China: Will the economy absorb shocks from US trade dispute?

China: Will the economy absorb shocks from US trade dispute?

The US-China trade war recently escalated with Donald Trump’s decision to increase tariffs on $200 billion of Chinese imports. As trade talks fail to overcome political barriers between both countries, China is feeling immediate economic pressure.

New Tariffs, New Challenges

The trade agenda is not looking easy for Chinese leaders at Zhongnanhai. On Sunday, May 5th, President Trump threatened to raise tariffs on $200 billion of Chinese goods. Trump tweeted that “the Trade Deal with China continues, but too slowly, as they attempt to renegotiate.” The new tax came into effect on May 10th. He also announced that he’s preparing a new round of 25% tariffs for another $325bn of Chinese goods.

Tariffs were scheduled to rise from 10% to 25% at the beginning of the year, but US administration delayed it ahead of the last round of trade negotiations. Listed products include fish, handbags, clothing, and footwear. Other export sectors such as electronics, circuit boards, computer parts, furniture, and automotive parts will be most affected by the additional tariffs. On May 8th, China’s Ministry of Commerce announced that it will take the necessary countermeasures against them.

May 10th also marked the end of the 11th round of China-US trade consultations in Washington. Talks were held between a Chinese delegation led by Vice-Premier Liu He, US Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin. Prior to the dialogue, Liu He declared that “raising tariffs is harmful to China, to the US, and to the whole world”, and expressed his will of engaging in “rational and candid exchanges” to advance consultations. Despite a sense optimism regarding recent progress made in the negotiations, the announced tariffs took place as planned.

The Chinese Reaction

The US-China trade dispute has taken its toll on the Chinese financial market. In 2018, after the US imposed its tariffs, the Shanghai Composite Index fell by almost 25% and the Hong Kong Hang Seng declined more than 13%. So far in 2019, the indexes have recovered by 15% and 12% respectively. However, stocks suffered again after Trump threatened with new duties. On May 6th, China’s CSI 300, which lists top stocks traded in Shanghai and Shenzhen, plunged by almost 6%. This registered its worst performance in three years.

However, China’s economy has been weathering the storm. In the first quarter of the year, GDP grew by 6.4%, beating analysts forecast of 6.3% growth. This figure reflects the effect of Beijing’s policy stimulus to offset trade risks. The stimulus package included loosening credit requirements, lifting restrictions on real estate investment, a more flexible monetary policy, and a proposal to incentivize spending for auto and consumer goods.  Exports sectors also improved in March, after a rough start of the year. They grew by 14.2%, diverging from a 20.8% drop during January and February. Imports, on the other side, dwindled by 14.2%, after a 20.8% decline in January and February.

Despite Beijing’s efforts, the stimulus package has proved to have only a limited impact. In the context of global trade deceleration, a significant upsurge in Chinese exports remains highly unlikely, let alone under a scenario with additional US tariffs.

What to expect next

The International Monetary Fund spokesman Gerry Rice, recently warned that trade tensions pose a “threat for the global economy” and renewed IMF call for a “speedy resolution.” However, the recent shift in the US-China trade negotiations seems to discharge any viable option for the resolution of the trade disputes in the near term. This leaves the trade dispute as the main challenge for China’s economy.

Barclays Bank estimated that the additional tariffs could reduce China’s GDP by 0.3 to 0.5% over the next year. This would situate China’s GDP growth at 6 to 6.2%, a figure within the government’s target.  But if the US administration imposes tariffs on another $325 billion of Chinese goods, as Trump threatened, the reduction in the growth rate could be more severe, reaching a 1% or higher drop, and affecting jobs and consumption. Other analysts suggested that due to the impact of previous tariffs and the weak global trade environment,  the latest duties won’t have a significant effect on the long-term growth trend.

On May 13th, China’s Finance Ministry announced a new round of retaliatory tariffs. Since the country already taxed most US-imported goods, Beijing increased duties from 10% to 20 or 25% of $60bn goods imported from the US. This could expand the burden of the dispute in China, intensifying the effects over consumers due to higher prices.

A sustained trade war scenario is also highly likely to affect real fixed investment, as diminishing exports and equity prices will force domestic and international investors to take a more vigilant approach in their spending. Moreover, the continuous shifts in the negotiations and the intensification of the protectionist discourse are adding unpredictability to the trade situation, which can translate into market volatility.

With unresolved politics, challenges persist

US concerns over China’s policies and practices on technology transfer, intellectual property, access to financial services, currency manipulation and state-sponsor enterprises remain at the core of the conflict. According to US sources, China deleted its commitments to change laws targeting these core complaints in its draft trade deal sent to Washington on May 3, right before Trump announced new tariffs. On the other hand, Chinese president Xi Jinping seems unwilling to make big concessions to solve those concerns, since that could hurt his political position and China’s strategic bid for technology advancement. Beijing may be ready to bide its time and bet on Trump losing the presidency in the 2020 election to reach a more favourable situation.  However, that is not a certain outcome, and inaction now could aggravate problems in the future.

Data shows that the Chinese economy is not collapsing as a result of trade tensions, but that some additional impacts are on the horizon. As US and Chinese leaders escalate the tit-for-tat, the negative economic implications will only be compounded.  


Categories: China, Economics

About Author

Borja Fernandez

Borja Fernandez is an analyst with focus in Asia-Pacific geopolitics and economics. He holds an MA in International Relations from Institut Barcelona d’Estudis Internacionals. He has studying experience and a strong interest in China and he is fluent in Mandarin. He worked on economic affairs and climate finance policy at the United Nations Economic and Social Commission for Asia-Pacific, in Thailand.