The Fall of the Chinese Economy - Seeker's Thoughts

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Thursday, 18 July 2019

The Fall of the Chinese Economy

China has seen the rise, and the reasons for the rise were ‘cheap labor’ and ‘high exports’. However, the tensions between the United States and China and the growing tendency of protectionism has impacted on China’s export-driven economy.


 In July 2019, the Chinese economy saw some troubles as Data released by the National Bureau of Statistics on 15th July 2019 revealed that the economy grew by 6.2 percent in second-quarter which is the slowest in 27 years. 

The reason for the slow Chinese Economy

The economic conditions are severe in China as well as abroad. The global economic growth has been slowing down and the external instabilities and uncertainties have been growing.
 There are various reasons associated with a slowdown in Chinese Economy like domestic slowdown and softening overseas demand and the most crucial point stands the ongoing trade war between the United States and China. 




As the Chinese economy remains heavily dependent on the export, the tussle between nations has jeopardized the business.
Secondly, some of the sectors of China like Construction (housing) has seen the downfall.
The third reason is the sentiments of investors, which shook due to the uncertainty of their return.


The United States and China’s Relationship

The United States and China did not have a smoother relationship in trade in recent years. The conflicts did not seem to end well and there were predictions from the International Monetary Fund that the world’s economic growth will reduce due to ‘protectionism’. At the end of June 2019, the G20 Summit was held in Osaka, Japan.  

During the summit, China did speak against the tendency of protectionism. There were some good developments as well as both countries the United States and China hinted to restart the negotiation on the basis of equality and mutual respect. However, that does not seem to end well either.

America imposed Aluminium and Steel tariffs in early March 2018 in order to protect its own industries. Some other tariffs imposed by the U.S were in the field of aerospace, information and communication technology, and machinery.

After all, tariffs imposed by the USA, China placed import duty on a wide range of US product. including scrap aluminum, wine, and apples.

The US again imposed tariffs on about 1,300 Chinese products.
 Later China came out with more tariffs this time taking aim at Boeing planes. America was entertaining the idea of another 100$ billion in tariffs.

 

The Pause: The G20 meeting in Buenos Aires, In November 2018


The U.S. and Chinese presidents, Donald Trump and Xi Jinping, agreed to a 90-day truce. The two countries will try to find an amicable solution to the various problems plaguing bilateral trade relations, such as disputes over intellectual property rights and Chinese state support for domestic industries, through talks over the next three months. 

Meanwhile, the U.S. will refrain from raising the tariff on Chinese goods worth $200 billion from the current rate of 10% to 25% on January 1, 2019, as planned.

 In return, according to the White House, China will purchase agricultural and other goods from the U.S. in order to reduce the trade imbalance between the two countries. 

If talks fail, however, increased tariff rates are scheduled to come into force immediately.
In the beginning of 2019 to the end of April 2019 remained peaceful months for both of the countries. Both sides were trying to negotiate a deal, and that kept everything at hold. 

In May 2019, U.S. president, out of nowhere tweeted that he would raise 10% tariff imposed on $200 billion worth of Chinese goods to 25 %.
That the Trump administration pressed ahead with the increase even as China’s Vice Premier Liu He was still in Washington for the second day of talks with U.S. trade officials only underscores the businessman-turned-president ‘take no prisoners’ approach to negotiations.

 China promptly promised retaliatory action but was yet to spell out the measures. With Mr. Trump tweeting that “the process has begun to place additional tariffs at 25% on the remaining” Chinese goods worth $325 billion, the U.S. administration unambiguously signaled it was not going to be the first to blink.

The latest revival in tensions between the world’s two largest economies elevates the risk of a global trade war to its highest level since the first signs emerged in 2018.


The Slowdown in China is not good for the world 

The U.S.- China often lock horns and cannot come to terms of peace in trade. Their conflict not only threatens them but the entire world will face the consequences of the trade war.

In April 2019, the International Monetary Fund reduced the projection for global growth in 2019 to 3.3%, from a 3.5% forecast made in January, citing slowing momentum in “70% of the world economy”. 

The fact is adding evidence that the trade war is not good for the world’s growth.
According to the World Economic Forum, a full-blown US-China tariff war could reduce global GDP growth by 0.7 percentage points (pp) to 2.8% in 2019. 

The impact would be greater on China’s growth (-0.9 pp), due to direct trade effects, and on Europe (-0.8 pp), due to indirect trade effects and financial links (see table). US GDP would decelerate by less (-0.4 pp), due to less direct trade effects and indirect financial links.

The increase in tariffs imposed on goods crossing international borders essentially represents a new tax on a global economy already facing a slowdown. 

In the multipolar, world there remains a struggle to stay strong and powerful and sometimes an economic crisis can lead to internal or external war and instabilities.

What is a trade war?

A situation in which countries try to damages each other's trade typically by the imposition of tariffs or quota restrictions. 

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Going through history- one of the most famous examples of US protectionism came during the great depression after world war 1. Domestic US businesses faced increased international competition, as well as declining prices due to overproduction.

When the stock market crashed in 1929, domestic businesses largely supported the protectionist measure and in 1930, President Hoover signed the Smoot Hawley tariff act.


Does America realize that it is a trade war with China?

The answer is NO, America believes that it is not in a trade war with China as it already has a trade deficit of $500 bn and is only taking these measures to protect American domestic industry, improve the trade deficit and intellectual property theft.

It is believed that the imposition of tariffs is bad economic policy and the ramifications of it can be far-reaching. 

The risks of the trade war between America and China is assumed to directly raise the costs of inputs for goods in America and dampen the interests of trade with the two countries. The European Union is looking for countermeasures for US products as they fear their jobs are threatened.

There is also a high possibility of American pulling out of the NAFTA (North America Free Trade Agreement) which could potentially have a deep global impact on trade.
The world trade chains are so interlocked, that this does not just affect North American and China but the entire business world as we know it. 

Mexican producers and consumers would feel considerable pain. Asian supply chains are also likely to be disrupted, very few players Asia or North America would remain unaffected.


Uncertainty 

Though the beginning is good, however, the uncertainty remains. It is suggested that both countries should come to one platform and negotiate. Imposing tariffs by both countries can create economic chaos worldwide.


It would impact every nation as world bank has warned that the effect of the increased use of tariffs to regulate international trade could be similar to the significant drop in global trade after the financial crisis.

The ongoing trade war remains a lose-lose situation for the warring parties. The only winner will be special interest groups and consumer in countries that do not engage in the tit - for- tat tariff war, but their winning will come at the cost of global growth. 

This is the right decision to pause the conflict, yet there is a factor of uncertainty. It is high time countries worldwide come together to promote the cause of free trade.



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