How Has the Trade War Affected China?
In the last two weeks the stakes in the ongoing trade conflict between the United States and China have increased significantly. After negotiations stalled in July, President Trump expanded his tariff targets to cover nearly all imports from China. But the weapons in this conflict have become increasingly more sophisticated. Beijing retaliated by suspending purchases of U.S. agricultural products and by lowering the value of its currency to make Chinese goods less expensive abroad. In response, the U.S. Treasury named China a currency manipulator and vowed to take actions to eliminate the alleged unfair competitive advantage. In addition, President Trump announced that the United States is not going to do any business with China’s tech giant Huawei.
While these escalations have recently uneased investors and rattled the markets, they have yet to make an obvious impact on the U.S. economy, albeit U.S. farmers have begun to experience the negative effects of lost sales to China. But how have these actions resonated in China? There are some indicators that the trade war has had an impact on the Chinese economy, as well as public perception in that country.
At the moment, the U.S. can claim a short term victory, although China appears to be playing the long game. Official reports indicate that Chinese economic growth has decelerated to its slowest pace since 1992, as businesses have held back on investment in light of the ongoing trade tensions with the United States. Also, Chinese exports to the U.S. declined by $5.6 billion in June, versus a $1.8 billion decrease in U.S. exports to China.
The Trump administration has claimed that its trade policy seeks to remedy problems which have been neglected for too long, and to defend America’s economic interests against perceived abuses by its trade partners. The administration has introduced tariffs as a means to address alleged intellectual property violations by China and a growing trade deficit. Its trade policy takes into account that some pain will need to be absorbed by the United States. However, it is not evident that the U.S. consumer has suffered yet. U.S. importers have to pay the tariffs, and so far many have sough ways to absorb them in whole or in part to minimize any price increases for the consumer. They have also begun to shift sourcing to third countries, including bringing some production to the United States.
Concurrently, Beijing has implemented a robust domestic stimulus by encouraging banks to relax controls on borrowing and by cutting 2 trillion yuan ($291 billion) in taxes. Furthermore, investment in infrastructure has increased in the first half of the year and Chinese factory output rose 6.3% in June from a year earlier, compared with 5.3% in May. Also, by letting the value of the yuan fall and making Chinese goods cheaper, China has in effect offset some of the impact of the U.S. tariffs – essentially giving the U.S. consumer a tax cut.
The efforts by the Chinese government to lower domestic taxes and support an easier fiscal policy appear to have been, at least temporarily, beneficial to economic growth. If these actions are to be expanded, they may continue to serve as a further stimulus in the second half of this year in areas such as consumption and investment. Although Chinese shipments to the United States have declined, they comprise only about a fifth of its overall exports. By allowing the yuan to fall, China can boost its sales to other countries to offset declines to the United States.
The trade conflict also does not appear to have had a negative impact on the mindset of the Chinese population at large. Skilled workers and professionals have expressed an open mind to the ongoing trade negotiations, some even welcoming them with a sentiment that “Trump is good for Chinese people” because he has opened up the dialogue between the two countries on trade which in turn has fostered certain welcome reforms in China, as well as tax cuts. Indeed, if Beijing had already planned to institute such measures, then U.S. policy may have provided ample cover for them.
The trade war has also led China to reevaluate existing global alliances, such as those with Japan and Russia. Mending fences with Russia, for instance, is key to the continuation of China’s ambitious “Belt and Road Initiative” of investment and infrastructure projects to connect Asia with Africa and Europe via land and maritime networks.
With further entrenchment by both sides, and a trade deal increasingly unlikely before next year’s U.S. presidential elections, China appears to be bracing itself for a protracted conflict and may have reason to believe it can “win” if President Trump faces increased political pressures entering the election. As the President recently announced, China may be counting on a Democrat to win the White House to strike a new trade deal. On the other hand, a continuing conflict between two of the world’s greatest economies which has evolved from measures to address intellectual property protection and trade imbalances to currency manipulation, may in the long run lead to recession and hurt growth globally.
Mark Ludwikowski is the leader of the International Trade practice of Clark Hill, PLC and is resident in the firm’s Washington D.C. office. He can be reached at 202-640-6680 and mludwikowski@ClarkHill.com
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