- Trade tensions between the U.S. and China are escalating again.
- Negotiations between the two sides have broken down and further tariff increases, beyond those already announced, are a growing risk.
- Credit Suisse says the renewed bout of tensions means “the global growth recovery that began a few months ago has been aborted”.
- Without a trade deal, the bank says a return to positive global growth will be “probably forestalled until 2020”.
Here’s an interesting chart from Credit Suisse to keep in mind during the trade war between the United States and China.
It shows the percentage share of global manufacturing production and workforce by individual nation.
In terms of the share of global output and workforce, China stands head and shoulders above the rest, reflecting not only that it has a lot of people but also that is still produces a lot of simplified manufactured goods.
The United States, while having a far smaller workforce than China as a share of the global manufacturing workforce, remains the second-largest manufacturer of goods in terms of value-add.
They’re both massive players in the global manufacturing sector, and they’re not the best of friends at present. Not only that, they’re also the other’s largest trade partner by some margin too.
The U.S. has already slapped 25% tariffs on around half of all Chinese imports entering the country. There’s a growing risk it may eventually apply 25% tariffs on all Chinese goods imports in the not-too-distant-future.
China is also about to lift existing tariffs on US goods imports at the start of next month.
“We are deep in the trenches of a trade war,” Credit Suisse said in a note released last Friday. “The global growth recovery that began a few months ago has been aborted, in our view.”
So what could potentially lead to a trade breakthrough, seemingly unlikely at this point given negotiations have broken down, to help reduce the risk of another step-down in the global economy?
To Credit Suisse, it depends on two main factors: the performance of the US stockmarket and/or developments in China’s manufacturing workforce.
“Donald Trump has an incentive to make a deal because not doing so risks the strong growth and solid equity market performance that will help his prospects in next year’s election,” the bank said, referring to which factors may see the US capitulate.
Given the share of China’s workforce still employed in manufacturing, it believes the prospect of increased unemployment, and potentially civil unrest, may also be enough to get Chinese president Xi Jinping to act.
“President Xi has an incentive to make a deal because China faces a significant growth shock, with business failures and rising unemployment, if no deal is reached,” it says.
While hopes of a trade deal, or at least a de-escalation in trade tensions, remain with Trump and Xi set to meet on the sidelines of the G20 meeting in Japan in late June, if no breakthrough is found, Credit Suisse says it won’t just be the American and Chinese economies that will suffer as a result.
“If a deal is not reached until later this year, we would expect the slump [in global industrial production] to be deeper and more protracted, with meaningful recovery to positive global growth probably forestalled until 2020,” it says.
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