Caixin
Jul 06, 2018 09:14 PM
OPINION

Opinion: U.S. Tariffs Against China to Have Little Short-Term Impact

* Trade war will be difficult for U.S. to sustain as many tariff targets are produced by joint ventures in China

* U.S. actions have made China wake up to the reality of its current position within the world economy

(Beijing) — New U.S. tariffs on $34 billion worth of Chinese imports took effect Friday as part of the ongoing trade conflict between the two countries, and the U.S. could levy tariffs on an additional $16 billion worth of Chinese goods in the near future. But while the numbers appear staggering, U.S. action will in fact have little short-term effect on China’s economy.

According to estimates by the Chinese Academy of Social Sciences, U.S. tariffs so far are expected to reduce the growth rate of China’s exports by only 0.75 percentage points, and their negative impact on China’s gross domestic product growth is expected by analysts to be between 0.05 and 0.25 percentage points. The impact on prices in China will also be minimal.

This is because China’s economic growth is less dependent on international trade than it is on domestic demand. In the first quarter of this year, actual final consumption within China contributed 5.3 percentage points to the country’s gross domestic product growth — or 77.8% of growth — compared with exports, which actually dragged down growth by 0.6 percentage points.

At any rate, the trade war will be difficult for the U.S. to sustain. A trade war does not serve the interests of any country, including both China and the U.S. As the Chinese Ministry of Commerce spokesperson said on Thursday, over $20 billion worth of China-made products being targeted by the U.S. tariffs are actually produced by foreign companies’ joint ventures in China, and the U.S.’ actions will hurt some U.S.-funded enterprises. Simply put, by opening fire at the rest of the world, the U.S. is also shooting itself in the foot.

In fact, while China’s trade surplus with the U.S. is relatively large, it has allowed American consumers access to cheap and relatively high-quality goods. In essence, both Chinese and Americans have benefited from the two countries operating based on their comparative advantages. The U.S. has maintained a services trade surplus with China for a long time, which has not only increased the income of the United States, but has also promoted employment. If the scope of increased tariffs is further expanded, it will also adversely affect the United States. Imports currently account for more than 70% of consumer goods in the U.S., and a large portion of Chinese goods that could soon face increased tariffs are daily necessities consumed by U.S. households. This means that escalating trade friction could push up prices in the U.S.

The Chinese economy has significant resilience. As China has strengthened its financial supervision and clamped down on risk, its financial sector has strengthened its support of the real economy, reinforcing in turn the domestic growth drivers of the overall economy. The Chinese economy has become a market with complete industrial systems and huge consumption potential. In the first half of the year, there was a net 131.3 billion yuan ($19.78 billion) inflow of overseas funds into the Chinese stock market; overseas institutional investors bought 308.9 billion yuan in Chinese government bonds; and the yuan’s rate against the U.S. dollar has stabilized.

Amid international trade tension, China should aim to maintain its strategic strength and focus on domestic economic activity. Some people believe that the real intention of the U.S. is to curb China’s technological progress, and that the two countries are playing a long-term game. Some also believe that the U.S. is attempting to contain the European Union by placing pressure on China.

Whatever the case, the actions of the U.S. have made China wake up to the reality of its current position within the world economy, as well as heightened its awareness of its weaknesses and direction of growth. China must recognize the areas where it is lagging behind, persist in reform and opening-up, promote structural adjustment, and increase its innovation capabilities. It is important for China to react rationally to trade tension with the U.S., maintain a stable and neutral monetary policy, prevent and resolve risks, and establish a long-term mechanism for regulating its property market in order to create more systemic benefits for China’s economic development.

Sheng Songcheng is the former head of statistics at the People’s Bank of China.

Translated by Teng Jing Xuan (jingxuanteng@caixin.com)

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