In its most recent economic and fiscal outlook, the International Monetary Fund (IMF) warned that the two greatest potential dangers to global growth in 2019 were a no-deal Brexit and an escalation of the US’s trade war with China. The first issue looks about as unlikely as it always has, but the second has heated up again.
Up until today, many thought the worst of the trade war was over. In 2018, Trump imposed tariffs on $250bn worth of Chinese imports. China retaliated with tariffs on $110bn of US products. As tensions heated up, Trump threatened to increase the tariff rate from 10 per cent to 25 per cent, and to impose tariffs on a much wider selection of Chinese goods.
But the conflict appeared to de-escalate as the two sides came to the negotiating table. Trump’s rhetoric became markedly tempered, and the threat of further sanctions seemed to recede. Many thought the two sides would come to a swift agreement.
But Trump defied those expectations on Friday by announcing that talks with Beijing weren’t progressing as quickly as he would like. He has now followed through on his threat to raise the tariff rate to 25 per cent, as well as stating that he plans to expand the now 25 per cent tariff to a further $325bn worth of Chinese goods. China is expected to retaliate soon.
Looking at trade statistics alone, it would appear that China has more to lose from the altercation. The US imports $539bn worth of goods from China, while China only imports $120bn back. US tariffs will reduce American demand for Chinese exports, hurting demand in an already slowing economy.
But, as highlighted in a recent report from IPPR that I co-authored, the US economy is reaching the peak of the business cycle and looks likely to fall into recession at some point over the next two years. An escalated trade war, which would both increase uncertainty and reduce US exports, could tip the economy into an early downturn.
The impact on the global economy could also be severe. The IMF estimates that a renewed trade war could reduce global GDP by up to 0.8 per cent in 2019. If it tips the US or China into an early recession, the effects will be much starker.
Absent demand from the two main engines of growth since the recession, the global economy’s mounting problems will start to look much more severe. Global debt is now more than three times the size of world GDP. Globalisation – whether measured by trade or financial flows – appears to have stalled. And monetary policy has remained extremely loose for a very long time, meaning that when the next recession does come, there won’t be much more room to cut interest rates.
Both sides stand to lose a great deal from another altercation – which is why many still anticipate that the US and China will reach an agreement before the end of the year. But democracy may yet prevent tensions from thawing.
Workers across the global north have had just about enough of neoliberal globalisation. In the US, most voters are now highly sceptical about the benefits of free trade. This scepticism helped to quash the Trans-Pacific Partnership (TPP) in 2016 when the US Congress refused to ratify the deal.
In Europe, anti-EU sentiment is on the rise. The far-right is the main beneficiary. Nationalist parties are likely to put in a strong showing in the upcoming EU elections. TPP’s European counterpart – the Transatlantic Trade and Investment Partnership (TTIP) – was also quashed several years ago after a popular backlash.
It isn’t hard to see why these concerns have emerged. Free trade today is not free, and is not strictly about trade. TTIP, which I campaigned against in 2015, included measures to “open up” public services like the NHS to competition from private US corporations, drive down regulatory standards in Europe, and create international courts to allow investors to sue democratically-elected governments if they imposed regulations that harm investors profits.
The most recent wave of globalisation – marked by a liberalisation of financial flows – delivered few tangible benefits to workers in the global north, whilst actively harming the global south. It has instead driven the kind of financial integration that helped cause the financial crisis, as well as boosting Wall Street and the City at the expense of manufacturers and exporters.
The dispute between the US and China is just the latest manifestation of a widespread backlash against the unfair, unstable and unsustainable model of economic integration that has emerged since the financial crisis. Even if the two sides do reach a deal, protectionism is here to stay.
This article appears in the 15 May 2019 issue of the New Statesman, Return of the Irish question