What Trump’s tale about the US trade war’s role in China’s economic decline got wrong

News that China’s gross domestic product growth had slowed to 6.2 per cent was celebrated last week by US President Donald Trump and his trade team: “China’s 2nd Quarter growth is the slowest it has been in more than 27 years. The United States Tariffs are having a major effect on companies wanting to leave China for non-tariffed countries. Thousands of companies are leaving,” Trump tweeted. Here, at last, was clear proof that his trade war was working.

 Well, for Trump’s base, maybe this storyline might strike a chord: the trade war is, after all, primarily a no-lose political ploy to improve chances of winning the 2020 presidential election. But, in reality, the conflict is harming everyone, from exporters worldwide to consumers, particularly in the US. And the longer it continues, the more harm it will do.

Singapore last week reported its economy shrank by 3.4 per cent in the second quarter, with a leading Singapore-based economist complaining of “a deepening manufacturing downturn for the rest of Asia.” South Korea’s exports fell sharply in June while the International Monetary Fund warned that the trade war is set to knock 0.5 per cent off global growth, or US$455 billion.

The slowing growth of China’s economy deserves particular attention, but not for the reasons Trump is selling to his voters. US tariff measures have undoubtedly had some impact, but as James Kynge at the Financial Times accurately noted last week: “The reality is that China’s dynamism these days comes mostly from within, from investment and consumer spending. Trade has long since ceased to be more than a bit player in China’s growth story.” As an investment strategist noted in the column, “Net exports accounted for less than one per cent of China’s GDP.”

Much more important than trade are China’s debt levels, which, according to the Institute of International Finance, have surged from 150 per cent of GDP in 2008 to over 300 per cent (over US$40 trillion) today, largely because of massive stimulus binges launched since the 2008 financial crisis. As Kynge notes, it is of concern that “much of China’s golden decade was borrowed rather than bought”.