Macro Matters: US versus China: is there room for two mercantilist powers?

The global consequences of the growing rivalry between China and the US presents a unique and dangerous macro environment which could for the first time in three decades see geopolitics once again take precedence over world trade.

Didier Saint-Georges, managing director at Carmignac, the €42 billion French independent asset manager, poses two fundamental questions facing financial markets today:

  • does the possibility of a new pickup in global growth – supported by China’s stimulus package, a favourable comparison basis after the dip in 2018, widespread dovish monetary policy and an ongoing boom in the United States – outweigh the growing evidence of waning momentum in an American economy suffering, with a lag, from the excessive monetary tightening in 2018, the natural ageing of an already long business cycle and blowback from Washington’s blatantly mercantilist trade policy?
  • Further down the road, the inescapable question has to do with the global consequences of the growing rivalry between China and the US. For the first time in thirty years, geopolitics could once again take precedence over world trade.

Didier Saint-Georges, managing director at Carmignac, explains:

“It’s apparently taken financial markets a while to admit that there is more to the recent tensions between the United States and China than just a spat over tariffs. They obviously reflect strategic rivalry as well.

“There is an unmistakable feeling in the US today that the country is heading for a Thucydides Trap (an analogy with what happened in ancient Greece when Sparta’s fears over the rise of Athenian imperialism led to the Peloponnesian War).

“On a less martial note, the current tensions between China and the US can also be interpreted as an irrepressible clash between two mercantilist powers. That policy puts the US on an inevitable collision course with China – a country criticised, and not so unfairly, for its mercantilist behaviour. We can also assume that the same treatment will eventually be applied to all nations whose trade surpluses with the United States thwart the Trump administration’s mercantilist designs – beginning with Germany and Japan.

“Therefore, the increasing friction between the United States and its trading partners is inherent in the economic model subscribed to by the Trump administration. And as far as China is concerned, that model is coupled with geostrategic rivalry. The intensity of that rivalry can be gauged from the fierce attack on Huawei.”

Europe between a rock and a hard place

In this complex environment, Saint-Georges says Europe is not operating from a position of strength. Not only can the ECB provide little in the way of monetary support, a handicap which would lead to a crippling appreciation of the euro in the event of a “currency war” between China and the US; the European Union also suffers from a number of vulnerabilities.

He added:

“The latest EU parliamentary elections are hardly to blame. True, several mainstream parties took a shellacking, notably in France and the United Kingdom. But the results at the polls show continued strong attachment to the EU.

“The trouble lies elsewhere. To start with, it looks like the reform process will be kept on hold for quite a while. Italy, France and several other member states have failed to give themselves the fiscal room to manoeuvre they will need to be able to counter the next economic slowdown. At the eurozone level as well, Emmanuel Macron’s proposal to create a common budget to rekindle growth has clearly fizzled out.

“The second source of vulnerability is Europe’s onlooker status in the tug-of-war between the US and China. That conflict may well prove damaging to the EU, both if the global economic outlook sours (since the pace of European GDP growth depends heavily on the state of world trade) and in the event of a US-China trade agreement, because even a shaky deal would no doubt be reached at the expense of Europe.”

james.wallace@realassetmedia.com