The trade talks between China and the United States are taking a bumpy ride.
The US will implement a 25 percent tariff on US$34 billion of Chinese imports on Friday, and then impose tariffs on another US$16 billion of Chinese goods later on. China has promised to respond with tit-for-tat action.
I have two main worries.
First, the trade war could escalate into a worldwide one. If US levies tariff on US$50 billion worth of Chinese goods, it would only represent 0.2 percent of China’s GDP, and so the negative impact would still be limited. However, if Washington ups the game to over US$400 billion, it could cost over 1 percent of the nation’s GDP.
China can expand domestic consumption and offset the loss through trade with other nations.
Unfortunately, Canada and the European Union are starting to worry that China’s excessive steel production may find its way into their markets following the tariff implementation.
Both Canada and the EU have said they will establish new laws to prevent Chinese exporters from dumping steel products on their markets.
Hopefully, the trade war won’t lead to the chaos triggered by the US Smoot-Hawley Tariff Act in 1930. That protectionist measure had led to a global trade war and subsequently to economic recession. It is believed to be one of the triggers of the Second World War.
We are happy to see Beijing is trying to prevent that. It has announced tariff reductions and relaxation of investment restrictions in over 20 industries, including finance, automobiles, agriculture, chemicals and mining.
If the China-led Regional Comprehensive Economic Partnership (RCEP) can succeed, China could continue to support free trade together with the EU.
I personally think Beijing should review whether its long-term industrial policy complies with fair competition rules in global trade.
Another concern is that the Chinese negotiating team is under great pressure from nationalistic sentiment at home.
Some Chinese citizens even compare any compromise in the negotiations to the humiliating Boxer Protocol. The authorities should be wary as such grievances could destabilize society.
Over the past two years I’ve been optimistic about the economy and the markets, partly because I’m bullish about the reform measures, such as deleveraging, relaxation of the one-child policy, tax reform and market liberalization.
But there are signs of policy backpedaling, including the lowering of the reserve requirement ratio for banks and the sudden 3 percent depreciation of the renminbi.
Hopefully, these recent changes are just short-term adjustments and China will stick to its reform agenda, rather than going back to the old practice of relying excessively on investments and credit expansion to drive economic growth.
This article appeared in the Hong Kong Economic Journal on July 3
Translation by Julie Zhu
[Chinese version 中文版]
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