International trade has been a driving force in the growth of the global GDP and the US-China trade war has been denting the global growth prospects to a certain extent.
The US-China trade war has gained gargantuan attention over the past year due to a series of tariff increases announced by the US over China and retaliatory tariffs by China over US goods.
Though both the sides have suffered on account of higher tariffs and resultant business loss, the US President, true to his style of using his social media pal, ‘Twitter’ for giving a jolt to the Geo-political thinkers, has left no opportunity to emphasise that the loss is bigger for China.
For argument sake, China’s 2nd Quarter growth of 6.2%, which has been the slowest in more than 27 years seems to be vindicating his stand. The analysts have also predicted that the ongoing trade war with the US would cause a slump in domestic demand in China.
News research has also reported that over 50 global companies, including Apple, have announced or are considering plans to move production out of China.
This has already started with companies shifting to nearby locations in South-East Asia, especially Vietnam. India too stands to gain out of this.
It was in 2018, July that the U.S. government went for the tariff war and has imposed three rounds of new tariffs on Chinese imports, covering 27 trillion-yen ($250 billion) worth of goods. Though the next round worth $325 billion is not executed, the companies are in doubt.
The fact that relocation of companies like this would be impacting the employment, consumption and eventually the production and investment activity in the Chinese economy cannot be viewed in a vacuum.
The country is, therefore, modifying its strategy to attract foreign businesses. Whether it would succeed or not is to be watched. Nevertheless, can China’s meteoric rise, its continuing growth, its $3 trillion forex reserves be ignored? I do not think so.
The Growth of China has been an example to many countries and China as a formidable force cannot be ignored
World Bank has acknowledged that China has experienced the fastest sustained expansion by a major economy in history and has lifted more than 800 million people out of poverty.
As per the data, China’s economic growth which began in 1979 under the leadership of Deng Xiaoping, the architect of China’s economic reforms, led to building up of strong trade ties with the world.
The numbers speak so. During the period of 27 years from 1991-92 to 2017-18, the trade between US and China increased from $ 35 billion to $660 billion.
The trade has become stronger with other countries as well. While the bilateral trade of India with US improved from $5 billion to $ 88 billion between 1991-92 to 2018-19, the trade with China rocketed to $ 87 billion from a minuscule level of $0.07 billion in the same period.
The phenomenal growth in China’s trade penetration gives an idea about the role of foreign trade in China’s growth. It is quite interesting to understand the imperatives which have led china to achieve the kind of phenomenal growth it has as many other developing countries stand on a similar economic structure like china. China has achieved an investment-led growth, which was supported by gains in productivity, efficiency and scale of production.
Its growth is based on the reforms which were undertaken in the areas of trade, investment and incentivisation of export-oriented industries which led to a surge in FDI beginning in the early 1990s.
As of now, the foreign investment-based enterprises have a significant share in China’s output
The US has been at the top as far as Chinese list of its trading partners is concerned. In such as situation, a trade war with US would definitely be impacting it, but Chinese growth model which has been followed by many other developing nations is on the process of redefining itself towards a consumption-driven economy from a through and through the export-oriented economy.
Though some of the representatives of Chinese think-tank says that China’s slower economic growth is more due to an effort of readjusting the Chinese economy towards domestic consumption and due to government efforts to cut manufacturing overcapacity and re-balance towards a service economy, the impact of a trade war cannot be ignored.
The debatable issue, however, remains who would be impacted more. Both sides have their stories, but the trade figures speak in favour of China.
In 2018, the US exported goods worth $120.3 billion to China and imported a huge amount worth $539.5 billion of goods. Certainly, the exports are dwarfed by imports.
As per 2018 State Export Report of US-China Business Council, China was not only the third-largest market for US goods and services exports but exports to China also support 1 million American jobs. Looking into all these factors, it does look like that the tariff war may impact US more than China.
Further, China has been quite sneakily laying down its plans to decouple itself from US and has forayed into trade expansion plans with other geographies.
The Belt & Road initiative is also being aggressively pushed to meet its geopolitical expansion plans
Though, the growth has come down to a 27 year low and the economy is expected to reach further lows, we should not forget the slowdown is across the globe with even US expected to take a hit of 50 bps in its GDP growth.
Even India after ruling as the fastest running economy slowed to 5.8% in last quarter of the previous financial year, a rate lower than china’s growth of 6.4% and 6.2% registered in Mar’19 and Jun’18 quarter respectively.
The Chinese economy is going through a transition phase and may come up back on its foot, though not in the similar fashion as in the early 2000s but certainly as an emerging superpower which intends to counter US dominance.
This would be the right time for strong developing nations like India to benefit from the trade war and expand presence in other geographies such as South America and Africa.