In 2018, China experienced the slowest rate of economic growth in almost thirty years, with the New York Times reporting “a resurgence of trade tensions with the United States” as a key contributor. Foreign Affairs reports that companies in the manufacturing sector have begun downsizing, and imports have gone down. Along with “a rapidly ageing population, a falling birth rate, a tightening Federal Reserve, and a slowing global economy,” China’s economic troubles also partially stem from the recent Hong Kong protests discouraging foreign investment as the cost of doing business rises. These aren’t the only issues. Urbanization has slowed as living costs in cities have become prohibitive, and high wages mean foreign companies are no longer quite as incentivized as they have been in the past. The trade surplus China has relied on before is a thing of the past, especially as the trade war with the United States shows no indication of being resolved quickly.
As the country’s economy has matured, China’s decision makers have embraced the slower economic growth as the new normal. With GDP growth slowing from 14.2% in 2007 to 6.6% in 2018, the country has focused on decreasing its reliance on fixed investment and shifting the economy towards services and innovation. How does this slowdown affect the global economy and major players like the United States? China was the US’s third largest export partner in 2017, accounting for over 8% of the US’s exports that year, as well the US’s largest import partner, accounting for 21.6% of total imports in 2017. The trade balance deficit between the two is financed by capital flows from China, who also happens to be the US’s largest creditor, holding $1.18 trillion in US Treasury securities as of 2018. All this goes to show that the importance of the Chinese economy lies overwhelmingly in its influence on the world’s largest economy: The United States.
According to the IMF, the now 14-month US-China trade war is one of the main contributors to global economic growth slowing to “the weakest rate in a decade.” Last week, the United States added an additional 15% tax on Chinese goods, and pre-existing levies will be raised in October. According to The Guardian, “Economists pointed out that China’s economy was still growing four times as fast as that of the US and that the tariffs imposed on Chinese goods were hitting Americans. Trevor Greetham at Royal London Asset Management said: ‘Sorry to break it to you, but tariffs are paid by the importer – US taxpayers in this instance.’” Domestically, the Trump government promoted the increased tariffs as a way to support the US economy and bring jobs back to the once-vibrant Rust Belt, the past home of US manufacturing prowess. Unfortunately, most economists believe that the tariffs are mostly passed on in the form of higher prices, negatively affecting the very workers they’re meant to help.
China’s leaders, on the other hand, are focused on curbing excessive lending, saying this is the main reason the economy has slowed, not the tariffs. Whether or not they are correct, the raised tariffs damaged consumer confidence in China. In June 2019, exports fell 1.3% from the previous year, and imports fell a whopping 7.3% in the same time period. Because many European and Asian countries are facing their own economic troubles, demand for Chinese goods has decreased globally, but American purchases from China have been hurt particularly badly by the trade war. Industrial production and private sector investment in China have slowed, as has car manufacturing. China’s financial system is burdened with debt, and these global pressures have led to a general shift away from riskier investments and a centralization of funds as more and more citizens turn to large, stable public sector institutions with their money.
If the trade war continues to significantly impact the Chinese economy, “the world would lose its biggest single driver of economic growth in recent years.” Foreign companies would look to relocate their offices and supply chains – a process which would take time and impact their bottom line in the short- and long-term. The Chinese government is hoping to offset these potential crises by passing out subsidies to consumers and assisting small businesses by sharply reducing taxation and regulation for the SME segment. Quoctrung Bui and Karl Russell believe the latest round of tariffs will impact American households by costing them anywhere from $340 to $970 annually, with the cost of nondurables increasing more sharply than that of durables. This would hit poor families the hardest, as these are the things families must buy routinely, such as canned or preserved food. How the world’s two most dynamic economies find a way to address this issue remains to be seen. For now, they’re scrambling to limit their exposure to each other and create a level playing field while the politics plays itself out.