The U.S.-China Trade War Will Transform The Global Economy

Thursday, 30 August 2018 20:57 Written by

The trade war that U.S. President Donald Trump started will profoundly reshape the global economy. We need to be prepared for it. Here’s a brief description of the transformational forces unleashed by the trade war and what they may wrought in the future.

The trade war has accelerated several trends that had been underway for some time. Consider the following.

In 2017, exports from EU (the collective of 28 member countries, as distinct from the Euro Zone) to Asia was bigger than that to the U.S.; and, more significantly, EU’s exports to Asia in the last decade have been growing almost twice as fast as its exports to the U.S. While Asia’s exports to the EU in 2017 was still slightly lower than that to the U.S., but it is also faster growing, making the EU increasingly more important to Asia, according to the IMF's Direction of Trade data. From a simple perspective of market size, Asia today is far more important to the EU than the U.S., and the EU will soon be more important to Asia than the U.S.

Asia’s market size for imports reflects its vibrant and growing consumer markets that are increasingly prosperous. Measured by estimates of private consumer expenditure, Asia today is just about as big as the U.S. The big difference is, however, that private consumer expenditure in Asia is growing at twice the speed compared with the U.S. If Japan is excluded, Asia’s growth is three times faster. Even more striking is China where private consumer expenditure has been growing at an average of 13.8% a year in the last decade, over four times faster than in the U.S., according to the World Bank WDI database and Eurostat. Not surprisingly China is now the largest market for an expanding list of countries, which includes Australia, Brazil, Russia, South Africa, South Korea and Indonesia, among others. Indeed, if the current growth rates of imports respectively in the U.S. and China hold in the next few years, by 2021 China will surpass the U.S. to become the largest market for imports in the world. This is a mere three years away, according to the IMF and the Bureau of Business Analysis at the U.S. Department of Commerce.

Against the backdrop of these powerful trends, Trump’s trade war is creating new impetus for the EU and Asia to speed up the opening of their markets to forge closer economic ties. This will lead to even faster growth than in the last decade in trade between the EU and Asia, accompanied by rising investment. Virtually everywhere outside of the U.S., a new sense of urgency is now afoot as policy makers seek to fast track regional free trade agreements. For instance, after Trump pulled out of the Trans-Pacific Partnership, a successor, renamed as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, was signed in March this year by 11 countries on both sides of the Pacific. Within Asia, China and Japan are seeking to mend fences, and the Regional and Comprehensive Economic Partnership, which includes China, is being prioritized as a major step toward Asia’s economic integration. A direct consequence of the Trump trade war, therefore, is faster and wider economic integration outside of the U.S., accelerating the shift of global economic center of gravity toward Asia.

Such a development in turn has profound business implications. As Europe and Asia forge closer economic ties, their tariffs against each other’s exports will come down. Businesses operating in these increasingly open markets will have to adapt to intensifying competition, thereby becoming more efficient, innovative and dynamic. The network of global supply chains that has revolutionized the nature of trade and investment since the 1980s will expand and become more productive and more densely intertwined across Europe and Asia while withering in the U.S. While 326 million American consumers are increasingly “protected” by Trump’s tariff wall, over four billion consumers in Europe and Asia will thrive and enjoy more, better and cheaper products and services provided by competitive and creative businesses.