In this episode, we continue our ongoing Rethinking Asia series with Louis Kuijs, the head of Asia Economics at Oxford Economics. His background includes a particular focus on China, reflecting experience in both the public and private sectors covering banking, macroeconomic, and policy issues in the world’s second largest economy.
We spoke with Louis about the ongoing trade tiff between the United States and China. He shared his thoughts on the regional economic and structural effects of evolving international trade patterns, China’s path to further integrating into the global financial system, and consequences for the broader U.S.-China relationship from the trade dispute fallout.
- The mood in the U.S.-China trade talks has seen some improvements as progress is being made. More broadly, the ongoing trade dispute reflects the change in American mentality; in the U.S., the narrative on U.S.-China relations has shifted from cooperation to rivalry.
- When measuring the near-term effects of the U.S.-China trade tiff, the impact on business confidence is often overlooked. Indeed, the effect of uncertainty could be larger than the direct impact of the tariffs via weaker exports and higher prices. Over the medium term, however, the trade dispute may have much larger effects via a global reconfiguration of supply chains and growing underlying tension between the U.S. and China which is centered on technology.
- While China serves as a well-known hub in the global supply chain, Chinese demand and China’s rapidly growing role as a destination for imports have been major drivers for regional trade. Tariffs will ultimately result in a net loss for regional trade partners by reducing Chinese growth and demand. Gains in trade for partner countries associated with receiving relocated production facilities, for example, will likely be overwhelmed by slower growth.
- Despite the U.S.-China dispute, appetite for free trade agreements in Asia remains strong. The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which came into effect on January 1, includes greater flexibility in several provisions relative to the TPP version. Another regional agreement, RCEP, can potentially add an additional layer or extension of trade liberalization that compliments CPTPP.
- Over the longer term, China’s stated liberalization objectives have implicit contradictions. On the one hand, policymakers plan to continue taking steps to open up the country, further integrating China into the global economy and financial system. On the other hand, policymakers have underscored their commitment to maintain China’s current model, whereby the Party remains at the heart of economic decisions and state-owned enterprises have a central role.