Japan’s Economy: Monthly Outlook (Oct. 2018)

The true nature of the US-China Trade War: The end of “the end of history” (or a new beginning?)

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  • Shunsuke Kobayashi
  • Yota Hirono

Summary

◆In this report we approach the prediction of where the US-China cold war will go in the future on both political and economic issues in hopes of revealing its true nature. We see the turning point in China’s role as “the world’s factory” and the end of its high growth period as occurring in 2010, as a result of the working age population having peaked out. At this point, with no further economic expansion in sight in quantitative terms (production volume having been the basis of its national wealth until that time), China began looking for ways of improving its productivity. A representative example of this effort was the “Made in China 2025”. A major part of this plan was the forced transfer of technology from advanced nations.

◆After President Obama left office, the US began efforts to prevent the usurping of its cultural and economic hegemony by China. Military policy has been a part of this effort, and in order to maintain and expand military superiority, the disparity in national wealth and economic strength with China must also be maintained and expanded. It is here that domestic tax cuts and tariffs on imported goods have their significance. China bashing by the US does not stop at tariffs. The containment of China by US allies is now making steady progress.

◆The cold war is a war of attrition. To maintain superiority in a war of attrition, provisions are essential. For this, the US can rely on its allies, who have accepted the following terms: Japanese investment in the US domestic automobile industry, the EU’s cutting of tariffs, Canada and Mexico increasing the ratio of their US domestic production, all of these have contributed to the effort. However, China has a way to breach this encirclement – that is the strategy of shaking up the US alliance by virtue of building mutually beneficial relationships with alliance members.

◆We have provided analyses of the effects of the US-China trade war on the economies of those countries, as well as on Japan and the world economy in our recent monthly reports. In this report we again present our estimates of the economic effects of US and Chinese tariffs based on the DIR macro model. There is essentially no change in our opinion (i.e. the effects will not be devastating, but they will be of a scale which cannot be ignored). The IMF’s calculations have also been updated, and do not differ greatly from ours if assumptions of the two studies are matched more closely.

◆At the same time, it is important to note that there are limitations to these models in how secondary effects and substitution effects are captured. A secondary effect is where components and capital needed to produce electronic devices manufactured in China for export to the US are imported from Japan, meaning that US tariffs cause Japanese exports to China to decline considerably. A substitute effect is where tariffs imposed by the US and China on each other’s products lead to the increase in substitute production in Japan.

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