hydrogen economy and 5G.
There is, of course, some commonality between the US and German positions. Both see a threat from aspects of China’s behaviour. Yet fund managers believe something more fundamental may be happening – that globalisation may be giving way to regionalisation.
From globalisation to regionalisation?
Devan Kaloo, global head of equities at Aberdeen Standard Life, says: “This rise of populism or state intervention is one of the big themes we have to deal with over the next five to 10 years. The market needs to price that change and that equals risk.
“As a consequence, you are going to have a harder time in terms of financial assets more generally.
“Over the last 20 or 30 years you have seen policy convergence in countries like US, Europe, the UK all going in the same direction, but this is changing. That is a megatrend, I don’t think people are thinking about so clearly.
“If you move away from globalisation, you are moving away from the big organisations which have slapped China’s hands or Germany’s hands for going it alone, but now we may be going back to an era of state interests coming first.”
Kaloo also suggests that we may be misreading the US-China standoff.
“The other big thing to think about is everyone is talking about the trade war – the tensions between China and the US – absolutely it has big economic consequences. But is it the cause or the symptom?
“The consensus view is that it is the case. But actually the US has decided that China is a strategic rival. They are doing that economically, militarily and in technology. That is quite an important point.
“It is not a Trump specific issue. The US-China relationship, one of the biggest most important relationships in the world, is becoming difficult. How does that play out? Again, one of the ways is what you find out, is when companies start to derisk their China position and in derisking you move from globalisation to regionalisation.”
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