Experts on US-China relations have advised that the 14 month-long trade war has had “little direct impact on China's economy” and warned that “it would take a truly massive economic shock to threaten” Chinese President Xi Jinping’s power. Instead, experts told a congressional hearing, China’s underlying structural challenges – such as high debt levels – pose greater problems to Beijing’s long-term economic goals. However, it was also suggested that the trade war could cause damage to the Chinese economy as it continues and escalates . Policy analysts gave written and spoken testimony to the US-China Economic and Security Review Commission annual review just hours before top trade negotiators confirmed a face-to-face meeting in early-October in a step resolve their increasingly bitter trade conflict. Among them was Victor Shih, associate professor of global policy and strategy at University of California San Diego, who said that the trade war may succeed in creating divisions among policymakers in Beijing as to how to deal with China’s economic slowdown. Officials have been torn over whether to pursue more stimulus-led policies to buoy the economy, or to continue with market-based reforms, including removing risky debt. Beijing has embarked on some stimulus , but not the full-blown measures seen during the global financial crisis of 2008. As economic losses accumulate under the trade war, Shih expects divergent camps in the ruling Chinese Communist Party to emerge and pressure Xi to ramp up economic stimulus. Beijing has already announced a series of monetary easing steps and increased fiscal spending in a step to push for new growth under the tense trading environment. “It would take a truly massive economic shock to threaten [Xi’s] power,” Shih said, adding that high domestic debt and trade frictions with the US are leading to increased state intervention in the Chinese economy. As the trade war drags on, negative effects through trade, economic sentiment, investment, and technological channels are likely to weigh on China’s medium-term growth prospects, according to Andrew Polk, co-founder of think tank Trivium China. The tariff battle has already created distance between the world’s two biggest economies. US Commerce Department trade data for July released on Wednesday showed that US exports to China fell by 18.2 per cent in the first seven months of 2019, while imports from China fell 12.3 per cent. The data came just days after both sides imposed further tit-for-tat tariffs , with further US tariffs on Chinese goods planned to take effect on October 1. It would take a truly massive economic shock to threaten [Xi’s] power Victor Shih Polk said that due to tariffs, C hinese firms face lower pricing power, but added that losses have been offset by the “ weaponisation of the yuan ”, referring to Beijing’s decision to allow the yuan to devalue. He added that trade tensions may have been significant for specific companies, and may have dented Chinese exports over the last year, but stressed that China’s cyclical economic downturn is driven “almost entirely” by domestic factors. These comments are contrary to US President Donald Trump’s view of the trade war, who recently said: “I am the chosen one, so I am taking on China. I’m taking on China on trade – and you know what? We’re winning.” China’s industrial engine has been slowing, with analysts attributing part of the blame to the trade war and part to a slowdown that predates trade tensions. China’s manufacturing purchasing managers’ index (PMI), a gauge of sentiment among factory operators, was at 49.5 in August according to the National Bureau of Statistics, indicating a contraction in production. At the same time, American manufacturing PMI contracted for the first time in three years in August to 49.1, according to data from the Institute of Supply Management. The continued downward trend is “evidence to the souring sentiment” among China's manufacturing industry thanks to trade war tensions, Polk said. Bilateral tariffs have forced Chinese lawmakers to focus on “putting out fires rather than structural economic reform”, said Elizabeth Economy from the Council on Foreign Relations, also speaking at the hearings. US policymakers, meanwhile, were advised to focus on improving America’s economic robustness, rather than trying to influence Beijing’s behaviour by escalating the trade war. Investing in America’s competitiveness should encompass investment in long-term infrastructure projects, education and science and technological research to compete with Chinese counterparts, the experts suggested. US policymakers should also to increase pressure on Chinese to further open its market, especially to foreign companies in the financial sector.
