What could a US-China trade war do?

What could a US-China trade war do?

Gavin Jackson - FT

Last week my colleagues reported that global investors and German manufacturers have both found themselves unwilling participants in a trade dispute between China and the US, but could the UK economy also be counted among the collateral damage?

German manufacturers are worried that tariffs on Chinese exports to the US will end up reducing demand for the German-made machines that are used in Chinese production. Fewer Chinese toys, for example, bought by US consumers means fewer German toymaking machines bought by Chinese investors.

The UK does not export many capital goods to China, which is the eighth-largest destination for UK exports after Italy. In 2016, cars made up 28 per cent of UK goods exports to China, followed by oil and petroleum products (12 per cent of exports) and pharmaceuticals (6 per cent).

In terms of services trade, the UK mainly sells business services and “travel services” meaning tourism. The UK has a surplus in services trade in China, but overall it sells more goods than it does services — £13.5bn goods exports in 2016 compared with £3.3bn of services.

Fewer Chinese toys, for example, bought by US consumers means fewer German toymaking machines bought by Chinese investors.

A slowdown in the Chinese economy due to US tariffs may mean fewer tourists visit London and wealthy Chinese industrialists buy fewer Land Rovers and Aston Martins, but overall the UK’s consumer-oriented exports are less exposed than German investment goods to an interruption in transpacific trade.

However, another, more indirect, channel by which an escalation in the dispute could affect the UK is so-called trade diversion. If less Chinese production is destined for the US it may end up in Europe instead, lowering prices for consumers but making it harder for producers to compete.

That’s the concern for the steel industry in particular, but mostly the UK does not produce the same kind of industrial goods targeted by the US tariffs or the agricultural goods targeted by China. For once, the UK may enjoy a rare upside from its smaller manufacturing sector.

The Bank of England’s chief economist will be giving the David Finch public lecture at the University of Melbourne. His topic will be whether central banks have made inequality worse through monetary policy. The Bank of England published research on this topic last week and concluded that their policies had reduced wealth inequality.

The Office for National Statistics will publish its monthly update on construction output, industrial output and trade flows for February. The figures for January showed the manufacturing sector had enjoyed the longest period of expansion since 1968, but bad weather (and reversion to the mean) are likely to bring that record-breaking run to an end in the latest figures. Construction is likely to register a hit from the snow as well.

Non-manufacturing production, which includes energy and gas, is likely to see a boost as thermostats across the country were cranked up. Either way, the data are unlikely to tell us much about the long-term trend in economic growth and are likely to reflect temporary weather effects.

The deputy governor of the Bank of England will be giving the second speech down under this week by a member of the Monetary Policy Committee. Mr Broadbent will be speaking at the Reserve Bank of Australia, no details have been released about the topic.

Purchasing managers’ indices last week showed the damage the Beast from the East was likely to inflict on the UK economy. Manufacturing emerged relatively unscathed, according to the surveys, but both construction and services activity growth dropped at the fastest rate since the immediate aftermath of the Brexit vote.

BATTLE OF THE BEANS

On Wednesday, China announced it would levy 25 per cent duties on 106 products, including soyabeans, cars and chemicals if the US went ahead with its plans to raise tariffs on Chinese products. Patti Waldmeir and Tom Hancock have the details on what this means for the Iowa farmers who have found themselves at the centre of a global trade dispute.

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