The U.S. China Trade War May Cause Multipolarity Instead of Deglobalisation

Henri Kouam
Sep 19, 2019 · 10 min read

The U.S.- China trade, technology, and possible currency war suggest a continued escalation beyond rhetoric, with negative implications for trade in an already slowing global economy. Following the bout of tit-for-tat tariffs, talks of “deglobalization” have emerged strongly, with falling trade volumes between both countries undoubtedly supporting this narrative. Such claims, I think, are however misplaced as the unintended consequences of the trade war could incentivize, rather than impede, trade amongst other economies in Asia, Europe and beyond. Furthermore, de-globalization is possible only several other countries simultaneously engage in trade wars or a Western-Eastern split emerges more strongly. Nevertheless, the aggressor i.e U.S. is unlikely to impede trade amongst countries over the long-term but the short-term economic costs cannot be understated. Falling PMIs, waning business investment and stock market corrections in both Shanghai and New York suggest the reverberations of the trade war are increasingly palpable.

It might seem economic nationalism could present significant headwinds to globalization; absent Brexit, most of the world continues to trade and all indicators suggest Britain will actively pursue independent trade agreements with the rest of the world contingent on the nature and the timing of its exit. Meanwhile, the European Union (EU) has signed a comprehensive trade agreement with Latin America spanning a range of consumer and non-consumer products for both sides. Nevertheless, its adoption and successful passing in the European Commission is contingent on increased environmental awareness by Jair Bolsonaro, who views the Amazon as an economic anchor for the Brazilian economy.

Latin America and the EU are countering the deglobalization trend

Following the election of U.S. President Donald Trump and the resulting trade war as well as Brexit, the EU has continued to champion free trade, negotiating an independent and comprehensive trading agreement with the Mercosur trading block. The later comprises a group of Latin American countries, namely Brazil, Argentina, Peru, and Uruguay. It is important to emphasize significant levels of trade between both trading blocs; the EU currently exports €45 billion worth of goods and €23 billion worth of services. It is also the biggest investor in Mercosur with a stock of €381 billion and €52 billion from the Mercosur trading area. These numbers are likely to grow significantly with the removal of tariff and non-tariff restrictions over the coming years.

Before the recent trade agreement, investors were significantly constrained in Mercosur markets, but the recent agreement removes both tariffs and non-tariff barriers to enable and facilitate trade for smaller SME’s amongst both countries. Contrary to the U.S. decision to exit the Paris climate agreement signed in December 2015, the agreement also strengthens workers’ rights, environmental protection, and food safety standards. This agreement is salient for member countries in Latin America, who are on the verge of an economic transition with a growing population and prospective middle class, which present significant opportunities for EU firms going forward. Whilst countries such as Peru seek to escape the middle-income country trap, Brazil and Argentina might benefit from EU market access as manufactured products comprise a majority of their exports.

Furthermore, domestic companies will also benefit from knowledge transfers and/or exchange, which is ultimately transferred as countries become interlinked through trade. Not only will this improve the domestic competitiveness of firms in Latin America, but consumers will also be able to access technologically advanced products such as solar panel, electric vehicles, and climate technology. This is both paramount and indispensable if said countries are to leverage their climate and demographic transition. Although Brexit suggests less open trade with the EU, the United Kingdom is poised to pursue more pragmatic trade policy as its industries will no longer be shielded by comprehensive and wide-reaching EU trade agreements.

Related Article: An M&A Love Story (Part 2 of 3)

Figure 1: EU — China trade in goods is rising steadily

European Union

The EU and China: Trading and reforming simultaneously

Furthermore, EU-China trade in services comprise 10% of total trade in goods and EU export of services make up 19% of EU total exports. The Chinese markets present significant opportunities for climate-technologies (solar panels, wind turbines, and storage technology), financial services, pharmaceutical, agricultural products amongst others; Meanwhile, China can benefit from EU technological advancements, well-developed capital markets and a less hostile investment climate than the U.S. for example. Whilst the EU and other economies around the world grapple with the adoption of Huawei’s 5G technology, it’s important to maintain market access for EU and other firms in China’s consumer-centric market.

Figure 2: EU-China trade in services

The EU’s trade with China is pragmatic, rather than driven by any set of ironclad values vis-à-vis the Uighur Muslims and recent protest in Hong Kong against an extradition bill. Despite trading significantly with China as illustrated in Figure 1 and 2, the EU designated China a strategic threat; by no means was this a deterrent for trade amongst both continents but rather suggest an understanding of Chinese trade practices and its economic and foreign policy implications. The EU continues to negotiate with China to improve its industrial policies, state subsidies, non-tariff barriers against foreign companies, poor protection and enforcement of intellectual property, strong government intervention in state-owned subsidies.

