summary
  • An Asian Perspective On Trade
  • Mexico Becomes The Second Front

When I scheduled my annual trip to Asia earlier this year, I was hopeful that trade frictions with China would be resolved before the journey. Instead, the acrimony between the main antagonists has increased. While this made my conversations more difficult, it also increased their value. Here are the main takeaways I gleaned from my long series of interactions across four countries late last month.

  • It is hard to overstate the differences in style between China and the United States. The Chinese are measured, patient and subtle. They view Washington’s posture as impulsive and unproductive. Several people in Beijing referred to the increase in tariffs and the restrictions placed on Huawei (China’s champion telecommunications firm) as “not the actions of a trusted partner.”

    There are certainly those in the United States who would assert that China has not been a trusted partner, given its alleged theft of intellectual property and its failure to deliver on promised economic reform. Hard-liners in Washington believe China has evaded these issues for far too long, and tough tactics are warranted. Indeed, by subjecting them to a measure of economic discomfort, these measures have gotten the attention of the Chinese.

    Weekly Economic Commentary Chart 1 - 06/07/19

    Tactics aside, the central question is whether America and China can reset the terms of their trade relationship without significantly disrupting the world economy. The rising antipathy between the two could place the global expansion in peril.
  • Developing countries reliant on commerce with China or the U.S. find themselves caught in the middle. Several nations in Asia are heavily dependent on exports for economic growth, and their trade flows are already constricting. (No matter how many times I visit the region, I am always amazed by the number of container ships lined up outside of the ports of Hong Kong and Singapore.)

    Even if the rhetoric eases and discussions resume, the resulting uncertainty surrounding the situation is harmful to commerce. Confidence and investment indicators from around the world are slipping, presaging slower growth in the second half of the year. Australia’s central bank cut its interest rates this week; the Federal Reserve may be forced to follow in the second half of this year.

    “Rising trade tensions are creating unwelcome uncertainty.”
  • China is taking aggressive steps to offset the trade conflict’s contractionary influence, including tax cuts, infrastructure spending and increased lending to small and medium-sized businesses. During a conference I addressed in Beijing, senior policy makers repeatedly stressed the importance of supporting the flow of credit to entrepreneurs. In total, the measures amount to the sizable sum of about 2% of Chinese gross domestic product (GDP).

    The reservoir of options for China remains fairly deep, but could come at the long-term cost of financial stability. Until last summer, China had been waging a successful battle against credit excesses. The trade conflict has forced the country to retreat, at least for now.