China-US ‘beggar thy neighbor’ trade war hurts us all
Abdel Aziz Aluwaisheg
The “no holds barred” China-US trade war is pushing the world into recession. Both the World Trade Organization (WTO) and International Monetary Fund (IMF) have warned that a global crisis could be the outcome of this war along with rising protectionism. As energy supplier to the world, Gulf Cooperation Council (GCC) economies depend on the health of the global economy. Like the rest of Asia, the GCC is experiencing the first signs of spillover effects of that trade war, but it could get worse if global economic institutions do not step in to stop this destructive dispute.
During a trip to Asia last week, I saw signs of the economic slowdown that its previously healthy economies are experiencing. Over the past few months, economists have observed the gradual accumulation of hidden indicators such as declining industrial output and exports, but now the evidence is visible: Normally bustling markets are quiet, flights are almost empty, and there are relatively few tourists around despite the fact that it is the height of the summer holiday season.
Some of the recession may be attributed to periodic business cycles, but much of it is self-inflicted. The China-US trade war, in particular, has hurt the two largest economies directly, and is indirectly affecting the rest of us. When the largest two economies in the world engage in a “beggar thy neighbor” trade dispute, the world suffers the consequences. And when global recession hits, the oil producers of the Gulf are among the first to be affected, as the global slowdown is usually accompanied by lower demand for oil, gas and petrochemicals, the GCC’s main exports.
The US and China together represent about 41 percent of the world economy, with a combined GDP of $36 trillion. Both have been affected by the trade war, albeit at different rates, but the contagion has spread throughout Asia. The rest of the world may follow. When the Scottish economist Adam Smith wrote “The Wealth of Nations” in 1776, he railed against mercantilists who believed in a zero-sum economic approach; they pursued “beggar thy neighbor” policies in the mistaken belief that their prosperity could be achieved only by making their rivals less prosperous. Smith and other economists proved them wrong. Since then, the world economic system has tried to get away from that self-defeating paradigm, establishing institutions, such as the WTO, IMF and the World Bank to promote cooperation and manage competition.
All that work is being threatened by the China-US trade war, which has intentionally bypassed those global institutions. The war is being waged with primitive tools high tariffs, quotas, boycotts, currency devaluation and the like. The dispute has now ensnared other economies as well, and may have inspired the “other” trade war in Asia between Japan and Korea. The China-US trade war started soon after US President Donald Trump was elected and marathon trade talks between the two nations failed to produce an accommodation. The latest measures taken by the US included an American decision on Aug. 1 to impose a 10 percent tariff on $300 billion of Chinese imports, in addition to the 25 percent already levied on $250 billion of Chinese goods. The US said that tariffs could rise above 25 percent if no progress was made in future trade talks with China.
Four days later, on Aug. 5, China responded by halting purchases of US agricultural products, and the Chinese currency, the yuan, was allowed to depreciate past the psychological barrier of 7:1 to the dollar. The following day, the US said that it had determined (for the first time since 1994) that China was a “currency manipulator.” China’s central bank responded by saying that it “has not and will not” use the yuan to respond to trade measures. Additional tit-for-tat measures will probably be taken in the near future if there is no progress in negotiations. American economists are warning that the US may suffer the consequences of the trade war with China. There are already visible jitters. The Dow Jones index dramatically lost 757 points (2.9 percent) on Aug. 5, and NASDAQ fell 3.5 percent the same day as investors fled stocks to bonds and gold.
Four “Asian tigers” (Taiwan, Hong Kong, Singapore and South Korea) appear to be the most affected. Taiwan and Hong Kong depend on China’s economy and were hit hard by the slowdown. The Hong Kong protests, which China also blames on the West, added to the slowdown as tourist numbers fell following several countries’ advice discouraging travel to Hong Kong. As for Singapore and South Korea, industrial exports have fallen by about 16 percent and 22 percent, respectively, in the past year, and the IMF has downgraded their growth potential for 2019.
And to make things worse, Japan and South Korea started their own trade war, as both downgraded the trade status of the other and ended the preferential treatment they had enjoyed. Asia’s economic slowdown is also felt in New Zealand and Australia, both of which rely on China for their exports. Like New Zealand and Australia, most GCC trade is with Asia, especially China, which is the GCC’s leading trading partner, after the European Union. Since much of GCC oil, gas and petrochemical exports go to China, a weakened Chinese economy means reduced demand for those products.
If this trade war leads to a global recession, the impact on GCC economies will be severe, as GCC exports rely on the health of the world economy. GCC export earnings, government revenues and consumer prosperity could feel the effects of the downturn. It is for these reasons that the IMF, WTO and others should move quickly to avert the disaster of a world economy hurtling toward an abyss.