Tariffs don’t work

UK and Africa also choosing free trade

Meanwhile, then Prime Minister Theresa May toured Kenya and Nigeria with business leaders from the UK during her tenure to improve trade ties and support development in the most populous and one of the most technologically advanced countries on the continent i.e Kenya. She also pledged a £4 billion fund to support youth employment, cultivating the industries and markets on whom the U.K will soon depend to sell Irish beef or the City of London’s consultancy and financial services. Although the decision to leave the EU suggests less open trade with the latter, the U.K. is nonetheless trading and will continue to do so, with other countries in the world.

Meanwhile, Africa is learning from the EU and recently tabled proposals to create a free trade area that will reduce tariffs on goods amongst countries, encourage trade and spur development. The continent of 1.2 billion has cities with some of the fastest rates of urbanization and will likely be the fastest-growing continent according to the U.N. Not only will a free trade area this facilitate the attainment of the sustainable development goals by standardising trade and labour market practices and knowledge sharing via competition and cross-border supply chains, it will also facilitate trade outside the continents and speed up development.

As the above trade agreement suggests, most of the world is becoming integrated and economically interdependent even as the U.S. threatens or imposes tariffs on the rest of the World. i.e from Canada, Mexico, France, Germany, etc. All indicators suggest the world is choosing to stay open and maintain the global rules-based order even as the current U.S. administration seeks to chip away at its legitimacy. A Chinese or U.S. dominated the world is unlikely to become a reality at this point and greater economic interdependence among the rest of the world underpin this point.

The United States and China might be embroiled in a trade war for the foreseeable future, resulting in less trade-in both economies. Even as the short-term economic costs cannot be understated, the long-term implication is much more nuanced than current claims of “deglobalization” suggest. However, businesses in both countries will likely find new suppliers in new markets, which suggest a structural shift in global trade, but it is difficult to see how a retrenchment in trade between both economies suggests a broader trend of deglobalisation. U.S. chip, semiconductor and software producers might find new markets in rapidly industrialising countries in Asia and Latin America, while Huawei will continue to expand rapidly in other markets, not only providing phones but also the digital infrastructure which is indispensable for economies such as Brazil, Kenya and India, poised to grow at a much quicker pace than most industrialised nations in the coming decades. Furthermore, the Jury appears to be out on 5G, but chances are, it will underpin the next wave of industrialization. If the U.S. chooses not to adopt 5G, it is almost certain that other countries would.

Trade will be cleared in all other currencies

Figure 3: The world is still trading (%)

It is unclear that the dollar dominance has been positive for all countries

A fortunate consequence of the U.S. — China trade war is that global trade will be cleared in a range of other currencies ranging from the Chinese Yuan to the Euro and South African Rand. This trend is already becoming increasingly apparent; as the Federal Reserve began raising interest rates, capital flowed out of emerging markets but was swiftly replaced by the Euro. We are likely to see countries diversify financing sources, more so as market-based financing plays an increasingly important role in funding EM current account deficits and financing needs. The trade war will have grave short-term costs, compounding the slowdown in the global economy, but a more multipolar world will be net-positive for economies around the world by improving funding sources and reducing the risk of a dollar-induced crisis. Companies such as Rosneft, a Russian oil producer have already notified customers that future oil tenders will be conducted in Euros, reinforcing the argument for a more multipolar world in spite of the uncertainty surrounding the U.S. — China trade war.

By no means I’m I discounting concerns of deglobalization, I do, however, believe that trade amongst other economies around the world will lessen the risk of a prolonged trade war splitting the world into two halves. Given the size of the U.S economy, its impact on global trade cannot be understated, but the remaining 163 countries in the WTO will continue to trade even if the trade war diminishes the role of the dollar amongst traders. One should, therefore, approach claims of deglobalization with caution.

Dialogue & Discourse

News and ideas worthy of discourse.

Henri Kouam

Written by

I am an economist and contributor to Nkafu policy, a think tank. I cover global economic, fiscal and monetary policy with policy and asset price implications.

Dialogue & Discourse

News and ideas worthy of discourse. Fundamentally informative and intelligently analytical.

Henri Kouam

Written by

I am an economist and contributor to Nkafu policy, a think tank. I cover global economic, fiscal and monetary policy with policy and asset price implications.

Dialogue & Discourse

News and ideas worthy of discourse. Fundamentally informative and intelligently analytical.

Medium is an open platform where 170 million readers come to find insightful and dynamic thinking. Here, expert and undiscovered voices alike dive into the heart of any topic and bring new ideas to the surface. Learn more

Follow the writers, publications, and topics that matter to you, and you’ll see them on your homepage and in your inbox. Explore

If you have a story to tell, knowledge to share, or a perspective to offer — welcome home. It’s easy and free to post your thinking on any topic. Write on Medium

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store