How the US-China trade war is hurting Britain’s economy
It is not just Brexit that is putting us at risk of a serious downturn
It’s easy to think of the trade tussle between the US and China as a pointless war thousands of miles away of no consequence to Britain. But the ripples from the clash have already reached this island and the effects will grow and multiply as the conflict drags on.
Perhaps the most direct and least obvious effect is the potential impact on the pound. So far, fears of a no-deal Brexit have been the driving force behind the currency’s slide. But if – as looks likely – the trade fight becomes protracted, threatening the global economy, the flight to safety it has already sparked will become a stampede. Investors will increasingly switch out of risky assets, such as shares and corporate bonds, and into so-called safe havens, such as government bonds and gold.
This newfound caution is likely to reduce any remaining appetite for the pound, which is vying for the title of the world’s newest risky asset. Its wild moves this year have made it look more like an emerging-market rather than a developed-market currency. And the whole Brexit process has gravely undermined the traditional view of Britain as a stable, pragmatic country, eroding with it the long-standing trust in the pound.
There probably won’t be any silver lining to the currency’s further tumble in the form of a significant rise in UK exports. Since the EU referendum, the pound has lost 16 per cent of its value against the dollar but Britain’s trade deficit has actually widened. In the 12 quarters since the vote, the median quarterly deficit adjusted for inflation stood at £6.15bn, while in the previous 12 quarters it was £4.52bn.
There may be a structural reason for this, as a former Bank of England policymaker suggested in comments on why the pound’s devaluation during the financial crisis failed to narrow the trade gap.
“One factor is that the United Kingdom is towards the upper end in global supply chains. That means whether it is cars or financial services of certain kinds, production requires a bunch of imported inputs, whether of people or car parts, before the end product can be exported. The net gain you get from currency depreciation is limited,” Adam Posen wrote.
Another way in which the trade war is hitting the UK is through inflicting pain on our most important export markets. Germany, the second-biggest buyer of our goods and services, is already flirting with recession, largely as a result of waning demand for its exports in China and elsewhere in Asia.
Weaker demand from China – whose slowing economy is under added pressure from the trade war – is also behind fears for the economy of France, our third-largest export market.
The latest PMI survey of UK manufacturers provides evidence of this knock-on effect from the US-China spat. Factory output recorded its steepest fall in seven years in July partly due to a decline in overseas orders. And the main markets behind the decline? The EU and China.
The top foreign buyer of our goods and services is the US, and its economy has been growing at a healthy pace. However, there are emerging signs it is running out of steam – at least partly due to the trade conflict instigated by Donald Trump.
For example, economists are forecasting only a 0.2 per cent rise in US retail sales in July. Could this be a sign that consumers, very important to the US economy, are starting to cut back on spending? After all, tariffs imposed on China since last year are costing the average American household $831 a year, according to a report from the New York Federal Reserve.
A ratcheting up of tensions between the world’s two largest economies will also put a big chunk of our pensions at risk. Around 30 per cent of UK pension funds are invested in stocks, which are vulnerable to falls if investors batten down the hatches because of a feared or actual downturn in the world economy.
Last week, the US Treasury branded China as a currency manipulator, opening a new and angrier phase in the trade war. In a taste of things to come, US and European stock markets tumbled and were able to pare only some of their losses by the end of the week.
These are only some of the ways in which the clash between two heavyweights on the opposite sides of the planet can leave its mark on our shores. There are many – and that’s unsurprising in a globalised world economy.
Whether globalisation will actually survive the trade war is another matter.