News & Insights Making sense of Trump, China trade and pork prices

Making sense of Trump, China trade and pork prices
Much of the discussion around the US-China trade relationship has framed the debate of how the evolving situation between the two superpowers will ripple through the global economy. But what if fundamental structural changes in how the global economy is currently operating means that it is inevitable for politicians to embark on policies that increase protectionism and challenge the accepted model of global trade?

That was a supposition of Lawrence H. Summers, who argued that the “defining macro financial trend of the current era” is the abundance of savings and the dearth of investment opportunities relative to those savings.

Why does the world have more savings? The reasons are manifold. For example, as people live longer and have longer retirements, they are saving more as a necessity. In addition, as geo-political uncertainty increases, it makes sense to put money away for a rainy day. The Former Secretary of the Treasury of the United States also highlighted the fact that wealth is now more concentrated in fewer hands and not enough of it is flowing into the real economy.

Lawrence H. Summers, Former Secretary of the Treasury of the United States; Charles W. Eliot University Professor, Harvard University, during a discussion at the 10th Credit Suisse China Investment Conference.

When it comes to the reason behind the drop in investment opportunities, one driver Summers highlighted was the increasing intangibility of the global economy.

“The most valuable residential company in the world, Airbnb, does not own any buildings. One of the most valuable transportation companies, Uber, does not own any vehicles,” he said during his speech at the 10th Credit Suisse China Investment Conference (CIC) in Shenzhen.

And this mismatch between savings and investment opportunities, which is driving down consumption demand and keeping interest rates low, explains why inflation in the industrial world remains persistently below the 2% threshold, despite central banks taking strong action since the global financial crisis to heat up the economy.

“What economists took for granted throughout the 20th century – that central banks could substantially raise the rate of inflation – has been called into question after a decade of effort with very little effect,” explained Summers.

No accident

And so if absorbing savings is the major policy challenge for governments, then countries will want to run a trade surplus in order to stimulate economic growth and boost demand. But as any economics student knows, the world trade balance must sum to zero, and this is what is driving today’s trade sentiment, according to Summers.

“Every country cannot be a net exporter, but if everybody wants to be a net exporter, the pressure is for increased protections, increased currency wars and increased trade protection. And I would suggest that the backlash against globalization that we are seeing today is because every country wants to be more of a net exporter and less of a net importer,” said Summers.

“It is not an accident that the US has moved substantially more towards protectionism in a period of sluggish growth and disinflation.”

So how does this situation get resolved? Well a trade deal is unlikely to be the answer, if the CIC audience is anything to go by. When polled, only 7.7% of them believed there was a 100% chance of the US and China reaching a comprehensive and lasting trade deal by the end of 2020. Instead, the majority (68%) felt that the world’s two largest economies would only be able to reach segmented deals.

Audience poll: How do you see the chance that China and United States will reach a comprehensive and lasting trade agreement by end of 2020?
Source: 10th Credit Suisse China Investment Conference, Shenzhen, November 6, 2019

Certainly, Summers believes trade frictions between the two countries will last as long as China remains a substantial economic success. 

Champion of trade

A more optimistic assessment was presented by Yongtu Long, Former Vice Minister of Foreign Trade and Economic Cooperation for the People’s Republic of China. A veteran of many international trade rounds, including the negotiations that led to China being admitted to the World Trade Organisation, Long does not think the situation is as unsurmountable as many would suggest. Indeed, his base case is that the US and China will be able to strike a deal as the two main points raised by the Trump administration are already on the way to being solved.

Take the trade imbalance. China’s near US$300 billion trade surplus with the US is one of Washington’s main concerns. However, Long believes that this will shrink because as Chinese companies become more integrated into the global supply chain, it is inevitable they will need to buy more components from overseas, including the US.

Yongtu Long, Former Vice Minister of Foreign Trade and Economic Cooperation, People’s Republic of China, spoke at the 10th Credit Suisse China Investment Conference.

“If China wants to become a strong country in trade it needs to become a strong importer. China will have to import more in the future, in which case China will become a champion of trade,” he explained. 

Another point that the US government has frequently raised with China is the forced transfer of technology to Chinese joint venture (JV) partners. But as Long noted, action by Beijing over recent years to liberalize industries such as financial services means that foreign companies no longer need to set up a JV to gain access to China. Moreover, for China’s ambition to be a global centre for innovation to succeed, the country needs to be respectful of intellectual property rights.

Perhaps more controversially, Long told the CIC audience that far from being a liability, he views Trump as an asset to getting a trade deal agreed between the US and China.

“Trump is more concerned about his own interests than politics…his priority is to win, to get re-elected, to put America first – none of which is likely a threat to China.”

Pork price pressure

So what does all of this mean for the Chinese economy? Providing insights on the outlook for China’s growth at the CIC was Credit Suisse’s newly established China Quantitative Insight team (CQi).

David Murphy, Head of China Quantitative Insight (CQi), Credit Suisse, presented at the 10th Credit Suisse China Investment Conference.

A recent survey of 400 Chinese small to medium-sized enterprises conducted by the CQi team showed that, by and large, the trade war is only having an impact at the margins. 

In fact, survey respondents felt that the cost of pork in China – which has seen an 84% year-on-year surge in price to a six-year high – had far more impact on their consumer confidence than the trade war.

Experts may be split on the outcome of the US-China trade negotiations, but policymakers would be wise to get a solution soon so they can focus on the issues that are most pressing to the people they serve.

Survey on the impact of the trade war/pork price surge on consumer confidence
Source: Credit Suisse China Quantitative Insight (CQi)