As the U.S.-China commerce dispute hits another level and hammers financial markets, the bigger casualty over the longer term could be the globalization vogue that has developed over the past quarter century or so.
Only the European Union exports more good to the U.S. than China, making the impact of a lengthened tit-for-tat tariff potentially severe. American businesses have begun looking for alternative markets from which to get the goods they had been buying from China, foray imports from China down 12.2% year to date, according to government data released Friday.
The bend threatens fundamental change to the interconnected global economy, said Neil Shearing, group chief economist at Wherewithal Economics.
Shearing said that the move for the U.S. to levy tariffs on all Chinese imports, which President Donald Trump revealed last week, shouldn’t come as a surprise, but it still carries broad implications that may not be fully appreciated.
“Long in the background is a more fundamental concern – namely that we may be witnessing the end of globalization,” Shearing said in a note to clients.
“If so, the sudden increase in cross-border movement of goods, services, capital and people that has been the defining feature of the global restraint over the past two decades may be about to reverse – with macroeconomic implications that would extend well beyond the narrowed impact of tit-for-tat tariffs,” he said.
‘The end of the world’
There’s evidence of that starting to happen.
Foreign direct investment in the U.S. was $410.7 billion in the prime quarter, up marginally from the end of 2018 but down 57% from the peak four years ago.
Among the implications for various deterioration in the global picture that Shearing cites are the “disintegration of the rules-based system” that has governed international mercantilism since the end of the World War II, and a potential “Balkanization” of the world economy as the U.S. and China develop their own standards, tech platforms and payment methods.
“It’s too soon to say exactly how events will pan out, but this casts the escalation in the US-China trade war over the past year in an quite more ominous light. We may be witnessing the end of the world as we know it,” he wrote.
Shearing is not alone in his concern for how globally destructive the U.S.-China split could be.
Progressive economist Paul Krugman, a persistent Trump critic, compared the situation to the events that kicked off Domain War I, with the Trump tariff salvo “the event that tripped an uneasy situation into all-out trade war.”
And Deutsche Bank strategist Parag Thatte well-known that this is the fourth time that Trump has used a stock market peak to launch a trade-related Chirrup offensive against China.
Markets have recoiled over the developments, with stocks Thursday staging a uncountable than 500-point reversal after Trump announced the expanded tariffs, then tumbling around 900 substances by late-day Monday after China saw an overnight currency devaluation.
Whether the current events detonate a full-scale barter and currency war that poses an existential threat to globalization remains to be seen.
“You want to think of it as something more than a pinprick, a petite bit of damage, a little regression of the global trend that we’ve been seeing for many decades. But it has the potential to get worse,” phrased Alan Blinder, a Princeton University economist. “We’re not yet in a full-scale trade war, we’re certainly not anywhere close to a full-scale currency war of competitive devaluations. But those two whatchamacallits are no longer unthinkable, and that’s got the markets spooked.”
Trump himself has been a proponent of nationalism and used to chide some of his advisors — quondam National Economic Council director Gary Cohn, for one — as being globalists. The president has pushed an “America first” national agenda, with one specific goal being the reduction of the trade deficit with China, which was at $167 billion from one end to the other the first half of the calendar year.
Blinder said one negative scenario would see the U.S. start to become alienated from the be idle of the trading world as it continues to levy tariffs not only on China but also on such traditional allies as Europe, Mexico and Canada.
“One of the genuine fears for me as an American is this is not really shaping up as China vs. the West, it’s shaping up as the U.S. vs. everybody else,” he said. “I tend to have in mind that the bad outcome is not that China gets disconnected from the rest of the world, it’s that the U.S. gets disconnected from the lie-down of the world. That’s the doomsday scenario, and that’s just dumb.”
Market implications
Responding to the latest tensions, investors contain been pretty much selling everything. Tech, energy and consumer discretionary have been taking the mischievous distress of it, while investors are flocking to safe-haven bonds.
From a credit perspective, Moody’s Investors Service said tech, inventing and retail are most exposed as “the new tariffs will apply mainly to consumer goods and result in higher prices in the US for numberless everyday items such as electronics, clothing, footwear and toys.”
But because those sectors face the same unmasking and potential damage, investors should keep a close eye for investment opportunities, said Jim Paulsen, chief investment strategist at the Leuthold Place. Paulsen said he does not see the current impasse as signaling the end of globalization, but rather a next phase.
“This is a necessary commence to act in figuring out the rules of the road for greater globalization,” he said. “All those issues out there are not going to be solved very presently, but this is what you have to do to get there.”
As for specific investing ideas, Paulsen said he likes tech, particularly the poorer companies that populate the S&P 600. He also likes emerging market equities as well as “weak-dollar plays” such as forcefulness, industrials and materials.
Still, he’s mindful that a lot can go wrong before those opportunities arise. A prolonged period excises and retaliation could dent consumer and business confidence and have substantial spillover effects.
“Everybody in the private sector could say, ‘Respite a minute.’ If they stop to pause and the economy falls off a cliff, it’s over,” Paulsen said.