US China trade war to drag global economy into recession

In a normal year, the Easter season would be a time for businesses to reap big as consumers loosen their wallets to make merry as they reflect on the crucifixion of Christ.

This year, however, it appears things will be significantly different due to the uncertainty posed by the unprecedented Trump tariffs on US imports.

Many of the US trading partners and allies have been measured in their response to President Donald Trump’s unprovoked aggression.

However, it is China’s rebuttal that is unravelling how the Chinese strategically established themselves not only as the world’s factory, but also got interwoven into the global trading system without anyone noticing.

While the rest of the world got hooked into the US-dominated social media and e-commerce system, the Chinese developed and perfected their own systems that they are now deploying to inflict maximum pain to their opponent.

On TikTok, Chinese suppliers this week have been exposing the actual wholesale prices for world renown brands, appealing for US consumers to order their products directly from them online. This exposé, if proven to be true, may spell the death of some of the world’s golden brands, not only in the US but also in the rest of the world.

For instance, there are already popular Kenyan TikTokers who’ve picked the Chinese vibes and are exposing clothing, shoes, electronics, furniture among other products that sale at golden prices in exclusive outlets in the country. While the quality is not in dispute, it is the obscene mark-ups that dealers add into these products that may spell doom to their businesses. 

To the Chinese businesses, Trump tariffs might have opened a frontier market for middle and low-income consumers that had been outpriced at the retail stores by greedy middlemen. As it is panning out, it appears US companies have only been appending their crown logos on Chinese-made products and offloading them for a fortune in the retail markets.

While this fact has been conversed in economic classes for decades, the tariff war and Chinese suppliers' willingness to expose the middlemen’s exploitation have opened a new chapter for consumers.

For example, even with 145 per cent tariffs, it appears US consumers can buy the same products directly from Chinese online stores at less than 50 per cent of the prices they buy the same products in US-based retail stores.

Effectively, that means consumers in the US will still get same quality products at a bargain, but US based retail outlets would bleed to death for lack of buyers. For those that understand the Chinese economic system, they probably have the world’s best integrated e-commerce system that links sellers, buyers, distributors and payment systems seamlessly.

They are also able to segment local and global markets through the e-platforms. For instance, Alibaba has aliexpress.com that serves as a convenient store for global markets and taobao.com that exclusively serves mainland China (domestic market).

For avoidance of doubt and consistent with well-documented economic literature, the Chinese authorities acknowledge that there shall be no winner in this war. They admit that Chinese businesses and their economy will suffer huge losses in the short and medium term. However, they argue that this is a necessary price to pay to defend a world economic order that the US itself created but that must now be rescued from US cannibalism tendencies.

To the consternation of many people, the Xi Jinping administration has deployed US-trained diplomats and experts to lead the charge against their opponent.

One of the most vocal voices in this war, Victor Gao, mocked US Vice President JD Vance as his 20-year junior at Yale Law School, touting him to go back for proper learning in response to Vance’s comments on US buying products made by Chinese peasants with money borrowed from the same peasants.

Turning to the broader numbers, Ralp Ossa, the Chief Economist at the World Trade Organisation (WTO), in an article by Charlotte Edawards of BBC, warns of the wide ranging effects of tariff policies, including some unintended ones. According to the article, trade policy uncertainty significantly dampens trade flows, reduces exports and weakens new economic activity.

The negative impacts can be worsened by reciprocal tariffs similar to Canada’s unflinching retaliation or political uncertainty like China’s all-out trade war.

For example, according to the foundation of economic education, trade wars of the 1920s are considered as a principal factor that lead to the great depression of 1930s and World War II. The US Congress had enacted tariffs in 1922 and 1930 designed to protect American industries from foreign competition. In the evolving scene, President Trump has usurped Congress mandate to impose tariffs through executive orders.

The WTO forecasts that trade will be expected to fall by 0.2 per cent down from an earlier projection for a 2.7 per cent expansion in 2025. The UN Trade and Development (UNCTAD) agency forecast that global growth would slow to 2.3 per cent in 2025 due to the escalating trade tensions. This is far below the 2.5 per cent threshold, signalling that a global recession will be inevitable. Singapore’s Prime Minister, Lee Hsien Loong, in an address circulating on Tik Tok warned his country to prepare and anticipate the impending slowdown, possibly a recession, especially for smaller economies that lack the trade instruments and economic muscle to respond to Trump’s tariffs.

On a minor silver lining, the WTO has included services trade in its forecasts for the first time and projects this to grow by four per cent in 2025. However, this is still lower by one per cent compared to earlier projections. This may provide a ray of hope for tourism and export of professional services.

In a paper published on the Internal Monetary Fund working paper series in January 2019, Davide Farceri, Swarnali A. Hannan, Jonathan O. Ostry and Andrew K. Rose evaluate the impact of tariffs on key macroeconomic variables using data from 1964 -2014 for 151 countries. They found tariffs led to economically and statistically significant declines in domestic output and productivity in the medium term. In addition, tariff increases led to unemployment, higher inequality and real exchange rate appreciation. Only a small effect was observed for Balance of Payments.

With this scary data at the global scene, folks may be wondering what does it mean for the domestic economy? Is there anything to worry about?

Given, the total African trade is negligible at the global stage, accounting for a paltry two to three per cent. Worse still, intra-African trade is only about 15 per cent of the total African trade. This means most of African exports are to the rest of the world, with the US being a significant recipient of African exports.

About 38 per cent of Kenyan total exports in 2023 were to African markets, according to the Kenya National Bureau of Statistics data. However, this has been fluctuating, with trade reversals in favour of our neighbours in the East African Community.

Effectively therefore, the local economy is significantly vulnerable should the trade war spillover into a global recession and interest rates increases. A card at play by some of the big economies is dumping their huge holdings of the US Treasury bills that may rock the world financial markets and push interest rates up.

Unfortunately for the ordinary Mwananchi, there is no discernible white smoke from Treasury that the country is working on concrete macroeconomic defences, except on living in the hubris that Trump favoured us with the most lenient additional tariff increases in the region at 10 per cent.