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When China sneezes, the world catches a cold

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When China sneezes, the world catches a cold Posted by David Smith at 09:00 AMCategory: David Smith's other articles My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt. It is said that we owe to Metternich, the distinguished 19th century diplomat, one of the most famous phrases used about the global economy. In an era when Europe dominated the world economy, he came up with: “When France sneezes. Europe catches a cold.” That was easily adapted, with the rise of the United States, to: “When America sneezes, the world catches a cold.” It remains true today. The sneezing fit that began in America’s housing market in the 2000s gave us the global financial crisis of 2008-9. There is, however, another country we should worry about in the

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When China sneezes, the world catches a cold

Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

It is said that we owe to Metternich, the distinguished 19th century diplomat, one of the most famous phrases used about the global economy. In an era when Europe dominated the world economy, he came up with: “When France sneezes. Europe catches a cold.” That was easily adapted, with the rise of the United States, to: “When America sneezes, the world catches a cold.”

It remains true today. The sneezing fit that began in America’s housing market in the 2000s gave us the global financial crisis of 2008-9.

There is, however, another country we should worry about in the sneezing stakes, highlighted by the Organisation for Economic Co-operation and Development (OECD) is in latest economic outlook. China’s rise is not new, but it is still easy to understate its importance to the world economy.

China’s gross domestic product at market exchange rates is about two-thirds of that of America, and ranks as the second biggest economy in the world. The EU, if counted as a single economy, slots in between the two. On a purchasing power parity basis, adjusted for relative prices, China’s economy is the biggest in the world and more than 20% bigger than America. On that basis, incidentally, the EU economy is 7.5% larger than the US.

The OECD, which revised down its growth forecast for the world economy to what it described as a sub-par 3.2% - its forecasts for Britain are for 1.2% growth this year and 1% next, on the assumption of a smooth Brexit – cited weak import growth in China as a key factor in the downturn in world trade.

Amid Donald Trump’s trade war with China, which has taken its toll on trade flows between the two countries – both export and import volumes are showing annual percentage falls in the mid-teens – there is plenty of collateral damage. China’s reduced appetite for imports is hitting Europe, and in particular the export powerhouse of Germany, as well as Japan and other Asian economies.

It is being felt in Britain. Though it is easy to mock Britain’s export performance in China – Germany sells four times as much – exports have been rising, to £18.5bn for goods and £23.1bn for goods and services last year. China is still a smaller export market for Britain than Ireland, along with America, Germany, the Netherlands and France, but the value of exports to China last year was almost three times the level a decade earlier.

China is, of course, a prime source of imports for Britain, £44bn last year for goods alone, and last year’s goods and services deficit with China was a chunky £22bn.

But the Chinese economy matters for exporters, could matter much more in the future, and it matters a lot for some now. Jaguar Land Rover’s £3.6bn loss for 2018-19 including special factors, was for a range of reasons. High among them was the drop in sales as a result of what it described as “the backdrop of a weaker China market”.

That, as far as JLR is concerned, is putting it mildly. Last month it saw sales in Britain up 12.1% on a year earlier, with US sales up 9.6%. But sales in China were down by a staggering 45.7% on a year earlier, contributing to an overall fall in sales of 13.3%.

The White House’s additional tariffs on Chinese imports will cost the average American household $831 (£660 a year), according to research from the Federal Reserve Bank of New York. The OECD is not alone in calling for an easing of trade tensions, which are taking their toll, to put the global economy back on track.

There is a wider point, also highlighted by the OECD. As it says: “The post-World War II process of globalisation driven by multilateral agreements that allowed ever-increasing trade openness is being challenged.”

When Brexit and Trump’s election victory happened within a few months of each other in 2016, it represented a lurch towards protectionism. The US president was explicit on taking over; “protection will lead to great prosperity and strength.” In each case, however, the tide of globalisation had already begun to ebb. It is not clear, even as the economic costs of trade wars rise, that attitudes will change.

After many decades in which the growth in world trade had been seen to lead global economic growth, the period since the crisis has seen trade struggle to keep up. Protectionism had increased before Trump came and along with other factors such as the availability of export credit, reduced trade growth. The US president was more explicit but was going with the flow, particularly towards China.

Attitudes to globalisation, meanwhile, had shifted. The boost to consumers from cheap Chinese imports, which at one time used to be seen as a key practical benefit of globalisation, gave way to concern, though many years too late, about the loss of traditional manufacturing jobs.

Where do we go from here? It would be naïve to think that an outbreak of sweetness and light between America and China is on the cards, even if the current trade dispute is would down. Google has been forced to restrict Huawei’s access to some of its apps and updates. The battle for control of the 21st century knowledge economy is joined.

For China, which had already seen a growth slowdown from an average of 9.5% a year since the late 1970s to roughly 6% now, this is the first serious challenge to tis rise. The poster-boy of globalisation is adjusting to a world of de-globalisation.

The assumption by Western countries that a richer China would become less addicted to unfair trade practices and appropriating the intellectual property and technology of others, may now never be tested.

China, naturally protectionist and suspicious of the West, will have been reinforced in that view by America’s tactics under the Trump. If protectionism comes naturally to the leader of the free world, why should the leader of a traditionally closed world be any different? As we have seen in the negotiations between America and China, son far at least, replacing subtle Western pressure on China with the sledgehammer has not paid dividends.

Meanwhile, under the Made in China 2025 programme, China will seek to match or exceed US standards across a range of advanced manufacturing sectors, including aviation, artificial intelligence, robotics and chip manufacturing, and will thus have less need of the West.

It does not need to be like this. In his recent book The Third Pillar, the former Indian central bank governor and candidate for next Bank of England governor Raghuram Rajan, writes: “There is a dialogue to be had which can reduce concerns on all sides, though the rise of a new power, challenging an earlier hegemony, is always difficult. That dialogue becomes much harder if China suspects the developing world is ganging up as well as if China becomes more repressive politically.”

That looks to be where we are at. Nobody wins trade wars and, to be fair, insufficient attention was paid to the fact that there are costs as well as benefits from globalisation. There are plenty of costs in the current deep global trade tensions, and it is hard to see any benefits.

When China sneezes, the world catches a cold
David Smith
David Smith is economics editor of The Sunday Times. His website is http://economicsuk.com . His latest book is Something Will Turn Up.

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