Chinese growth prospects in Trump's trade wars

Dan Steinbock
US trade deficits are unlikely to disappear. Only their composition will change as US trade deficits with South and Southeast Asia will replace some of those with China.
Dan Steinbock

As Trump tariffs continue to spread, there is much speculation about the state of the Chinese economy. What are the facts?

When the People’s Bank of China (PBOC) recently cut banks’ reserve requirements, skeptics in the West saw it as doom and gloom. Yet, local analysts saw the cut as an affirmation of the Chinese government’s commitment to the domestic economy.

In the new, more challenging status quo, accommodative monetary policy is likely to continue, along with fiscal easing.

For now, solid service sector growth, supported by monetary and fiscal support, has kept the economy on track. Inflation is moderating and the current account surplus could narrow more than expected. Trump tariffs are designed to hurt export growth and thus the growth of manufacturing investment. The White House’s sharpened tone suggests US trade hawks hope to instigate capital outflows from China.

In the medium-term, China is deleveraging, while reducing poverty and pollution, to sustain higher-quality growth.

In the long-term, the Chinese economy is rebalancing as the sources of growth are shifting from investment and exports to consumption and innovation.

On the supply side, the economy continues to move away from industry and toward services.

On the demand side, consumption is increasingly fueling growth. Meanwhile, global innovation hubs are expanding from Shenzhen to Shanghai and Beijing. Obviously, Trump’s trade offensives complicate the economic conditions in China, but the momentum of Chinese development will remain unchanged.

Over time, the unintended implication of US tariffs is that they are accelerating China’s long-term rebalancing — particularly the transition to innovation and consumption — faster than anticipated. This will be challenging in the near-term, but it could make Chinese economy less susceptible to US policies in the long-term.

In turn, US trade deficits are unlikely to disappear. Only their composition will change as US trade deficits with South and Southeast Asia will replace some of those with China. Unless, of course, US tariffs are expanded against them as well, in which case costs to US multinationals will soar, making them less competitive internationally, while increasing prices to US consumers.

There are no winners in a trade war. If the White House ups tariffs on all Chinese imports, the stakes will soar to US$500 billion. That could penalize China by 1 percent of its GDP; but US GDP would suffer a 2 percent hit.

However, global economic prospects could suffer even more. The International Monetary Fund (IMF) has cut its forecast on global economic growth to 3.7 percent for 2018 and 2019, citing rising trade protectionism. But that is an optimistic projection because it downplays the full impact of the Trump administration’s tariffs, retaliations, potential new targets and collateral damage.

What is needed is a united front of advanced, emerging and developing economies for global trade.

The alternative is the kind of global depression that was only just avoided in 2008.

Dan Steinbock is the founder of Difference Group and has served as research director of international business at the India, China and America Institute (US). He is a visiting fellow at the Shanghai Institute for International Studies (China) and the EU Center (Singapore).

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