The trade war fallout – Victor Shih

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Victor Shih

The trade war damages both the US and China’s economy, and global trade. Financial and political analyst Victor Shih, Ho Miu Lam Chair associate professor of political economy at UC San Diego and author of the forthcoming “Economic Shocks and Authoritarian Stability,” gives an overview of the damage in the Los Angeles Times.

Victor Shih:

The trade spat between the U.S. and China now seems headed toward a new phase, which could prove to be far more dangerous for the global economy.

The recent shifts roiling global markets began with President Trump tweeting on Aug. 1 that the U.S. would impose an additional 10% tariff on $300 billion in Chinese exports, starting Sept. 1. On Tuesday, the administration announced a delay on tariffs on some consumer goods until Dec. 15. But that may not be enough to alleviate the anxiety in world markets. China already reacted last week by weakening the Chinese currency, pushing the exchange rate to 7 yuan per dollar for the first time in over a decade.

Both sides risk considerable harm to their economies. As the Trump administration increases tariffs on Chinese goods purchased by American firms and consumers, Americans will be paying billions more for Chinese goods. Higher prices brought on by tariffs will decrease U.S. business investment and consumption, dampening momentum in U.S. economic growth.

Likewise, China’s imposition of tariffs on American goods — even barring Chinese companies from buying agricultural and energy commodities from the U.S. — since the start of the trade conflict in April 2018 has imposed costs on Chinese firms and consumers, stalling growth momentum in China.

With inflation on food already at 7% in China, more import restrictions or tariffs will put a great deal of hardship on ordinary households. Although Chinese President Xi Jinping does not face any electoral pressure and may not suffer any political fallout from the economic results of the trade war, these consequences still directly contradict his desire to bring about “more prosperous and healthy lives” to the Chinese people.

Now, devaluing the yuan may further jeopardize the stability of China’s financial system. China’s high domestic debt already forces the central bank to expand its money supply at a rate of 8% to 10% a year, a relatively high pace that typically weakens the exchange rate. To guard against the expectation of a weakening currency, the central bank of China has spent years establishing the reputation of the yuan, which has been built on the tacit assumption that it would not fall below 7 yuan to the dollar. This reputation is important for the yuan because, unlike the dollar, the currency does not have a deep and liquid market, where market participants can hedge against various risks at a relatively low price.

More at the Los Angeles Times.

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