3.2. The picture effect of China from the trade war in the future.
Market in China
The US tax will make China reduce exports to the US market, making it more
difficult for Chinese exporters to access the US market, especially the high-tech
market.
Therefore, Chinese businesses are forced to look for other markets to replace
exports to the US market, including the near market is Vietnam. More difficult
exports to the US market also made it possible for foreign investment in the
Chinese market, while also affecting the investment of Chinese enterprises
themselves in the domestic market.
Investment and production for export which is affected is likely to lead to
increased unemployment and in the long run can greatly affect the country's
economic growth.
The capital outflow.
While such a strategy was a very real option a decade ago when capital readily
flowed into China, it is less realistic now. In 2019, China is on track to run a current
account deficit. In other words, capital is flowing out of China. While one can debate
whether China’s current account deficit is temporary, the fact that it exists at all
suggests that a sudden sale of U.S. Treasury securities would be risky. It could
trigger a flight of capital from China, as the difference in yields between Chinese
and U.S. government debt narrows.
Tariffs.
While Donald Trump is, “getting tough” on China is one issue he has relatively
supported . As Elizabeth Economy (a well respected China commentator) from
China File said “The trade war signifies far more than President Trump’s desire to
rebalance the bilateral trade deficit. It represents the culmination of decades of pent-
up frustration within the United States over China’s failure to make good on the
promise of its 2001 WTO”.
While the current impasse will likely be resolved, it’s likely that strong resentment
and disagreements on both sides of the Pacific will remain. Many have raised the
possibility that even if the tariffs are removed in the short term, they may be
reinstated at a later date. As China expert Michael Hirson said, “[Any] deal’s
implementation is likely to be rocky, with a real risk that the U.S. will reimpose
tariffs in the next one-two years.”
Importers find the announcement of a new round of duties extremely annoying, at
the very least. We, the importers, are paying the costs in the short term and will be
loathed to increase prices. But this burden will be passed on to the end-user. Prices
will rise and consumers will be the real ones paying the cost in the long run.
Exchange rate.
If China’s economic growth continues to decline relative to America’s, the yuan will
naturally weaken against the dollar. Eventually, it will breach the 7-yuan-to-the-
dollar level, regardless of what China might do to prevent it. But more important is
how the yuan depreciates. Will it devalue in an orderly or disorderly fashion? A
rapid plunge would suggest a loss of confidence in China’s ability to keep its
economy .That could presage bigger problems for China, including perhaps a debt
crisis or a massive capital outflow. After all, a devaluating currency does not attract
capital.
The devaluation of its currency would give China’s economy an immediate boost, it
would also ease the inflationary pressure that Chinese tariffs have put on the U.S.
economy. Worse still, it would break China’s informal currency peg to the U.S.
dollar, which has not traded above 7 yuan to the dollar for over a decade. While there
is nothing inherently special about that level, breaking it would suggest that the
economic conditions in China had worsened to a point where Beijing could no longer
defend the peg.
GDP index
The trade war has not really damaged China so far, largely because Beijing has
managed to keep import prices from rising and because its exports to the United
States have been less affected than anticipated. This pattern will change as U.S.
importers begin to switch from buying from China to buying from third countries to
avoid paying the high tariffs. But assuming China’s GDP continues to grow at
around five to six percent every year, the effect of that change will be quite modest
China hasn’t had a recession in the past 40 years and won’t have one in the
foreseeable future, because its economy is still at an early stage of development, with
per capita GDP only one-sixth of that of the United States. Due to declining rates of
saving and rising wages, the engine of China’s economy is shifting from investments
and exports to private consumption.
As a result, the country’s growth rate is expected to slow. The International
Monetary Fund projects that China’s real GDP growth will fall from 6.6 percent in
2018 to 5.5 percent in 2024; other estimates put the growth rate at an even lower
number. Although the rate of Chinese growth may dip, there is little risk that the
Chinese economy will contract in the foreseeable future. Private consumption, which
has been increasing, representing 35 percent of GDP in 2010 and 39 percent last
year, is expected to continue to rise and to drive economic growth, especially now
that China has expanded its social safety net and welfare provisions, freeing up
private savings for consumption.
The forecast of the overall picture:
If the trade war continues, it will compromise the international trading system, which
relies on a global division of labor based on each country’s comparative advantage.
Once that system becomes less dependable—when disrupted, for instance, by the
boycotts and hostility of trade wars—countries will start decoupling from one
another.
China and the United States are joined at the hip economically, each being the other’s
biggest trading partner. Any attempt to decouple the two economies will bring
terrible consequences for both, and for the world at large. Consumer prices will rise,
world economic growth will slow, supply chains will be disrupted and a digital
divide—in technology, the Internet, and telecommunications—will vastly hinder
innovation by limiting the horizons and ambitions of technology firms.
