Daniel Moss

What If There Was a Trade War Truce?

Even a trade truce could have its losers.

The economic conflict between the US and China has been jarring, no doubt – decades-old commercial relationships have been torn up, supply chains are getting upended, global growth is slowing, and investors and businesses are rattled. On days when the standoff seems endless, you might find yourself asking: Can’t we just go back to the way things were?

But that view would dismiss the relative winners of this conflict, particularly those countries in Southeast Asia that have attracted investment otherwise destined for China. Just this week, the Nikkei Asian Review reported that Google Inc. is taking steps to shift production of its Pixel smartphone to Vietnam from China. Shipments to American ports from Asia, excluding China, jumped in the first six months of the year, while imports from the mainland declined. An outbreak of trade peace, or a meaningful suspension of hostilities, could jeopardize this.

In its annual review of China's economy this month, the International Monetary Fund gamed out some scenarios for a trade deal. The baseline for such an agreement would likely aim to steer the trade balance between the countries toward zero. At the very least, it would try to make a big dent in the $419 billion U.S. merchandise deficit with China.

The IMF’s outlined scenario would see China buy more American cars, machinery and electronics; yet the lender found that it’s unlikely Beijing will stimulate its economy so much that it can absorb enough US goods without cutting back elsewhere. South Korea and Singapore – which both count China as their largest trading partner – stand to lose exports equal to about 2.1% and 3.8% of gross domestic product, respectively, under such a trade agreement, the IMF reckons.

Australian mineral exports would suffer, too, as would electronics sales from Southeast Asian countries such as Malaysia. “The impact on global GDP from the distortions introduced by a trade deal would likely be negative and weigh against the benefits from reduced policy uncertainty, the withdrawal of higher tariffs, and the introduction of new reforms,” the IMF wrote.

While the biggest downsides would be felt in Asia, the disruption wouldn’t be limited to the region. More purchases of US aircraft could affect France, in particular, given that Airbus SE is Boeing Co.'s main competitor.

This isn’t to say that the IMF, a champion of free-market orthodoxy, has become an advocate of trade war. Rather the lender would prefer a pact that isn’t based on quotas or scaling up of specified purchases (though its concrete alternative isn’t immediately clear).

Of course, you could argue that the Asia region may have been better off if the trade war hadn't started at all. But that risks ignoring some of the larger forces shaping the global economy long before President Donald Trump’s election: the sustainability of the US’s record expansion, the sunset of China’s double-digit growth boom, and aging populations in Europe and North Asia.

Views on whether the trade impasse can be bridged vary with Trump's every second tweet. Beijing is right to be wary of his flip-flops. As the economic damage from the trade war becomes more apparent, however, it's worth considering whether peace would necessarily be the nirvana some are expecting come January 2021. While the Treaty of Versailles was better than the trenches, it also had serious some flaws.