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Next year could see US-China trade wars accelerate

There are also three clear battlegrounds on which Mr Trump’s trade wars will be fought in 2019

US President Donald Trump (2-R) US Secretary of the Treasury Steven Mnuchin (R) and members of their delegation have dinner with China's President Xi Jinping (3-L) and Chinese government representatives, at the end of the G20 Leaders' Summit in Buenos Aires, on December 01, 2018. US President Donald Trump and his Chinese counterpart Xi Jinping had the future of their trade dispute -- and broader rivalry between the world's two top economies -- on the menu at a high-stakes dinner Saturday. / AFP / SAUL LOEB
US President Donald Trump (2-R) US Secretary of the Treasury Steven Mnuchin (R) and members of their delegation have dinner with China's President Xi Jinping (3-L) and Chinese government representatives, at the end of the G20 Leaders' Summit in Buenos Aires, on December 01, 2018. US President Donald Trump and his Chinese counterpart Xi Jinping had the future of their trade dispute -- and broader rivalry between the world's two top economies -- on the menu at a high-stakes dinner Saturday. / AFP / SAUL LOEB

If 2018 was the year that US President Donald Trump gave the world a new taste of an ancient phenomenon - trade wars - then 2019 is shaping up to be the one in which the combat risks will be fiercest.

Mr Trump is as unpredictable a leader as a major economy has seen in generations. For that reason alone there are myriad scenarios - from de-escalation to all-out economic war between the world’s two largest economies, the United States and China - within the realm of the possibility. Yet there are also three clear battlegrounds on which Mr Trump’s trade wars will be fought next year. And if things go wrong for any of the three, the results could roil the global economy.

While Mr Trump and Chinese President Xi Jinping agreed during a December steak dinner in Buenos Aires to begin 2019 with an uneasy truce and a pause in their tit-for-tat tariff war, it may not take long for their conflict to resume. The big question looming over the two economies going into 2019 is how they can find a solution to what remain major differences on trade.

These disagreements will also weigh on the rest of the world. In November, The National reported that the OECD warned the global economy will slow down amid escalating trade tensions and tighter financial conditions.

The world's largest economies are forecast to grow at a slower pace of 3.5 per cent in 2019 and 2020 from 3.7 per cent this year as steeper interest rates, higher oil prices and the US-China trade war weigh on outlook, the OECD said in a report this month. Slashing taxes and increasing spending will be necessary to stimulate demand if global growth weakens sharply.

"The imposition of new tariffs and uncertainty about further restrictive trade actions are contributing to a marked slowdown in trade growth, dampening global investment and threatening jobs and living standards," OECD chief economist Laurence Boone said.

In October, the International Monetary Fund forecast global growth of 3.7 per cent in 2018 and 2019, 0.2 per cent lower than the fund’s July forecast, and at the same pace of 2017.

"We see a good case for a co-ordinated response, particularly on fiscal policy," Ms Boone said. "We think the major economies should be preparing the ground for such a co-ordinated response now."

Saudi Arabia's economy, the only Arab G-20 economy, is projected to grow from 1.7 per cent this year to 2.6 next year, and 2.5 per cent in 2020, IMF said.

“There are few indications at present that the slowdown will be more severe than projected. But the risks are high enough to raise the alarm and prepare for any storms ahead," said Ms Boone. "Co-operation on fiscal policy at the global and euro level will be needed."

For the US and China that may be a hard task. Mr Trump and his hawks have repeatedly set a high bar for Mr Xi by insisting they want to see “structural” changes in the Chinese economy to rebalance the trade relationship. But it’s not clear that Mr Xi will ever be willing or able to make those sort of concessions.

In early November, speaking at the New Economy Forum in Singapore, Marjorie Yang, chair of Esquel Group, said trade wars offered an opportunity to revamp operations, saying: "With this trade war, everyone is scared - that's good."

Others were less upbeat. In the same month Borge Brende, the World Economic Forum’s president and a former Norwegian Minister of Foreign Affairs, said: “I don’t believe trade wars are an answer. Trade is not a weapon.

“We are worried we are seeing a faster slowdown in the world economy. The only way to sustain growth is to come together.”

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Washington, meanwhile, says it wants to see an end to the vast web of subsidies and cheap, state-directed loans that has fuelled China’s economic rise and the international march of its state-backed champions. It wants a wholesale reform to China’s intellectual property regime and an end to state-directed cyber-theft.

The US also knows it is asking for the Moon. “If China were to say, 'well, we’re going to stop doing all that stuff', it would be left with an economy that would effectively lose its edge,” Peter Navarro, the most strident China hawk in the White House, told a Washington think tank, in November.

Mr Trump has been facing pressure from financial markets and farmers to strike a deal and has already demonstrated an ability to spin modest achievements on trade as epochal victories. There is reason to believe he could do the same with China, according to Bloomberg. But that also carries political risk for him going into 2020 with Democrats eager to pick holes in his populist trade appeal in key swing states in the Rust Belt.

For that political reason, the most likely scenario when it comes to China, calls for an enduring frozen conflict rather than a grand armistice. That would mean the US tariffs imposed in 2018 on $250 billion worth of imports from China - and the vast majority of the Chinese retaliation to those - remaining in place.

It would also mean the rolling out of new export controls strictly limiting the sale of key emerging technologies to China and continuing scrutiny of inbound Chinese investment into the US. That result may be better than a hot war. But it would not remove the possibility of the world’s two leading economies slipping into a new Cold War as many experts fear at the end of 2018.

If there is one Trump trade conflict in 2019 that risks overshadowing the dispute with China, it is the one over cars. The outcome of this conflict may also serve as a telling reminder of how Mr Trump has set about rewriting America’s long-standing economic and strategic relationships and the shadow that casts over the global economy.

Mr Trump’s ordering a national security investigation into US imports of cars and parts followed the model he used to impose steel and aluminium tariffs in 2018. He has since made repeated threats to levy a 25 per cent import tax on cars from Europe and Japan.

Whether an imported Subaru or a Porsche is a threat to US national security is debatable. But the investigation fits with what the administration insists is its broad definition of national security to include "economic security".

A strong manufacturing base, Trump administration argues, is as important to national security as a flotilla of aircraft carriers. Canada and Mexico have secured exemptions from any new tariffs as part of the renegotiated North American Free Trade Agreement.

The European Union and Japan, meanwhile, have drawn promises of temporary exemptions from the auto tariffs while they negotiate trade deals with the US. The negotiations with the EU and Japan are fragile, however. And Mr Trump is not a patient man.

Before the end of 2019, there is a real risk that at least a substantial portion of the more than $140bn in finished cars and parts that the US imports from Europe, South Korea and Japan could be hit with tariffs. Such a move would be disruptive in itself.

But there is another risk, of a broader effect on supply chains if the tariff strikes parts, which could affect both US and foreign car makers that now manufacture in the US. Trump has claimed his renegotiation of Nafta, now rebranded the US Mexico Canada Agreement, or USMCA, as a major victory for his belligerent approach to tariffs and trade.

Experts continue to debate just how much of a meaningful change the new deal marks and what its economic impact will be. But no one doubts that Mr Trump is facing a fight in 2019 to get the pact ratified by Congress. Particularly with hostile Democrats controlling the lower House of Representatives and thus wielding the power to block ratification.

Mr Trump has responded by vowing to pull out of the existing Nafta altogether if Democrats don’t ratify the USMCA, a move that would again leave immense uncertainty hanging over the North American economy.

And reinforce the fears that in his trade wars Mr Trump’s most damaging trait may be his unpredictability

Updated: December 19, 2018 06:36 PM

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