Europe and China are Losing the Global Trade War
In many ways, United States President Donald Trump views economics as a zero-sum game. In short, if one economy is winning, then another must be losing. For the US president, the United States economy was losing too often due to the unfair trade practices of other major economies, most notably China. Now, President Trump and the supporters of his economic and trade policies are feeling rather vindicated, due to the fact that the US economy is expanding rapidly. In fact, the US economy now appears likely to grow by at least 3% this year, the first time that the world’s largest economy has reached this level of annual growth since the financial crisis.
In contrast, many of those economies that have been vilified by President Trump for their use of unfair trade practices are finding their economic growth rates slowing as they struggle to fight the trade war that was launched by the White House. In fact, there are concerns that, should the ongoing trade war continue, if not worsen, economies such as China and the European Union could realize much lower rates of growth in the months ahead. What has happened is that this trade war has exposed some of the fragile foundations of both the Chinese and the European economies, foundations that are now cracking as the system of global trade and investment created by the United States flounders.
Europe: The European Union’s economic results for the third quarter of this year were worse than expected, even though growth had been forecast to slow in the second half of this year. For the 28-member European Union, economic growth slowed to 1.9% on a year-on-year basis (0.3% quarter-on-quarter). For the 19-member Eurozone, growth was even weaker, coming in at just 1.7% year-on-year (0.2% quarter-on-quarter). Even with weak currencies (the usual driver of European economic growth) and low interest rates, European economies are now finding it more difficult to generate growth, a trend that is likely to continue.
Since 2014, there were a number of factors in place that allowed most of Europe’s leading economies to pull out of their successive crises and record decent rates of economic growth. These factors included weaker currencies, strong demand in export markets and pent-up demand at home. Now, demand in many export markets, particularly China, is in jeopardy, while domestic demand is once again showing signs of slackening. Furthermore, the region’s drivers of growth in previous years, notably the United Kingdom and Germany, are likely to record lower growth over the coming year, while major economies such as France and Italy struggle to generate any growth at all. If Europe’s internal problems (Brexit, Italy’s budget, etc.) and its external concerns (trade war with the US, weaker export demand in Asia, etc.) persist, Europe could be in for yet another major economic slowdown in the coming year.
China: Like Europe, China’s official rate of economic growth in the third quarter was also worse than expected. In fact, the 6.5% official rate of year-on-year GDP growth in the third quarter, even if made up, was a signal that China’s economy was slowing significantly. On top of the economic slowdown, markets in China have been highly volatile in recent months, with share prices falling significantly and the yuan depreciating faster-than-expected against the US dollar, signs that business and investor confidence levels in the world’s second-largest economy are falling.
A number of factors have led to this economic slowdown and increasing market volatility in China. First and foremost, China’s trade war with the United States has both weakened export growth in China and raised concerns among businesses and investors in that country. Second, while domestic demand levels remain strong in China, external factors still play a key role in driving economic growth, and the recent slowdown in export growth has hurt many Chinese industries. Third, fears of China’s rising debt levels are worsening as the trade war with the US continues, as there are fears that private sector and local government debt levels have risen to unmanageable levels. As a result, Beijing has recently indicated that it might be willing to make some concessions to the United States in order to bring this trade war to an end.
Other Victims: The European Union and China are not the only casualties in this trade war. In fact, monetary and trade policy changes in the United states have claimed many other victims in recent months. Many of these victims are emerging markets, particularly those with large current account deficits. In fact, a number of major emerging markets such as Argentina, Turkey and Iran have already found their economies battered by recent policy changes in Washington. Worse, a number of other large emerging markets, including Brazil and Pakistan, are facing similar pressures. If an extended global trade war is combined with these changes in US monetary and trade policies, many emerging markets could face even more economic and financial troubles in the months ahead.
Outlook: As long as the United States economy continues to record high rates of economic and wage growth, there will be little incentive for the Trump Administration to make any concessions to the US’ leading trading partners. However, economic growth in the US is forecast to slow in the coming months as the impact of the recent tax cuts by the Trump Administration begins to wear off. Meanwhile, the longer the trade war between the US, China and other major economies continues, the greater the risk to the world’s more fragile economies, particularly those dependent upon exports for much of their economic growth. For the moment, it is a handful of emerging markets that are bearing the brunt of this trade war. However, many European economies are also struggling and a major slowdown in that region cannot be ruled out. Finally, China is likely to prove to be a little more resilient thanks to its rapidly-expanding domestic market, but it too faces a much higher level of economic risk than just a couple of years ago. For the US president, this is likely to be received as an affirmation that his policies are working, but for the global economy, these are very worrying developments.