China’s Economic Perils in a Post-Trump World
The past 70 years of globalization have been the single greatest period of economic and cultural connectivity among nations in history. Since the 1970s, the accelerating international flow of goods, resources, people, ideas, and capital has given birth to countless trade networks and opportunities for development. By many measures, China has been globalization’s greatest beneficiary. An explosion in domestic factory manufacturing has helped China to become the world’s second largest economy. The International Monetary Fund (IMF) claims China to be the generator of one-third of global growth over the past 15 years, and projects the country’s 2016 GDP to be the world’s highest, at $20.85 trillion.
But China’s economic rise is naturally slowing. Difficulties arise from the country’s aging labor force, rising wages (which make it more difficult to compete with poorer Asian neighbors), a volatile stock market that nearly crashed in June of last year, and aggressive state intervention in the economy. The sometimes painful transition from an economy built on cheap exports and manufacturing to one focused on human capital and services will be apparent for years to come. Amid this shift, another potential threat to China’s economic rise has emerged: Donald Trump.
President-elect Trump has promised to raise significant tariffs (specialized taxes) on Chinese imports—to levels as high as 45 percent—if China refuses to alter practices such as subsidizing steel and other state-owned industries. Trump has also accused China of deflating its currency, and opposes the Trans-Pacific Partnership (TPP), a free-trade accord between America and 11 of its Asian allies. It seems the TPP is effectively defunct with a protectionist Trump administration on the horizon.
While the TPP’s collapse may be devastating for many Asian economies, this alone is unlikely to put a huge damper on the volume of U.S.-China trade. Trump’s proposed tariffs, however, could have a significant impact on a Chinese economy that is still heavily export-based. According to Daiwa Securities, just a 15% tariff on Chinese goods would create a 1% decrease in China’s growth rate. Millions of Chinese workers in low-wage industries would be laid off, flooding China’s job market and raising unemployment. Worse, the IMF reports that even a slight drop in Chinese exports would shave 0.25% off of global growth.
A recent article from the Wall Street Journal argues that hefty tariffs on China would also harm Japan and South Korea, two Asian U.S. allies who are increasingly dependent on the Chinese market. “For many countries around the world, China is now the biggest trading partner, so this kind of tit-for-tat trade protectionism with China will dampen the atmosphere for the international trading community,” stated Yorizumi Watanabe, a trade expert and professor at Japan’s Keio University.
Plenty of countries besides Japan are dependent on China as a major trading partner. During its tremendous period of middle-class growth from 2000-2015, China not only developed into a massive producer of exports, but also into a top consumer of non-U.S. imports (such as tech products from South Korea and commodities from Brazil). If U.S. tariffs lower Chinese exports and slow China’s economy, China will also purchase fewer goods from dozens of foreign countries, slowing their economies as well. Like the United States, China is a linchpin of the global economy. Trump’s threats to disrupt its trade flows would produce ripple effects that harm trade connectivity and prosperity elsewhere.
Trump’s tariff policy may foolishly and irreparably damage U.S.-China trade relations, hurting a range of foreign economies at best and igniting a trade war at worst. On November 14, a Chinese state-run newspaper even released a scathing editorial that promises a tit-for-tat response from the People’s Republic should Trump proceed with his tariff. Chinese threats include setbacks to the sale of notable American products, including Apple iPhones and computers that are hugely popular with Chinese middle-class consumers.
Another precedent suggests that a trade war remains possible: Shortly after Barack Obama’s election in 2008, the U.S. instituted a 35% import tariff on Chinese car tires. China countered with retaliatory tariffs on U.S. chicken and car exports. This sort of mutually harmful, tit-for-tat trade contest between the two powers may be possible again, but at a much larger scale.
As with a slew of other policy issues, it remains unknown whether Trump will actually attempt to enact his anti-China tariff. Countries around the world are hoping that Trump’s business experience and favoritism toward large American corporations will deter him from seriously considering naïve and protectionist measures. Trump simply cannot reverse globalization or fend off its effects with “America first” policies. But, in an era where globalization is already being questioned by many in the West, a hostile American tariff would represent a strike against China and the basic tenets of an interconnected economy.