Caixin
Oct 10, 2019 05:57 PM
OPINION

Opinion: U.S.-China Trade Conflict Is Overrated

Photo: IC Photo
Photo: IC Photo

Large countries are less vulnerable to global economic shifts. This is obvious, but has been lost in the hype over the U.S.-China trade conflict. The conflict is not yet important to China, as the world’s second-largest economy. It’s even less important to the U.S., as the largest. Moreover, both countries are making domestic economic choices that are far more damaging.

This may seem odd, with hundreds of billions of dollars involved in trade. On China’s side, the most recent nine-month figure for exports to the U.S. is $353 billion. The previous nine months saw $401 billion. That decline will probably continue, but even a drop of $200 billion in annual exports to the U.S. would not matter that much to China.

Credit Suisse estimated Chinese wealth at nearly $52 trillion in the middle of 2018. Official GDP was over $13 trillion. Exports are overseas sales; domestic retail sales in 2018 were $5.6 trillion, meaning exports to the U.S. were the equivalent of just 3.5%.

It is of course true that a sharp drop in exports harms growth in wealth and GDP, but it is a temporary effect. Once exports to the U.S. reach their new, low level, the growth effect is ended and all that is left is a very small impact on China’s overall economic size.

Compare that to the impact of domestic policies, some highly questionable. China’s financial system is distorted. A quantitative glimpse is provided by broad money, or M2, reaching 183 trillion yuan in 2018, more than the U.S. and Japan combined. Yet growth in money actively used — narrow money, or M1 — was 1.5%. Plentiful financing is failing to improve the economy.

This failure has been implicitly acknowledged in the words and actions of monetary authorities. A more controversial issue is the enormous state sector. The Ministry of Finance reports 2018 revenue at 58.8 trillion yuan, profits at 3.4 trillion yuan. Over 80 Chinese state-owned enterprises (SOEs) are in the latest Fortune 500.

This seems impressive but it is costly. SOEs thrive because they are sheltered from competition; for example, the three Chinese entries in the top 10 of the Fortune 500 have an administrative monopoly over half the country. They are not forced to innovate because they can never fail. The huge state sector thus unavoidably limits innovation.

A long-term challenge highlights the unimportance of the trade conflict. Annual rural income for 2018 was reported below 15,000 yuan ($2,100). To reach high income status, according to the World Bank, annual rural income must increase over 400%. What will determine success or failure is rights of rural people over land, rights present in all rich countries. Trade with the U.S. means almost nothing to that.

The chief harm from the trade conflict is not domestic but to the balance of payments. Foreign exchange reserves are barely holding. Loss of revenue from U.S. sales will draw on those reserves and pressure the yuan downward. This is a notable issue but it pales against China’s domestic choices.

The U.S. does not have to worry about foreign reserves because the dollar is the world’s currency. It is also economically bigger than China. Credit Suisse’s figure for mid-2018 U.S. wealth is $98 trillion. American GDP neared $21 trillion in 2018. Consumption expenditure was $14 trillion. There are many estimates of costs to the U.S. of the trade conflict with China; none reach even 1% of American consumption.

Any growth effect would be very small and, as with China, one-time only. The main impact of trade conflict may be on U.S. stocks. But the benchmark S&P 500 index has nearly tripled over the past decade — a 20% decline would be easy to absorb.

Moreover, high-flying American equities have contributed to a problem that far outweighs trade conflict: wealth inequality. In the recovery from the downturn that started in 2007, all wealth gains, amounting to tens of trillions of dollars, have gone to richest half of Americans. It is unlikely a settlement with China would even be noticeable in this context.

The other large American mistake is fiscal irresponsibility. The U.S. federal budget deficit will be 5% of GDP in 2019, or over $1 trillion. Officially, it is projected to fall in coming years but that is not convincing, since the reason it is high now is political weakness. China trade is barely relevant here, as well.

It is of course possible that the U.S.-China dispute could intensify, for example spreading to finance. Even then, however, improving Chinese financial intermediation or reducing American borrowing would far more important than bilateral economic conflict. In large economies, the home front is what matters.

Derek Scissors is a resident scholar at the Washington-based American Enterprise Institute (AEI), where he focuses on the Chinese and Indian economies and on U.S. economic relations with Asia.

Contact editor Lu Zhenhua (zhenhualu@caixin.com)

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