Richard Jerram, Chief Economist, Bank of Singapore Member of OCBC Wealth Panel

Fears of a global trade war, led by America, have diminished. The issue is compressing into a conflict between China and the US, perhaps reflecting growing super-power rivalry as much as pure economic tension. China is already taking steps to offset the impact.

A trade deal on NAFTA looks close

A couple of months ago there was the risk of a trade war on three fronts: NAFTA, the EU (or automobiles) and China. The first two of these seem to have reached a truce.

After the visit of European Commission President Juncker to Washington in late July there was an ill-defined agreement to try to find an agreement. Despite the lack of specifics, the risk of a major trade conflict, centred on automobiles, appears to have faded for the moment.

Now the US and Mexico have reached a deal on updating trade relations, centred on a revision to the amount of domestic content needed in trade in automobiles. There are no radical changes from the current terms of NAFTA. This seems likely to extend to include Canada, although political considerations might determine what any new deal is called.

China remains the focus of friction

This leaves China. Here there is a long-standing complaint, not just by President Trump, but also by key advisors such as US Trade Representative Lighthizer and Director of the National Trade Council Navarro. Moreover, the issue increasingly seems to extend from a purely trade-related concern to an attempt by the US to slow the ascent of the rising super-power. Tighter limits on Chinese acquisition of US technology (being followed by Europe) are part of the process.

The US has already imposed a 25% tariff on $50bn of Chinese exports, with China retaliating in kind. September is likely to see another round of tariffs on a further $200bn of exports. China cannot respond directly, simply because it does not import that much from America, but it can always target the operations of US firms in China.

$250bn is a meaningful number, but at about 1.3% of US GDP it will not have much effect on US growth or inflation. China is clearly worried about the hit to growth and is already taking offsetting steps; loosening credit, cutting interest rates, easing fiscal policy and allowing the exchange rate to fall (although this seems to have hit the limits of tolerance).

Rising US trade deficit means renewed tension is always a danger
The impact on the rest of Asia is mixed. Perhaps one-third of China’s exports to the US are made up of imports from the region. However, this will be balanced by the US switching its imports away from China – places like Vietnam, Thailand and Malaysia stand to benefit.

At the same time, US fiscal stimulus is boosting demand in an economy that is already facing capacity constraints. This should suck in more imports and push the trade deficit up to record levels – irrespective of the trade conflict with China. This suggests that the risk of friction with other countries will never be too far away, even though it has moderated for the time being. With the US equity market hitting new highs and Trump’s approval rating untouched by threats of retaliation, there are no obvious constraints on abandoning the current détente at some point in the future.