Chimerica is a term made famous by historian Niall Ferguson about the symbiotic nature of the economies of the USA and China. However, for the past year, Chimerica has started to unravel as the two biggest economies in the world have locked horns in what has panned out to be an extremely bitter economic and trade battle. This was initiated by the US president to try and curb what he saw as China’s unfair trade practices that negatively impact the US, thereby leading to its growing trade deficit. Examples of these practices are the forced transfer of American technology to China and the perceived theft of intellectual property.
These issues are long-standing and, in many ways, mirror historical situations where the dominant economic power gets concerned by the rising power. The relationship between the UK and USA at the end of the nineteenth century was rather similar.
President Trump’s first salvo involved some significantly increased tariffs by the United States on Chinese goods. China viewed this as the US tying to stifle its economic growth. China then imposed retaliatory tariffs on American goods. Ultimately these two economies have levied taxes on billions of dollars’ worth of each other’s goods, and there seems to be no concessions likely to be forthcoming from either side.
To put this into perspective, the US has imposed tariffs on more than $360bn (£296bn) of Chinese goods, and China has retaliated with tariffs on more than $110bn of US products. President Trump's tariffs policies aim to encourage consumers to buy American by making imported goods from China more expensive. Chinese imports, from meat to musical instruments, therefore had a 15% duty imposed on them. Beijing hit back with tariffs ranging from 5% to 25% on US goods. The latest tariff strike included a 5% levy on US crude oil, the first-time fuel has been hit in the trade battle.
Although there has been attempts at negotiations, this has proven to be a herculean task, and the two sides have not been able to reconcile their differences on paramount issues such as how to cut back on the imposed tariffs and forge an agreement or pact that would be a basis for a truce at the very least, or an end to the trade war. Negotiations have also been impacted by different timeframes; President Trump being driven by needing a “victory” ahead of next year’s election and China focussed on its long-term approach to economic development.
The uncertainty is detrimental to businesses and weigh heavily on the world economy. According to the International Monetary Fund (“IMF”) the tariffs imposed by the two countries could shave 0.8% off global economic output in 2020, with potentially more losses in the coming years. IMF spokesman Gerry Rice stated that trade tensions were already affecting a global economy that is already riddled with challenges such as the weakening of manufacturing industries at a scale not observed since the world financial crisis of 2007-2008.
Although monetary policies can be used to mitigate uncertainty shocks, they cannot completely prevent the damage. This is especially true at the current time, when interest rates are at historic lows in most major economies and where there is little fiscal headroom to increase government expenditure or reduce taxes. If central banks around the world respond to demand weakness, the worlds Gross Domestic Product (“GDP”) can be predicted to be 0.3 per cent lower in 2021. In the recent past, central banks across Europe, Asia, and Australia have already cut interest rates in response to the broadening fallout from the trade war.
Although most countries economies are hurt by this trade war and are showing a “weak manufacturing performance”, it is crucial to note that some countries have been economic beneficiaries where some sectors are concerned. This is mainly because of two reasons. The first is that these countries have had increasing trade with China and USA as the two countries have decreasing trade with each other, thereby filling in the gap. Secondly, manufacturing technology companies have moved to these countries thereby boosting their economies (for example Vietnam).
There are however warnings that these benefits are not long term and that even these countries will be negatively impacted in the long run. Sadly, currently there seems to be no resolution in sight.
L Ndungu & N Harriss