Nomura

Nomura Investment Forum Tokyo featured article: US-China conflict reshaping global trade order

Instead of putting the brakes on global trade, the ongoing friction between the US and China simply accelerates a shift in global supply chains from China to countries such as Vietnam and Mexico that was already underway, according to historian Niall Ferguson.

Speaking at the Nomura Investment Forum 2019 in Tokyo, the former Harvard professor and author of “The Ascent of Money,” argued that the days of what he calls “Chimerica” — a global trade order dominated by an exporting China and an importing US — have long been under threat because of unsustainable political and trade balance pressures. Donald Trump, Ferguson argued, “didn't kill Chimerica, it was already dying.”

China’s rise to middle-income status, for example, sent its labor costs above Mexico’s a decade ago, and the gap has since widened rapidly. In 2017, an hour of work in China cost nearly USD5 against less than USD2 in Mexico, according to Economist Intelligence Unit data. It’s therefore only natural, said Ferguson, for multinationals to seek cheaper labor in other Asian countries, as well as Latin America and sub-Saharan Africa. Tariffs and the political risk of dealing with China as trade dispute rumbles on, he argued, simply send underlying trends into overdrive.

“(Multinationals) are having to find alternative businesses to work with in countries like Vietnam, Indonesia, even Myanmar,” said Ferguson. “Are they a perfect substitute for China? No, their infrastructure is probably not as good.

“On the other hand, China was becoming a more and more expensive place for Western corporations to do business. So I think opportunities are being created by the trade war for other countries ... to take some of the China business away. And that's okay, because that's the way these things are supposed to work. And probably this would be happening even if there were no trade war.”

Strategic interests at heart of trade dispute

Although the Sino-American friction is reshaping global trade networks, Ferguson argued that the conflict is not fundamentally about trade interests but rather geopolitical ones.

He sees the Trump administration as challenging a conventional wisdom that formed under former President Barack Obama about the perceived inevitability of China’s rise to global dominance. Trump is now actively trying to forge a new consensus among allies such as the EU and Japan — through a variety of trade and policy measures — with the argument that containing China’s rise is both possible and within their interest.

“Adam Smith wouldn’t approve,” said Ferguson. But “as a strategic move, it has made sense for the Trump administration to challenge China, and the narrative that China's dominance is inevitable, and there's nothing the US can do to stop it. That really had become the default setting of the Obama administration in its second term.”

Bit-yuan dominance?

Ferguson said that China’s biggest concern in the trade conflict is Washington’s concerted effort to prevent it from accessing integrated chips. It needs sophisticated semiconductors to power its next-generation digital technologies, especially in the field of 5G.

However, Ferguson argued that the US has a key vulnerability of its own: digital payments. In his latest book “The Square and the Tower,” the historian predicted the emergence of an official Chinese digital currency he dubs “bit-yuan.” China is reportedly about to test launch just such a digital currency.

“From an American point of view, it still is concerning that China seems ahead of the United States in the area of digital payments,” said Ferguson. “There is nothing remotely as developed as Alipay and WeChat Pay in the United States. Americans are still pulling out paper money and signing checks and waving plastic, and the Chinese are paying for everything with their phones,” Ferguson said.

It’s a sign of China’s massive lead in a mobile payments arena that Ferguson believes will trigger a financial revolution. Chinese platforms such as Alipay and WeChat Pay process trillions of dollars in transactions per year. Meanwhile, Chinese tech giants are aggressively spreading their payment technologies in emerging markets — a strategy that may tether countries from Asia to Africa to Latin America to China’s financial architecture.

“If one day, we wake up and find out that a really large volume of global transactions is going to happen on Chinese platforms, that really will be a major change in financial history and a big blow to the dollar’s dominance.”

Interview with

  • Niall Ferguson

    Senior fellow of the Hoover Institution, Stanford

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