How China will with Trump’s trade war?
China navigated the challenges posed by Trump’s initial trade conflict. The subsequent iteration is likely to present greater challenges.
At this juncture, Xi Jinping would be well-advised to avoid yet another confrontation with Donald Trump regarding trade issues. China is facing a significant property crisis, while local governments are struggling with immense debt burdens amounting to trillions of dollars. The Chinese leadership under Xi has intensified its focus on manufacturing, urging domestic firms to increase production significantly. This surge in output is flooding international markets and providing crucial support to the domestic economy.
A new trade war could undermine a vital engine of growth. In a clear indication of his commitment to increasing tariffs in response to perceived inequities in trade, President-elect Trump has expressed to his associates his desire to appoint Robert Lighthizer, a former U.S. trade representative known for his critical stance on Chinese trade practices, as the trade czar of his administration, according to The Wall Street Journal.
A reduction in the $430 billion worth of goods that the U.S. imports from China annually could prompt Chinese firms to redirect their exports to alternative markets, a tactic that Beijing effectively employed following the imposition of tariffs on Chinese products by the Trump administration in 2018. However, various nations are expressing significant concern regarding a surge of inexpensive Chinese exports that are adversely affecting their domestic industries. The increasing imposition of tariffs and the proliferation of antidumping investigations across Europe, Asia, and Latin America indicate a clear message: China can no longer depend on foreign markets to absorb its expanding industrial production, let alone the additional goods excluded from the U.S. due to substantial new import duties.
Certain analysts contend that the policies of Trump, coupled with a deteriorating global trade environment, may compel Xi to reconsider his longstanding reluctance: adopting a significantly larger role for household consumption in driving China’s economic growth.
On the campaign trail, Trump committed to increasing tariffs on all imports from China to 60%. If implemented, this would signify a significant intensification of a trade conflict that originated in his initial term and has been ongoing since then. In 2018, Trump imposed tariffs of up to 25% on washing machines, solar panels, steel, and aluminum imported from China. China responded by imposing its own tariffs on U.S. imports, while under President Biden, tariffs on Chinese electric vehicles, clean-energy equipment, and semiconductors were increased.
China has navigated the initial stage of the conflict adeptly. The country has successfully shifted its export focus towards alternative markets, including Russia and adjacent nations in Southeast Asia. It has established a dominant global presence in lucrative emerging sectors, notably electric vehicles. Consequently, China’s participation in global manufacturing and its share of global goods exports have risen since 2018, despite a decrease in its share of U.S. imports.
Analysts suggest that the forthcoming stage of the trade conflict may prove significantly more challenging if it unfolds in accordance with the scenarios proposed by Trump during his campaign. According to Oxford Economics, a 60% tariff on imports from China could lead to a reduction in trade with the United States by up to 70%, potentially decreasing China’s share of U.S. imports from approximately 14% in 2023 to as low as 4%. UBS projects that the implementation of tariffs at a rate of 60% could lead to a decline in China’s economic growth by approximately 1.5 percentage points in the subsequent year.
“The repercussions for trade are expected to be significantly more pronounced than those observed during the initial trade conflict,” remarked Daniel Yi Xu, an economics professor at Duke University. A number of economists express skepticism regarding Trump’s ability to implement the complete 60% measure. A significant number of American corporations are resistant to elevated tariffs, and it is plausible that Trump may reconsider his stance, particularly if he can leverage the prospect of increased tariffs to obtain concessions from China. Nonetheless, Duke’s Xu and fellow economists contend that the likelihood of a substantial rise in tariffs is considerable. Policymakers in the United States, regardless of party affiliation, seem increasingly aligned in adopting a stringent stance towards China, potentially providing the Trump administration with greater latitude to fulfill its campaign commitments.
While China may manage to compensate for a portion of its diminished U.S. exports by redirecting shipments to alternative markets, it cannot anticipate that the global community will readily accept inexpensive Chinese products. Global trade barriers against Chinese imports are on the rise, as major economies such as India and Brazil explore measures to protect their domestic industries from an influx of inexpensive Chinese competition. “Should other nations retaliate with their own trade barriers, it significantly complicates the situation for China,” remarked Julian Evans-Pritchard, head of China economics at Capital Economics, a consulting firm.
Beijing possesses a variety of mechanisms at its disposal to mitigate the impact of increased tariffs. Policymakers might consider reducing interest rates, devaluing China’s currency to bolster international sales, and prolonging tax rebates and additional incentives for exporters. They might seek to compel the U.S. to reassess its stance through retaliatory measures, potentially by increasing tariffs on American goods or by restricting the flow of essential minerals required for high-tech sectors like semiconductor manufacturing.
China is proactively engaging with U.S. allies by offering visa exemptions, reducing import levies, and implementing various incentives aimed at fostering trade and enhancing diplomatic relations, according to reports from the Journal. A widespread trade conflict would pose significant challenges for an economy that has increasingly depended on exports and manufacturing for growth, particularly as other sectors show signs of weakness. Scarred by the property collapse and the residual effects of the pandemic, Chinese consumers are exercising considerable caution in their spending habits.
Municipal finances are facing significant pressure, while confidence in the private sector remains notably low. Chinese firms find themselves in a more precarious position to navigate the increasing tariffs compared to five years ago. Subdued domestic expenditure has led to a protracted decline in prices for manufactured goods over the past two years, severely compressing corporate profit margins and driving numerous companies into losses.
On Friday, Beijing announced a substantial $1.4 trillion initiative aimed at assisting local governments in alleviating their increasing off-balance sheet debts. Authorities have reduced borrowing costs and implemented measures to stimulate the stock market, aiming to reignite consumer and business confidence. However, numerous analysts contend that China requires more audacious measures to boost consumption in order to evade deflation and attain a more sustainable growth trajectory.
Xi has frequently indicated his resistance to U.S.-style consumption and the reforms necessary to facilitate it, including enhancements to China’s inadequate social safety net aimed at encouraging households to increase spending and reduce savings. Excessive assistance, he has argued, may result in a state of “welfarism.” His primary economic objective is to reshape China into a technological powerhouse capable of displacing the U.S. as the preeminent global economy, rather than fostering a consumer-driven society.
Over time, the trade conflict that a second Trump administration could instigate may compel Xi to increase domestic expenditure, as China exhausts alternative avenues for stimulating growth. The real estate sector, which once accounted for approximately 25% of China’s annual economic growth at its zenith, is unlikely to drive the economy with the same vigor in the future. Public investment in infrastructure no longer provides the substantial growth stimulus it once did, given that China is already well-equipped with high-speed railroads, roads, airports, and power plants.
Consumption remains the primary mechanism available to sustain economic vitality. At present, it constitutes approximately 40% of China’s economy, in contrast to nearly 70% in the United States. Should China enhance its efforts to stimulate consumption, particularly through increased investment in health and education aimed at lowering household savings, it might effectively absorb a greater portion of its production. This would alleviate the substantial trade surplus with the U.S. and contribute to a more equilibrated global economy.
