Things are heating up between the US and China.
The world’s two largest economies are in the middle of a trading spat. Last week’s meetings ended without any real agreements from either side.
They are both threatening big tariffs against each other, and both have significant demands.
As Bloomberg reported on one side:
‘The U.S. delegation asked China to reduce support for high-tech industries, allow U.S. companies non-discriminatory access in China and cut the trade deficit by at least $200 billion by the end of 2020 from 2018, according to a document seen by Bloomberg. It also called on China to avoid any retaliation, drop a pair of World Trade Organization cases and agree to quarterly reviews of its progress in meeting targets.’
On the other side, as Bloomberg continued:
‘The Chinese side — led by Vice Premier Liu He, President Xi Jinping’s top economic adviser — asked the U.S. to stop its 301 investigation into Chinese intellectual property abuses, drop planned 25 percent extra tariffs on Chinese goods and end discrimination against Chinese companies in national security reviews, according to a separate document also seen by Bloomberg. China also asked the U.S. to open its e-payment market and approve China International Capital Corp.’s application for a financial license.’
China has threatened on levying tariffs on US$50 billion of US imports including soybeans, automobiles and aircraft. That’s about a third of all US imports into China.
The US is threatening to impose US$150 billion in tariffs. This would also affect about a third of exports from China into the US.
Tensions will hopefully fizzle out as both sides negotiate a solution.
Yet we could also see an escalation in the tit for tat responses. And then things could get out of hand fast.
The US is looking to reduce its trade balance deficit. That is, the US spends much more on imports than the rest of the world spends on US exports. As you can see in the graph below, the US has been running a balance of trade deficit since the 1980s.
Source: Council on Foreign Relations
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In 2017, according to Statista, this balance of trade deficit was US$566.03 billion. By far, the biggest contributor to this is the US’s relationship with China. The US runs a US$375 trade balance deficit with China.
Global trade has always been a balancing act.
Back until around the 1820s, India and China accounted for almost 50% of the world’s GDP, while Europe and the US only accounted for about 20%. By 1913, the balances had shifted.
Source: Visual Capitalist
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After the Second War World, Europe and Asia struggled to rebuild from the wreckage. Yet the US enjoyed a never-before-seen period of prosperity.
Now China’s economy is making a comeback.
Emerging markets the biggest contributor to global economic growth
In 2007, while Europe and the US were struggling with one of the deepest crises ever, emerging markets were growing. The BRIC nations — Brazil, Russia, India and China — saw impressive growth.
In 2008, the BRIC’s economies accounted for two-thirds of global GDP growth and 22% of global output. By 2011, after South Africa’s inclusion, they accounted for half of the world’s GDP growth.
According to the World Bank, China has lifted more than 800 million people out of poverty since 1978. China is now also the world’s largest exporter.
Incomes in Asia are rising fast. They are making advancements through investments in technology and infrastructure.
China is also becoming a major economic force through the Belt and Road Initiative (BRI). This is a plan to revive the old Silk road trading routes and increase connectivity and trade by building infrastructure.
In comparison, the advanced economies have barely had any growth. In fact, they have kept interest rates low, which has ballooned debt.
That’s why much of the world’s economic growth in coming years will be coming from emerging markets, as you can see in the graph below.
Source: World Bank
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The US and China relationship is one to watch closely. In my opinion, it will be one of the most important trends shaping the world’s economy in years to come.
The US is the world’s largest economy. China is an upcoming competitor. Yet both countries have close ties on trade.
And China will be a major force driving world’s growth in years to come.
Editor, Markets & Money
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