Insight: Seeing Global Economic Recovery after US-China Deals

JAKARTA (TheInsiderStories) – The impact of the “cold war” between the United States (US) and its allies against the Uni Soviet and its bloc in the period 1947-1991 still haunts the collective memory of the global society. These “war” instead of being directly involved in conflict, the two sides competed through military coalitions, the spread of ideology and influence, espionage, propaganda, nuclear races, attracting neutral countries, to technological competition such as space races.

If at the end of the 20th century the two countries highlighted the power of technology, to date, the economic superpower, namely the US was again involved in a “trade war” with “Asian tiger” China, in the struggle for dominance and influence on the flows of world trade.

President Xi Jinping once said that the trade war between the two countries does not involve industrial forces, but also concerns ideology, namely capitalism versus socialism, referring to the capitalist (US) vs communist (Uni Soviet) ideological war in the past.

The two countries’ trade war began in January 2018 after the US imposed tariffs on washing machines and solar panels imported from China. The fight continues to heat up when US imposes a 25 percent tariff on steel imports and 10 percent on aluminum imports in March 2018, or US $ 32.5 billion. China then bullied US by imposing a tariff of $ 3 billion from US imports affecting 128 products such as oranges, grapes, pigs and aluminum on April 2.

The war between the two countries has not yet ended, but instead it has become increasingly fierce in mid-2018. President Donald Trump once said he would target all valuables, if China continued to reciprocate, up to $2.67 billion. With that, the total import tariff of China to the US is valued at $517 billion.

We know, China controls 21.6 percent of US imports, while US only controls 8.4 percent of China’s import market. Exports to the US generate $436 billion in foreign exchange for China. In contrast, exports to China generated $112 billion in US foreign exchange.

2016 became the golden era of China because it reached exports of $2.27 trillion and was recorded as the largest export in the world. China’s exports over the past five years have increased 1.7 percent annually from $2.04 trillion in 2011 to $2.27 trillion in 2016.

With the imposition of high tariffs both in the US and China, it will affect the export performance of both countries and countries that make the two countries the main export destinations, such as South Korea, Japan, Singapore and the European Union, which ultimately suppress the growth rate world economy.

The World Trade Organization (WTO) blames trade war due to the fall of global trade growth. WTO economists estimate growth in merchandise trade volumes fell to 2.6 percent this year, down from 3.0 percent last year. If trade tensions subside, the WTO estimates another 3.0 percent growth in 2020, if not, it will remain sluggish.

Meanwhile, the Asian Development Bank (ADB) also estimates that key economic growth will drop to 1.9 percent in 2019 and 1.6 percent by 2020, from 2.2 percent last year.

The US economy is expected to grow at an annual rate of 2.4 percent this year, slowing from 2.9 percent in 2018, and slowing to 1.9 percent in 2020. Japanese growth will remain flat at 0.8 percent this year, and fall to 0.6 percent next year. In the European region, the economy fell to 1.5 percent in 2019 and 2020, from 1.8 percent in 2018.

Asian developing countries are expected to grow 5.7 this year, slowing from the projected expansion of 5.9 percent in 2018. For 2020, the region is expected to grow 5.6 percent, which will be the slowest since 2001.

For Southeast Asia growth was cut to 4.9 percent from a previously estimated 5.1 percent, because Manila-based lenders expect Malaysia, Singapore, the Philippines and Thailand to grow at a slower rate than previously thought. In 2020, Southeast Asia is predicted to grow 5.0 percent.

Meanwhile, China may grow 6.3 percent this year, but is slower than the country’s expansion of 6.6 percent in 2018, and again cools further to 6.1 percent by 2020.

This is because Chinese banks may still be reluctant to reduce borrowing costs for some companies because of concerns about the increased risk of corporate defaults in a slowing economy. The central bank can take further action, such as cutting 1-year lending rates and desposit interest rates.

Amid the increasing of trade tension, the two countries chose to make peace. The trade negotiators of the two countries have held rounds of negotiations several times, both in Beijing and in Washington DC on Wednesday this week.

As a result, the two countries will reach an agreement, even though they admit that there are still issues that have not been agreed upon, said an official report today (04/05).

In a meeting with Deputy Prime Minister of China Liu He, Trump said some difficult points had been agreed even though there were still differences that had to be bridged. But Trump hopes to hold a summit with President Xi if an immediate agreement is reached within the next four weeks.

But Trump refused to say what would happen to the US-imposed tariff on Chinese imported products worth $250 billion, which was part of the agreement.

The positive sentiment from the peace of the two countries had an impact on the weakening value of the US dollar. Meanwhile, the Euro and the Pound also rose against the US dollar after the British parliament approved legislative institutions to delay Britain’s exit from the European Union.

These positive sentiments will continue to strengthen the position of the Rupiah and encourage capital flows into the Indonesian stock and bond market. In other Asia, the Yen, Hong Kong dollar, Peso, Yuan, and Singapore dollar also strengthened.

With that, the main risks of this trade conflict have an impact on the recovery of the level of investment and manufacturing activity and the volatility of global trade. The weakening of industrial production growth will again get its fire. In addition, the added burden of having a business cycle for the main economy will lead to a positive trend.

Moreover, the global purchasing managers’ index, an indicator of global manufacturing health, which has been slowly declining. The growth of world trade volume has experienced a number of extreme decreases, especially in January 2019. But the bright point of the trade agreement between the two countries opened a wider tap to channel the flow of trade.

Referring to the analysis of the World Bank, IMF, WTO and ADB, the trend of weakening world economic growth was triggered significantly by the trade conflicts between the two superpowers. Therefore, the positive sentiment from the agreement can move capital flows and global trade performance again. It is hoped that, since the second semester of this year, world economic growth will recover in finding its trade segmentation.

Written by Daniel Deha, Email: daniel@theinsiderstories.com