China analysts report alarm at high levels in Beijing about whether the government has miscalculated – provoking the United States on two fronts at once, in military assertiveness in the South China Sea, and in a rising trade surplus. There is a quiet note of alarm about the effect that a trade war might have on China’s economy and growth, and therefore, on its stability.
The latest measures are a targeted assault on Chinese manufacturing. On 6 July, the Trump administration brought in tariffs of 25% on $34bn of Chinese goods. It then announced that it might impose tariffs of 10% on an extra $200bn of Chinese products – the president then raising that threatened tariff to 25%. The choice of sectors of this second tranche will hurt: textiles, electronics, machinery, furniture. These categories, analysts reckon, are two thirds of China’s exports and in turn 18% of GDP. Manufacturing now employs more people than any other part of the economy (more even than farming or construction).
This clash with the US has come at a bad time for Beijing. The government has had some success in managing the slowdown of China’s growth over recent years (and growth is still above the 6.5% per annum target). It injected credit when growth seemed to falter too much, but these efforts took an increasingly risky form. State lending to property construction continued and banks were urged to lend cheaply to small and medium sized companies. In 2016 China’s banks extended a record 12.65trn yuan ($1.88trn).
Only since the middle of last year did Beijing start trying to do something about credit growth, recognising that it was the economy’s weak point. Monetary and fiscal policy has been kept tight, and tighter regulations have encouraged deleveraging. But the tariffs create a new predicament; there is a case for monetary policy at least to be loose to keep growth going. Yet too loose, and its pledge to do something about the debt will be suspect.
There are several ways in which the tariffs can hit growth. They can hit exports, although a decline in the yuan would mitigate the effect, maintaining the competitiveness of Chinese goods. They could also hit investment. They might also encourage firms to move to lower wage neighbouring countries such as Vietnam and Thailand. Wages have grown in China at more than 10% a year; it is many years since it has been truly a low wage country. Yet unemployment – or pressure on wages – will add to the government’s difficulties.
Official data in July appeared to show the first impact of the tariffs against a wider picture of a slowing economy – a slowdown in investment in manufacturing and in household consumption. The summer has also brought a flurry of new measures from Beijing to try to prop up growth.
Although China has threatened to retaliate with equivalent tariffs, it imports comparatively little from the US. To the relief of US investors in China, official statements have said “their legitimate rights in China will be protected”. Frightening off foreign investment is one of the concerns of the leadership.
It is conceivable, too, that the trade row could prompt China to rein back on the One Belt One Road initiative, the $1trn investment project linking nearly 70 countries. The International Monetary Fund has warned Beijing that some of the countries may struggle to repay loans. At first, that is their problem – but then it becomes China’s. It is clear, in the tally of projects that the leadership is conducting, that the sprawling, financially opaque nature of the enterprise is a concern.
A trade spat – if not yet a war – that started quickly could have many repercussions.
Bronwen Maddox is director of the Institute for Government and a commentator and broadcaster