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US-China Trade Tensions Threaten Global Stability

Tensions between the United States and China continue to threaten global economic stability. The tortured relationship between the world's two largest economies dominated the recent APEC summit in Port Moresby, with both countries struggling to find common ground when it came to defining trade tactics and the role of the World Trade Organisation (WTO). While the upcoming meeting between President Trump and President Xi Jinping in Argentina is promising, analysts have warned of rising global trade tensions and reduced domestic demand in China if the situation remains unresolved.

The US-China trade war has been called the largest trade war in history. The US has already imposed three rounds of tariffs on goods from China, covering everything from railway equipment through to handbags. With 25 percent tariffs on US$250 billion of goods already applied and an additional US$267 billion threatened, President Trump seems intent on making US-made products seem cheaper than those imported from China. While the Asian superpower has hit back with US$110 billion worth of its own tariffs, many experts expect that China has more to lose.

According to a new paper from EconPol Europe, a network of researchers in the European Union, US companies and consumers are likely to pay just 4.5 percent more due to the 25 percent tariffs, with the other 20.5 percent falling on Chinese producers. Consumer goods are likely to rise by 6.5 percent in the US, followed by intermediate goods at just over 5 percent, mixed goods at just under 4.5 percent, and investment goods at just under 2 percent. According to the study, the tariffs will cut American imports of affected Chinese goods by more than a third, and lower the bilateral trade deficit by 17 percent.

The deteriorating relationship between the two countries has led to growing uncertainty in global markets, with affected companies more likely to offload assets quickly in an effort to reduce debt and improve short-term profit margins. International trade in goods has already fallen significantly over recent years despite a relatively healthy global economy, thanks in part to a rising hostility to globalisation. Rising tensions and growing nationalism could lead to a global trade war that involves many more countries, something that could slow global GDP growth by 2.5 percent according to a Bank of England report.

Along with a global trade war, growing tensions between the US and China could lead to a significant slowdown of the Chinese economy. According to a recent assessment from the International Monetary Fund, the ongoing trade dispute is likely to have a profound effect on economic growth in China, with this eventuality almost certainly creating challenges for the Australian economy. While US-China trade only represents a small proportion of the global export market, Australia’s economic growth could be threatened due to reduced demand for Australian industrial commodities and property assets.

 

Image source:  g0d4ather/Shutterstock

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