The bitter trade dispute between China and the United States entered a new stage when President Trump announced tariffs on another $300 billion worth of Chinese imports. Negotiations seem to have reached an impasse and truculent language in the media is raising the tension. Duncan Bartlett has been listening to the fighting talk
Reporters fill their articles with militant language when writing about China’s relationship with the United States.
Having declared that the nations are locked in a ‘trade war’, they are now warning of the threat of a ‘currency war’. They claim that China has ‘weaponised’ the Renminbi and infer that other countries may be drawn into the conflict, causing global economic damage.
Such aggressive sounding terminology raises the rhetorical volume on the economic pages of newspapers and websites. It enlivens the media’s analysis of complex issues such as tariffs and trade – topics which tend to be shunned by readers as abstruse or irrelevant. After all, why would people choose to click on a piece about capital flows when they could instead turn to a juicy titbit of celebrity gossip, or the fallout from some fresh Trump-inspired Twitter storm?
Yet the US-China trade war has pushed economics up the media agenda and into the public consciousness, particularly in the United States, where the dispute has become headline news, not only in newspapers and TV news channels, but also on social media sites.
The excited tone of the press coverage appears to have affected public opinion. A Pew Research Centre poll conducted in June, after the acrimonious breakdown of trade negotiations between US and Chinese officials, found that 60 per cent of Americans hold an ‘unfavourable’ view of China, compared with just 26 percent whose opinion is positive.
The trade dispute has also contributed to volatility on the financial markets, particularly over the summer, as investors have been selling equities and buying assets which they regard as safe havens for their money, such as bonds or gold. Prices fluctuate as rumours spread about developments in the trade negotiations.
The trade war is a tit-for-tat process. Whenever the US slaps tariffs on Chinese imports, China imposes penalties on US goods in return. Yet because China enjoys a significant trade surplus with the US, selling more than it buys, it is running out of American goods upon which it can impose retaliatory levies.
This has led the People’s Bank of China to devalue the currency, the Renminbi, allowing it to drop to less than seven against the dollar – a dramatic U-turn in its approach. Until recently, the Chinese authorities would quickly step in when they saw the currency heading down towards that level, using huge sums from the nation’s foreign exchange reserves to prop it up. The deputy governor of the People’s Bank, Liu Guoqiang, insists the new policy is in response to the actions of the Americans.
‘The international community is currently in dire need of a stable economic and financial environment,’ Liu told the Financial Times. ‘Rather than resorting to protectionist measures, countries should be working together to promote economic growth and rebuild the confidence of global markets.’
The Chinese media is eager to promote such an upbeat perspective, always giving the impression that the trade war is the fault of Donald Trump and his hawkish allies in Washington. This side-steps debate about what the Americans claim are the fundamental reasons that the trade war started in the first place.
Their resentment stems from what they see as the forced transfer of their technology to Chinese companies, copyright infringement and a profound imbalance in market access. Such complex matters take up the majority of time in the trade negotiations and the Americans complain that the Chinese refuse to concede ground for ideological reasons.
The Chinese may require a face-saving compromise. Their exports to the US have fallen for eight straight months, according to Chinese customs data. And although the trade war has not caused a financial crisis, it has been a drag on the Chinese economy. After two decades of double digit growth, it slowed to its lowest rate in 30 years in the spring, although economists say there were many domestic factors behind this.
One of the major concerns of the People’s Bank is that if there is a sudden panic about China’s economic prospects, causing the Renminbi to fall sharply, people may attempt to take their money out of China or transfer it into other currencies, including the US dollar.
As China’s growth has been fuelled by immense borrowing, not all of it sustainable, too sharp a currency devaluation could cause trouble for Chinese companies which hold all or part of their debt denominated in US dollars. The last thing the People’s Bank wants is for companies to turn to China’s notorious shadow banking sector to cover their debts.
The focus on the Renminbi places China in poll position in the global currency cycle. Yet that should not distract from the relative strength of the US economy and the continued importance of the almighty dollar.
America is the only major advanced country where central bank rates remain significantly above zero, despite the Fed’s 25 basis point cut in July to a range of between two and two and a quarter percent.
Although volatile, the US stock market is coming off a run of record highs. Inflation and unemployment remain low and America’s pre-eminent position in the global economy appears relatively unchallenged.
The language of war
So does this situation look like a war? That depends from which perspective it is viewed. ‘We’ve reached a very high plateau, but it is a plateau,’ says David Kelly, chief global market strategist at JP Morgan Asset Management, as he surveys the US economy. ‘But I do think this trade war is a problem because we’re making the assumption that, at some stage, the other side will blink. But what if they don’t?’
Mr Kelly told CNBC: ‘Tariffs are a terrible thing for us and for other countries and I’m afraid this increasing rhetoric is negative and damaging. It’s an increasingly messy war. And of course, that’s how wars always end up,’ he warned. ‘The generals will tell you that the troops are going to be home by Christmas but they never are. This problem could extend into next year and the year after that. From a political perspective, neither side will want to be seen as giving in.’