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US-China trade war: Opinion

Trade war headwinds should not push China into a tit-for-tat strategy instead of economic reform

David Brown says rather than responding to the trade war with the US with retaliatory measures, China should focus on domestic reflation and speeding up structural reform

PUBLISHED : Monday, 13 August, 2018, 3:00pm
UPDATED : Monday, 13 August, 2018, 10:30pm

There is a storm coming and it is likely to wreak havoc on economies exposed to the deepening trade war. No nation is too big or too small to dodge the damage if they stand in harm’s way. Global growth has already crossed the Rubicon, world trade is showing definite signs of slowing, and China and emerging markets are in the firing line. It is no use hoping the weather front will soon pass. China must go on the policy offensive and use its economic muscle to prevail. 

There is a lot to lose right now. Beijing must protect its 6 to 7 per cent growth target, critical at a time when China’s economy is losing momentum. The government can ill afford to be seen to be caving into the United States’ coercion on trade, losing international prestige in the process. US President Donald Trump has crowed about China’s stock market losing more than 25 per cent of its value in recent months due to his trade threats, not something that Beijing can easily ignore.

All the signs are that the world is slipping into slowdown thanks to growing trade frictions. Trump has bypassed the usual channels of diplomacy and negotiation, opting instead for the crude cudgel of trade tariffs with little consideration that global markets will suffer the consequences.

And suffer they will, as events in Turkey have shown in recent days after Trump’s imposition of tough trade sanctions. The Turkish lira has collapsed, local stock markets have crashed and European bourses are feeling the pinch. Washington’s moves are being read as an act of economic war.

Turkey is just a microcosm of what is happening in the broader picture. World financial markets are clearly beginning to take on board the seriousness of a deeper crisis evolving, although investors are showing few signs of outright panic just yet as headline figures are not showing too much of a dent. US gross domestic product growth, at 4.1 per cent, and China’s economy expanding at a 6.7 per cent rate can hardly be justified by the Jeremiahs as reasons for doom and gloom.

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But scrape beneath the headline numbers and the cracks are clear to see. World trade flows are showing strong hints that global demand is slowing, not just in the vulnerable emerging markets, but in the major economies too. The growth trend for emerging markets has dipped back into negative territory, an early warning that the International Monetary Fund’s forecast for 3.9 per cent world GDP growth for the next two years is a bridge too far.

Germany is a good bellwether for the health of global growth being a major supplier of capital goods exports and boasting the world’s largest trade surplus – twice as big as China’s. But Germany’s export powerhouse definitely looks fatigued, with annual growth in new manufacturing orders from abroad slowing very sharply in recent months, almost at a standstill compared with 13 per cent year-on-year growth at the end of 2017. The global headwinds are beginning to build.

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It is time for Beijing to start rallying its resources ahead of time rather than leaving things to chance. If America is resorting to unilateral action, then so must China. But Beijing also needs to take the moral high ground and lead by example rather than lower itself to Washington’s standards.

It is imperative Beijing keeps interest rates low, allows the economy to stay fully funded and keeps its fiscal pumps operating overtime

It can fight fire with fire, applying higher tariffs to US imports into China and exerting greater pressure on America through yuan currency devaluation and by dumping US Treasury bonds. In the long-run, these methods will also be self-defeating, worsening the drift into a global slowdown.

Beijing needs to raise its game through domestic reflation and speeding up much-needed structural reforms to promote faster internal growth. It is imperative Beijing keeps interest rates low, allows the economy to stay fully funded and keeps its fiscal pumps operating overtime. Government spending growth should be maintained well above 10 per cent per annum.

If Trump persists with US unilateralism and abandons the international stage, then Beijing should take advantage, fill the gap and increase its influence in a mutually inclusive, non-exploitative way. There is a clear opportunity for China to fulfil a bigger role as a major world leader.

Just because Trump has put the US on an economic war footing, China should resist following suit.

David Brown is chief executive of New View Economics