Asia Calling: China's Great Rebalancing - Why the Consensus Is Wrong

Global Macro Strategy

Callum Henderson

Macroeconomics

* US-China trade: From word war to trade war? For now, all we have is a war of words, as none of this is policy (yet). There are signs that a deal could be achieved, but also material risks that the opportunity may be missed.* Smoot-Hawley, this ain't (yet) - A brief examination of the Smoot-Hawley Tariff Act of 1930 shows why this recent trade spat is of a much smaller magnitude (for now) - and also why just looking at the trade impact on macroeconomic aggregates misses the potential for broader contagion.  * Implications: Fallout from second-round effects - Potential transmission mechanisms of this trade spat need to be watched closely. Given the complexity of global supply chains, telling the winners and losers from proposed tariff increases on all but the simplest of products is extremely challenging. Nevertheless, much of Asia has important trade vulnerability to any second-round economic shock to Chinese import demand.* To Boao or not to Boao: At Boao, Chinese President Xi Jinping took the opportunity to reaffirm China's commitment to opening up its economy and further economic and market reform. Given China's geopolitical, strategic imperative to seek its rightful place in a more multipolar world, these commitments are likely to be honoured and a face-saving compromise is possible. That said, a worrying precedent has been set.

* US-China trade: From word war to trade war? For now, all we have is a war of words, as none of this is policy (yet). There are signs that a deal could be achieved, but also material risks that the opportunity may be missed.* Smoot-Hawley, this ain't (yet) - A brief examination of the Smoot-Hawley Tariff Act of 1930 shows why this recent trade spat is of a much smaller magnitude (for now) - and also why just looking at the trade impact on macroeconomic aggregates misses the potential for broader contagion.  * Implications: Fallout from second-round effects - Potential transmission mechanisms of this trade spat need to be watched closely. Given the complexity of global supply chains, telling the winners and losers from proposed tariff increases on all but the simplest of products is extremely challenging. Nevertheless, much of Asia has important trade vulnerability to any second-round economic shock to Chinese import demand.* To Boao or not to Boao: At Boao, Chinese President Xi Jinping took the opportunity to reaffirm China's commitment to opening up its economy and further economic and market reform. Given China's geopolitical, strategic imperative to seek its rightful place in a more multipolar world, these commitments are likely to be honoured and a face-saving compromise is possible. That said, a worrying precedent has been set.

Polit-Econ: US-China - Tariffs at Dawn