April 6, 2018
U.S. Needs China More Than China Needs the U.S.
Not one to be outdone by any adversary, Donald Trump has upped the ante in a rapidly escalating trade war with China, threatening an additional $100 billion of tariffs on top of the initial round of $50 billion. In doing so, the Trump administration is failing to appreciate a crucial reality: The United States needs China more than China needs the U.S. Yes, China is still an export-led economy, and the American consumer is its largest customer. But China’s export share of its gross domestic product has fallen from 37 percent in 2007 to slightly less than 20 percent today, an important outgrowth of a decade-long rebalancing. By drawing increased support from domestic demand, China is better able to withstand the pressure of tariffs and other actions that are aimed at its exporters. Not so with the United States. The U.S. depends heavily on China for providing the low-cost goods that enable income-constrained American consumers to make ends meet. The U.S. also depends on China to support its own exports; next to Mexico and Canada, China is America’s third largest and by far its most rapidly growing major export market. And, of course, the U.S. depends on China to provide funding for its budget deficits. It is the largest foreign holder of U.S. Treasury securities – some $1.3 trillion in direct ownership and at least another $250 billion of quasi-government paper. A lack of Chinese buying could turn the next Treasury auction into a rout.
Euro-Area Inflation Ticks Up to 1.4%
Euro-area inflation accelerated last month, buttressing the arguments of policy makers keen to phase out unprecedented stimulus. The inflation rate rose to 1.4 percent in March, the highest level since the end of last year. The reading is in line with the median estimate in a Bloomberg survey and up from 1.1 percent in February. The core rate remained unchanged. More than three years after the European Central Bank cut interest rates below zero and started its asset-purchase program, policy makers are finally confident inflation will return to their goal of below but close to 2 percent. That confidence has fueled a debate over how and when to scale back support, with officials telling investors they’re are broadly right in anticipating an end of bond buying by December and the first rate increase in the middle of next year. Most prominent among the Governing Council’s 25 members arguing for bringing quantitative easing to a halt is Jens Weidmann. The president of Germany’s Bundesbank reiterated his call last month for ending asset purchases “soon” and labeled expectations for a mid-2019 hike “probably not entirely unrealistic.” Dutch central bank Governor Klaas Knot has adopted a similar stance, saying policy normalization is a “top priority.” Buttressing Weidmann’s stance, inflation in Germany, the bloc’s largest economy, jumped in March to the highest level since December, data last week showed. Consumer-price growth accelerated more than forecast in Italy and France, though Spain’s uptick fell short of expectations. The timing of Easter may have distorted data last month.
China Seeks EU’s Support in Standing Up to U.S. Trade Threat
China called on the European Union to aid the Asian nation in rejecting protectionism from the U.S. and upholding the international trade order. China and the EU “need to stand up together with a clear-cut position against protectionism, and need to work with each other to uphold the rules-based multilateral trade order,” Zhang Ming, the head of the Chinese Mission to the EU, said in an email response to questions from Bloomberg. Recent U.S. actions go “completely against the fundamental principles and values of the World Trade Organization,” he said. China is in the midst of an escalating trade dispute with Washington and said on Wednesday it would levy an additional 25 percent tariff on about $50 billion of U.S. imports including soybeans, automobiles, chemicals and aircraft. That was in response to the release by the U.S. of a list of proposed tariffs a day earlier, covering $50 billion in Chinese products. President Donald Trump on Thursday increased the pressure by threatening additional levies on $100 billion in Chinese goods. “China and the EU have kept positive, sound and timely communication following the U.S. move,” according to China’s head of mission. China and the EU need to work together to “sustain the sound momentum of global economic growth,” he said. The European Commission, the EU’s executive arm, has said it’s currently in high-level talks seeking to alleviate the situation. “The EU believes that measures should always be taken within the WTO framework, which provides numerous tools to effectively deal with trade differences,” Commission Spokesman Daniel Rosario said this week. “We call on the relevant parties to ensure WTO compliance of their trade actions.”
How China’s Economy Grows Even as Credit Tightens
China is serious about weaning itself from debt and even more serious about keeping its economy stable. Achieving these goals might seem like a contradiction, given that unwinding a credit binge tends to restrict economic activity, at least in the short term. And if the skirmish between the U.S. and China on trade does degenerate into a war, then pumping a bit more money into the economy doesn’t seem like a terrible option. It’s hard to imagine a huge Chinese fiscal leap like the one undertaken in 2008 during the global finance crisis. The key to threading the needle between deleveraging and growth lies in a huge change in the nature of China’s economy, one that is still poorly understood in the West. That is the increasing dominance of services and consumption, which now account for the bulk of gross domestic product. They grow faster than old-line industries and, critically, soak up much less credit. Many Americans and Europeans still think of China as a low-cost, sweatshop factory setup. The same people will typically attach great import to whether pieces of economic data exceed or fall short of estimates by one-tenth, or a few tenths, of a percentage point — as though that is a smoking gun, evidence of data manipulation by Beijing. The real story the past few years has been that manufacturing — while still big and not as cheap as it once was — accounts for a diminishing chunk of what’s become the world’s second-largest economy, behind the U.S.