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The writer is chief economist from Asia to Morgan Stanley
Currently, it is quite clear that American-Chinese trade has collapsed, because the rate rates are too prohibitive. Recognition of the extent of the disturbance of bilateral trade could be an initial gateway to the start of negotiations. As the talks progress, there could be room for a mutual agreement to gradually suppress the prices of the Tit-For-Tat-those which were put in place by the United States after China retaliated against the taxation of reciprocal prices.
But the average weighted rate rates will always end the year of 34 percentage points higher than what they were at the start of the year (which was then at a level of 11% imposed after the first series of trade tensions in 2018-2019). Investors should accept that solving problems underlying trade tensions will not be fast and easy for the following reasons.
First, the Trump administration has imposed prices because it thinks it will considerably reduce the United States trade deficit and promote onshore production, especially for critical goods. But these two questions are not likely to be resolved quickly by the imposition of prices or the completion of trade agreements with many business partners.
The important trade deficit reflects a deeper problem on the behavior of American (high) and (low) savings expenses. The increase in manufacturing capacity in the United States would take time. It is not only a question of setting up manufacturing plants, but rather of building a supply chain focused on the United States. At the starting point, American participation in global manufacturing value chains is only 13%, while China is more than three times higher to 41%.
Second, in China, there is a very clear political preference to generate growth via investment, even more during a slowdown. Decision -makers prefer to stimulate investment because they believe that it creates tangible assets and stimulates productivity rather than using it for consumption, which would mean only an increase in debt levels for future generations. In addition, from a geopolitical point of view, China aspires to be on the technological border and to keep its avant-garde with regard to high-end manufacturing.
In this context, a sustainable reversal of the bilateral trade balance between the United States and China would require fundamental hardening changes to the growth model of these two economies – a major challenge. Even if political decision-makers force the question by forcing China to intensify its active purchases in the United States via a trade agreement, the implementation will always be heavy with challenges.
The United States may not have a significant offer of goods to export to China and strategic competitive considerations can still be an obstacle. It is unlikely that the United States is not willing to sell high-tech and defense equipment to China, and China will not want to count on the United States as a key supplier of food and energy, preferring to diversify its sources.
Finally, from the point of view of negotiation, we believe that the United States and China will want a complete agreement, but given the multiple problems concerned, these discussions are likely to be complex and will take time.
Currently, investors seem to comfort themselves in the break in reciprocal prices and the fact that trade outside the United States-China is repairing. But we are less confident on growth prospects. The uncertainty persists and there has already been damage caused to the cycle. For China, it is difficult to envisage a scenario in which the prices quickly return to the levels of January 2025.
For Asia outside of China, trade agreements can be concluded, but we do not know if the prices will be less than 10% on the signing of an agreement and if all these agreements will be completed before the break.
A high uncertainty weighs on the economic cycle and makes the business sector wait and see if it relates to its investment and hiring decisions. The slowdown that has followed capital and trade expenses will be the dominant channel by which the tariff policy exercises the largest growth trail in Asia. We therefore expect the growth of China's GDP in annual shift to 5.4% in the first quarter of this year to 3.7% in the fourth quarter, while the rest of Asia will face downward pressures on growth at various degrees, according to their exposure to negotiate.
The most trade economies (that is to say those which have a high relationship of goods exports to GDP and which benefit from a stronger contribution to the GDP of net exports) will face greater growth damage, as in 2018-2019 when the Chinese economy has cooled considerably. We are heading towards a sharp and synchronous slowdown unless we see a rapid lifting of the uncertainty linked to the price.
