The First Casualty of Trade War Is Truth11th October 2018
By Dan Steinbock
As Trump tariffs continue to spread, an ideological war of words is redressing harsh protectionist realities. What is the state of Chinese growth amid the US tariffs? And what is the impact of the trade wars on global economic prospects?
Recently, US academic Yasheng Huang argued on Wall Street Journal that “Jack Ma is retiring. Is China’s economy losing steam?” By the same logic, Elon Musk’s forced resignation from Tesla would mean US slowdown.
Similarly, Bloomberg columnist Nisha Gopalan explains Ma’s retirement by claiming that the prosecution of corrupt business oligarchs in China signals economic weakness, despite corruption’s corrosive impact on private economy. In turn, Gordon F. Chang urges US tariffs against all Chinese imports as “necessary.” But these prophecies have a pathetic track record. In 2001, Chang published The Coming Collapse of China, even as Chinese economy was about to grow sixfold in a decade.
It is often said that the first casualty of war is truth. Trade war is no different. What is odd is not that times of peril offer opportunities to ideologists, or ideologies to opportunists. What’s odd is that, despite recurrent flawed predictions or prejudiced bias, partisan oracles continue to be given ample space in major global media.
Setting aside the hollow prophecies, where is Chinese economy today?
Chinese growth amid Trump’s trade wars
As the People’s Bank of China (PBOC) recently cut banks’ reserve requirements, Reuters headlined: “Trade war imperils [China’s] growth.” Yet, analysts saw the cut as an affirmation of Chinese government’s commitment to support the domestic economy. In the new, more challenging status quo, accommodative monetary policy is likely to continue, along with further fiscal easing.
In the short-term, China is responding and adjusting to US tariff wars. In 2018, growth forecast is 6.5% to 6.6%, thanks to strong first half of the year. Moderation in the second half will reflect US tariff wars and consequent slower demand growth.
For now, solid service sector growth, supported by monetary and fiscal support, has kept the economy on track. Inflation is moderating and current account surplus could narrow more than expected. Trump tariffs are designed to hurt export growth and thus the growth of manufacturing investment. Further, 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. A year ago, shadow banking still peaked at more than 15% year-on-year; now its growth has plunged. While substandard loans and actual bank losses have been relatively low, “special mention” loans – a category slightly above nonperforming loans – remains substantial, though they have been declining.
In the long-term, 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 offenses complicate and defer Chinese reforms, but the direction of these reforms prevails. There are no winners in a trade war. If the White House will up tariffs on all Chinese imports, the stakes will soar to $500 billion. That could penalize China by 1% of its GDP; but US GDP would suffer a 2% hit.
However, global economic prospects could suffer even more.
Undermining global prospects
The International Monetary Fund (IMF) has now cut its forecast on global economic growth to 3.7% percent for 2018 and 2019, citing rising trade protection. But that is an optimistic projection because it downplays the full impact of the Trump administration’s effective tariffs, retaliations impact, the inclusion of new potential tariff targets and subsequent collateral damage.
Following a sharp upswing in 2017, exports and imports in Asia have held up fairly well. But thanks to Trump’s new protectionism, world trade and investment are set to take severe hits. According to the World Trade Organization (WTO), merchandise trade volume growth was expected to increase 4.4% in 2018. But as tariffs escalate trade tensions, the outlook is likely to be penalized. In turn, world investment soared to $2 trillion before the 2008 global crisis. Last year, it fell to $1.5 trillion. As tariff wars spread, world investment is likely to languish even more.
Instead of confronting protectionism, Brussels and Tokyo still hope to gain exemptions to avoid Trump’s trade wrath. In the B20 Summit, the business voice of the G20, advanced economies have been pushing a policy proposal to address “state-related competitive distortions.” In advanced economies, the share of state-owned enterprises (SOEs) in national employment is about 5% to 15%. In the early days of Chinese reforms, the comparable figure in the mainland was over 75%; today barely 20%. However, advanced economies have had two centuries to reduce the role of SOEs in their economies; China barely two decades.
If confrontational approaches are favored by G20, then why not start by reviewing the role of US and EU agricultural subsidies that have caused irreparable harm to developing economies in Asia, Latin America and Asia for decades?
What G20 and the world economy needs today is not more friction, but a united front of advanced, emerging and developing economies for global trade. As long as that front remains absent, Trump’s trade hawks can continue their bilateral ‘rule-and-divide’ tactics against individual economies – instead of having to cope with the multilateral force of the global economy.
Over time, the alternative is the kind of global depression that was barely avoided in 2008.
About the Author:
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) and a visiting fellow at the Shanghai Institute for International Studies (China) and the EU Center (Singapore). For more, see http://www.differencegroup.net/
A version of the commentary was released by China Daily on October 10, 2018.