China’s economic policymaking has its own weaknesses, of course; some are mirror images of America’s. Its economy is threatened by deflation, not inflation. The country’s consumer prices declined by 0.1% in February, compared with a year earlier. And its policymakers are, if anything, too rigid in their goals and too slow to change course. Only in September last year did they turn decisively to the goal of boosting consumption to help the economy weather a long-running property slump and the forthcoming trade war.
That war has arrived with a speed and ferocity China did not anticipate. According to Goldman, a 50% hike in American tariffs (roughly the scenario China faced before it retaliated) would have cut the country’s GDP by about 1.5%. A hike of 125% will reduce it by 2.2% this year. The first 50 points, in other words, hurt more than the second or third. Exorbitant tariffs kill trade and you cannot kill the same trade twice.
These calculations cannot, however, take full account of the damage to confidence and financial-risk appetite. China’s stockmarket plummeted on April 7th, after the government chose to retaliate against Mr Trump. The country’s “national team” of state-directed banks and investment funds was obliged to step in to stabilise prices. China’s leaders have also announced that they are ready to do more to stimulate the economy if required, by cutting interest rates and bank-reserve requirements, as well as by selling more government bonds.
They will have to issue a lot of them to offset the tariff shock. Barclays, yet another bank, calculates that China would need up to 7.5trn yuan (over $1trn, or 5% of this year’s GDP) of extra stimulus on top of the easing of 2.4trn yuan it announced in March. Even that would only get growth to about 4%. To hit the government’s target of “around” 5%, the 7.5trn yuan would have to be closer to 12trn (or 9% of GDP).
Offshore bonanza
Another survival strategy for Chinese exporters is to recede upstream, out of the direct reach of American tariffs. They can sell parts and components to trading partners in neighbouring countries, where they can be incorporated into finished products for export to America. On the face of it, the incentive to pursue this strategy will be overwhelmingly strong if China remains stuck with American tariffs of over 100% while countries including Thailand and Vietnam face levies of only 10%.
One problem is that this strategy is no secret to the trade warriors in the White House. Peter Navarro, Mr Trump’s trade adviser, recently accused Vietnam of acting as a “colony” for Chinese manufacturers. “They slap a made-in-Vietnam label” on a Chinese good “and send it here to evade the tariffs”, he complained to Fox News. Vietnam could jeopardise its own access to the American market if it does not distance itself from China.
Chinese manufacturers may have doubts of their own. Even if their Asian neighbours can now seal a “bespoke” deal with Mr Trump, it could easily come unstuck in the months and years ahead. The United States-Mexico-Canada (USMCA) trade agreement has not held fast, even though Mr Trump himself signed it. What if a country’s trade surpluses with America fail to narrow in a year or two, due to larger macroeconomic forces outside the country’s direct control? Could the reciprocal tariffs return? The post-war trading rules that America helped enshrine once offered convincing answers to these doubts. They gave exporters the certainty they required to serve the world’s biggest market. That certainty has now gone for good.
No bell sounded in the world’s busiest ports when America’s tariffs came into effect. Cargo kept moving. But make no mistake, the death knell of the post-war trading order has been rung. ■
That war has arrived with a speed and ferocity China did not anticipate. According to Goldman, a 50% hike in American tariffs (roughly the scenario China faced before it retaliated) would have cut the country’s GDP by about 1.5%. A hike of 125% will reduce it by 2.2% this year. The first 50 points, in other words, hurt more than the second or third. Exorbitant tariffs kill trade and you cannot kill the same trade twice.
These calculations cannot, however, take full account of the damage to confidence and financial-risk appetite. China’s stockmarket plummeted on April 7th, after the government chose to retaliate against Mr Trump. The country’s “national team” of state-directed banks and investment funds was obliged to step in to stabilise prices. China’s leaders have also announced that they are ready to do more to stimulate the economy if required, by cutting interest rates and bank-reserve requirements, as well as by selling more government bonds.
They will have to issue a lot of them to offset the tariff shock. Barclays, yet another bank, calculates that China would need up to 7.5trn yuan (over $1trn, or 5% of this year’s GDP) of extra stimulus on top of the easing of 2.4trn yuan it announced in March. Even that would only get growth to about 4%. To hit the government’s target of “around” 5%, the 7.5trn yuan would have to be closer to 12trn (or 9% of GDP).
Offshore bonanza
Another survival strategy for Chinese exporters is to recede upstream, out of the direct reach of American tariffs. They can sell parts and components to trading partners in neighbouring countries, where they can be incorporated into finished products for export to America. On the face of it, the incentive to pursue this strategy will be overwhelmingly strong if China remains stuck with American tariffs of over 100% while countries including Thailand and Vietnam face levies of only 10%.
One problem is that this strategy is no secret to the trade warriors in the White House. Peter Navarro, Mr Trump’s trade adviser, recently accused Vietnam of acting as a “colony” for Chinese manufacturers. “They slap a made-in-Vietnam label” on a Chinese good “and send it here to evade the tariffs”, he complained to Fox News. Vietnam could jeopardise its own access to the American market if it does not distance itself from China.
Chinese manufacturers may have doubts of their own. Even if their Asian neighbours can now seal a “bespoke” deal with Mr Trump, it could easily come unstuck in the months and years ahead. The United States-Mexico-Canada (USMCA) trade agreement has not held fast, even though Mr Trump himself signed it. What if a country’s trade surpluses with America fail to narrow in a year or two, due to larger macroeconomic forces outside the country’s direct control? Could the reciprocal tariffs return? The post-war trading rules that America helped enshrine once offered convincing answers to these doubts. They gave exporters the certainty they required to serve the world’s biggest market. That certainty has now gone for good.
No bell sounded in the world’s busiest ports when America’s tariffs came into effect. Cargo kept moving. But make no mistake, the death knell of the post-war trading order has been rung. ■
