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Your Guide to What Trump’s Second Season Means Washington, Business and World
The author is Morgan Stanley’s Chief Asian Economist
Now, tariff rates are so banned that trade between the US and China has collapsed. Recognition of the extent of bilateral trade disruptions could be an early gateway to launch negotiations. As consultations progress, there may be room for mutual agreement to gradually remove tariffs set up by the US after China retaliates against mutual tariff imposition.
However, the average weighted tariff rate is 34 percentage points higher than the beginning of the year (to the 11% level imposed after the first round of trade tensions in 2018-19). Investors should accept that fixing issues that underpin trade tensions is not quick and easy for the following reasons:
First, the Trump administration is imposing tariffs because it believes it will significantly reduce the US trade deficit and promote land production, particularly for important commodities. However, both of these issues are unlikely to be resolved quickly by imposing tariffs or by completing trade transactions with numerous trading partners.
The substantial trade deficit reflects deeper issues regarding US consumer spending (high) and savings (low) behavior. It will take time to improve US manufacturing capacity. It’s about not just setting up a manufacturing plant, but also building a US-centric supply chain. At the starting point, the US participation in the global manufacturing value chain is only 13%, while China is more than three times higher at 41%.
Second, in China there is a very clear policy preference for generating growth through investment. Policymakers prefer to inspire investments because they believe they create tangible assets and increase productivity, rather than use them for consumption. This simply means an increase in debt levels for future generations. Furthermore, from a geopolitical perspective, China aims to be on the frontier of technology and remains cutting edge when it comes to high-end manufacturing.
Against this backdrop, a sustainable transformation in the bilateral trade balance between the US and China requires fundamental and lasting changes in the growth models of these two economies. Even if policymakers force the issue by requiring China to strengthen aggressive purchases from the US via trade agreements, implementing it will still be full of challenges.
The US may not soon have a large-scale supply of goods to export to China, and strategic competitive considerations may still be a barrier. China would not want to rely on the US as a major food and energy supplier, as the US is unlikely to rely on it to sell high-tech and defense equipment to China.
Finally, from a negotiation perspective, we believe that both the US and China want a comprehensive deal, but given the multiple issues involved, these discussions are complicated and take time to complete.
At this point, investors seem to be comforted by the suspension of mutual tariffs and the fact that trade outside of US-China is being repaired. However, we are not confident about our growth outlook. The uncertainty persists and there is already a loss in the cycle. In China, it is difficult to imagine a scenario in which tariffs will quickly return to levels in January 2025.
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In Asia other than China, trade agreements can be reached, but we don’t know if tariffs will make 10% less than 10% in the contract signing, and whether all of these contracts will be achieved before the expiration of the suspension.
The growing uncertainty is considered the business cycle and wait and see if the company sector is related to investment and employment decisions. The subsequent slowdown in capital expenditures and trade will become the dominant channel in which tariff policy exerts Asia’s biggest growth resistance. Therefore, we expect China’s year-over-year GDP growth to slow down from 5.4% in the first quarter this year to 3.7% in the fourth quarter, but the rest of Asia will vary in degrees of depressurization to growth, depending on its exposure to trade.
More trade-oriented economies (i.e. those with a higher rate of exports of goods to GDP and those who enjoy a stronger contribution to GDP from net exports) will face greater growth losses, just like in 2018-19, when the Chinese economy was cooled significantly. Unless we see a rapid lifting of tariff-related uncertainty, we are heading sharply towards a slower sync.
