USA and China trade war and its macroeconomic impact in Portugal

When we take a closer look into this complex issue of what is usually called “trade wars” we must take into consideration the fact that international disagreements over trade barriers or trade partnerships usually hide other problems or oppositions that more often than not lie under the surface. In the specific case of China vs USA trade war, we could point out, at least, three different elements that might be the main sources of the current situation:

1. Specific options of the current US presidency – in the long term debate free trade versus protectionism, the current White House leader seems to have a heart that shifts towards the latter. Before people start to throw rotten tomatoes towards US current Leader, it might be relevant to take into consideration that part of the voters that gave Mr Trump his political victory are inhabitants of the so-called Rust Belt. These regions felt, more than average, the effects of the industrial migration (due to trade globalization) during the last thirty/forty years. The heart and soul of America’s industrial power right now is a dramatic mix of unemployment, social security dependency and lack of confidence towards the future. This reality should tell us that the right question lies more on the type of new activities that might boost the rust belt economy rather than dreaming of a glorious past., So, what is exactly the world where Donald Trump and his economic advisors still think of themselves as leaders? Glorious Past or Challenging Future?
2.  Patent warfare and commercial openness – industrial espionage, misappropriation of research results, cyber attacks, constitute realities that affect and challenge international and inter-business relations. The US and its Western allies, when it comes to this particular matter look into China with mistrust as they consider that the Asian giant too often uses grey methods to take advantage – see the recent case of the Marriott hotel chain.
3. Balance of power in the International Relations chess board – China is no longer the “sleeping giant” of World Economy and Politics. A Trade War with this Asian nation must take into account that “it’s not the 80s anymore. Nowadays, China has most of what it needs now, and what it doesn’t have it can easily obtain from vendors outside the U.S. The newer emerging market countries have become much more interesting to Beijing” (Nie, 2017).

On the other hand, China still appears, in our eyes as a very closed market to the outside, that is, to imports. This way, we have three domains of opposition between US/Western Countries and China: market access, intellectual property and technology transfer.

The previous considerations should tell that, at least in geoeconomic terms, the US will have to get used to a G2 world (US + China) or maybe G3 (US + China + EU). Although in the domains of Geopolitics and Geostrategy the US still retains considerable advantages, namely in dissymmetry (Tomé, 2005) vis-a-vis any opponent, the fact is that the sustainability of long-term geo-strategic advantages also depends on geo-economic competitiveness (pattern of success in terms of integration in the world markets) and the ability to cultivate and maintain alliances (this is the case of the well known geopolitical code in the words of John Lewis Gaddis). And it is in these last two points that the strategy of the US Presidency seems to be failing. The US economy needs international openness, either at the level of investment flows or in the access to strategic markets (including China – see, for instance, that by the end of 2015 the Chinese had acquired 131 million iPhones). On the other hand, Donald Trump could have preserved some advantages, for example in the Asia-Pacific region, if he had kept the US within trade agreements like the TPP.

 What lies ahead for Portugal?

When analyzing the potential impacts on the Portuguese economy, disagreement seems to be a remarkable point.

On one hand, there will be losses due both from commercial tensions that affect international investment flows and from the negative impact of factors such as “increased uncertainty and erosion of confidence and the fall in productivity due to the reduction of specialization and international competition” (Banco de Portugal, 2018). These factors can have a more dramatic impact in a country (Portugal) that assumed an export-oriented strategy.

However, this approach is not consensual. In fact, Portugal might obtain some advantages due to the fact that our country can assert itself as a replacement exporter. As it was noted on a recent study (edited by Nomura Holdings Inc), “reciprocal diversion of imports from the US and China to other countries may benefit export-oriented industries in some specific nations, as it is the case of Portugal, where the impact of the increase in Chinese and American imports (in sectors such as refined petroleum products and automotive components) resulting from the commercial war between the two superpowers is more than 0.4% of GDP” (Barroso, 2019).

In this sense, the worldwide spread of the effects of this Beijing-Washington war has dual effects. If, on one hand, the uncertainty associated with a commercial conflict between the two economic powers has perverse effects in areas such as investment flows, on the other hand, the substitution mechanisms of products / services in international markets can bring advantages to a country such as Portugal that clearly opted for an externally oriented economic model – in this matter see the growing weight of Portuguese exports in the country’s GDP – according to recent estimates, that amount reached the impressive figure of 44%!

However, it should be borne in mind that the United States is our number one geostrategic ally, so any reasoning over which side to choose in the event of conflict escalation is an issue that should not even be equated. Wisdom is to know where to stand in the Grand Chessboard. Not everything in the field of international relations falls under the geo-economic umbrella. Portugal should use its diplomatic tools with caution.

José Lúcio PhD, NOVA University of Lisbon

References:

Banco de Portugal (2018) Boletim de Primavera, Lisboa.

Barroso, Rui (2019) Portugal é o país da Europa que mais ganha na guerra comercial, Dinheiro Vivo.

Nie, Winter (2017) Why America would lose a trade war with China, Forbes Magazine

Tomé, Luís (2005) A Dissimetria dos EUA e a Guerra Assimétrica, Janus.