The China-US Trade "War": Questioning Economic Predictions - Part 1

From 2018 to mid-2019, the consensus among economists on the consequences of the US-China trade conflict was deafening. One economic think-tank after another issued papers and/or op-eds explaining that the Trump administration’s tariff increases was akin to dropping a stone on one’s own foot. In a second volley, it was often said that "decoupling" technologies and their financing would hurt America’s high tech sector and its international partners as much as China, which would also be encouraged in its push for self-reliance. Assessments from Chinese sources, and especially the PRC’s controlled media¹, have hovered between ambitious claims and more cautious perspectives. One of these affirmed that China would prevail "in the long term", thanks to the resilience of the Chinese economy and/or political system, with even a chance for China to develop self-reliant technologies. The less optimistic perspectives, according to another viewpoint, mentions "the extreme case, where the United States imposes tariffs on all imports good from China, and China on all imports from the US, China will suffer more than the US. Therefore, China should not be driven by the US and flight in the field that is disadvantageous to itself".² Others have stuck to a middle course, emphasizing the lose-lose nature of a full-blown trade conflict.³ There have also been variations in time. Firstly with optimism, until the resumption of Trump’s trade offensive in the spring of 2018. Then succeeded by a more hesitant mood. A return to stridency in August 2019 when there was a new phase of tit for tat tariffs announcements. Several statements since that date have been ambivalent, legitimizing both "principles" and "flexibility/compromise" on the Chinese side. Clearly, Chinese analysts are having a hard time predicting the behavior of their own side in the conflict.

The school of self-castigation

Some Western think tank interpretations or predictions went further, without fearing a degree of inner contradiction: the global economic slow-down in 2019 is often attributed to lower growth in China, with lower external demand and less financing going abroad. Thus the trade conflict would have no significant impact on China, yet enough impact at the same time to slow down global growth...
 
Decoupling itself has become a topic of discussion. Even if this is not something the Trump administration recognizes as its strategy, the fact that Steve Bannon is pushing it, and its frequent mention by Chinese sources even as the "strategic goal" of the Trump administration as opposed to its "trade goal"⁴ have given real saliency to the issue. The IMF has opportunely published a paper based on a two-country modeling of changes in value chains, deducing that value chains are mostly inflexible. The conclusion, left implicit, is that "decoupling" simply cannot happen. In response to a Nomura Research Institute study that pointed out the trade diversion effects of the US-China trade conflict, IMF’s Christine Lagarde acknowledged it yet pointed out that the net impact on the overall US trade balance would not be felt and that these trade diversion benefits for other economies were only "a short term fix". Yet a shift of US imports to other providers, unless it results from bogus Chinese sales through these third countries, implies shifts in the value chain⁵, and would seem to contradict the IMF’s theoretical model. As we shall see, some value chains are indeed very hard to replace, and both parties in the trade conflict have chosen to spare these for the time being. But that does not apply, by any means, to the entire mutual integration of what was once called Chimerica.
 
Yet a third volley of papers has focused on the "uncertainty" brought by the trade and wider economic conflict. That is indeed an important political aspect of the situation, heightened by the peculiar circumstances of the Trump presidency, and we shall return to this third aspect.⁶

A dismal track record for economic science applied to China

Interpretations derived from the dismal science should be checked, especially when they intersect with political issues. So it is with the US-China trade conflict, with some pundits going as far as to predict a "catastrophic outcome" that would be "worse than world wars". On China – perhaps more so than on many other issues – economic consensus or quasi-consensus has been proven wrong on a number of occasions. A prime example is the contention that globalization, and its number one feature – direct investment in China making it "the global factory", had NOT resulted in an overall job loss in older industrialized economies. Less than three years ago, Peter Navarro, author of the best-selling Death by China, who claims that job losses for the United States have been very large, was appointed to Donald Trump’s White House. This was met with a barrage of scorn from economists and many others. Yet, by 2016, a pioneering study had begun disputing the thesis that globalization and the increasing trade deficit had a net positive impact on employment in America. A similar forecast has been published by the European Commission on the potential impact of market economy status in sectors where Chinese production is sold at dumping prices.