Page 26 - 2019 White Paper on the Business Environment in China
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9 White Paper on the Business Environment in China
where exceptionally high levels of savings no longer Trade War Repercussions
serve the same purpose as during the country’s catch-up
phase of economic development. A national savings rate Despite a near 20 percent fall in the US stock market
that still approaches 50 percent of output increasingly in the fourth quarter of 2018, some US investors believe
implies either bubbles in credit domestically or large there are reasons for hope. They think Beijing might
capital surpluses that have to be exported (Setser). J. W. blink first in talks because the Chinese have much to
Mason of John Jay College-CUNY, Roosevelt Institute lose by maintaining their objections to Trump’s demands
disagrees and claims this orthodox view about trade over trade imbalances, market access and alleged
being macroeconomically neutral measure to improve abuses of intellectual property. Chinese officials have
US trade balance would be a mistake. He claims that if downplayed the impact of the tariffs, but the evidence
all things were equal a more favorable trade balance from businesses and commentators inside China is clear:
would raise demand and boost employment, but all the dispute is hurting. China’s economy was already
things are not equal due to the role of the US in the set to slow in 2019, but the trade dispute has added to
world economy. The global economy today operates on it another set of intense pressures. China’s exporting
what is effectively a dollar standard: The US dollar serves regions in the south have felt the impact most. While
as the international currency, and gold did under the it would be a mistake to attribute this primarily to the
gold standard. In part for this reason and in part because trade war, the severe deterioration in foreign orders,
of the depth and security of US financial markets and especially in the export-sensitive Guangdong region,
the disproportionate weight of the US in the global stands out as a stark example of the pain the tariff war is
economy, the US can finance trade deficits indefinitely already causing. An added pressure of escalating tariffs
while most other countries cannot. Higher net exports on the Chinese economy may prove excruciating. China’s
for the US imply lower net exports somewhere else, but small and medium-sized manufacturing companies,
for many of the US’s trade partners, any reduction of net traditionally the backbone of the economy, are bearing
exports would imply unsustainable trade deficits. So, the brunt, according to Ye Tan, an independent
policies intended to improve the US trade balance are economist based in Shanghai. “Economic figures
likely to lead to lower growth elsewhere, imposing large have already started to reflect the downturn but we
costs on the rest of the world with little to no benefits to cannot tell exactly how awful it is,” Ye said. “For some
the US (Mason). technology companies or larger companies that have
bargaining power, the impact is not so big.”Yu Yongding,
According to Council on Foreign Relations’ Benn a former member of the central bank’s monetary policy
Steil and Emma Smith, protectionist policies would be committee, who has advised policymakers for years, was
especially counterproductive because blocking imports quoted by the China Business News as saying: “China’s
without changing underlying savings and investment experiences in the last 40 years have told us that all the
levels would simply raise the value of the dollar and problems will worsen if we can’t maintain economic
exports to fall while leaving the deficit unchanged and growth rate at a certain level. “Without a certain level
reducing overall trade, ultimately making the country of economic growth speed, structural adjustments or
poorer. Trade deficits do not magically disappear and tax economic system reform will be baseless,” said Yu, who
revenues soar because a country blocks imports. When is a senior research fellow at the Chinese Academy of
the trade deficit goes down, capital inflows from abroad Social Sciences (Inman and Kuo).
go down with it. And since foreign capital fills the gap
between savings and investment at home, savings must According to Business Insider, a trade war with China
rise or investment must fall. For the trade deficit to fall, is the biggest threat to the US economy in 2019, and
savings and/or investment have to change. The last two it’s making economists the most worried they’ve been
times significant fall in the trade deficits occurred were in years. While none of the Wall Street banks predicted
in 1988 to 1992 and 2006 to 2009. Then, investment a recession, they also suggested the economic risks
fell significantly more than savings, resulting in the two were firmly tilted toward the downside. The fear is that
largest recessions in the last 35 years. In short, “the idea keeping existing tariffs in place for a longer period of
that protectionism is the road to riches is logically and time, increasing those tariff rates, and imposing new
historically monstrous” (Steil and Smith). tariffs will drive up prices of imported goods for US
consumers and businesses. This would slow investment
and consumer spending, harming GDP growth (Bryan).
26
where exceptionally high levels of savings no longer Trade War Repercussions
serve the same purpose as during the country’s catch-up
phase of economic development. A national savings rate Despite a near 20 percent fall in the US stock market
that still approaches 50 percent of output increasingly in the fourth quarter of 2018, some US investors believe
implies either bubbles in credit domestically or large there are reasons for hope. They think Beijing might
capital surpluses that have to be exported (Setser). J. W. blink first in talks because the Chinese have much to
Mason of John Jay College-CUNY, Roosevelt Institute lose by maintaining their objections to Trump’s demands
disagrees and claims this orthodox view about trade over trade imbalances, market access and alleged
being macroeconomically neutral measure to improve abuses of intellectual property. Chinese officials have
US trade balance would be a mistake. He claims that if downplayed the impact of the tariffs, but the evidence
all things were equal a more favorable trade balance from businesses and commentators inside China is clear:
would raise demand and boost employment, but all the dispute is hurting. China’s economy was already
things are not equal due to the role of the US in the set to slow in 2019, but the trade dispute has added to
world economy. The global economy today operates on it another set of intense pressures. China’s exporting
what is effectively a dollar standard: The US dollar serves regions in the south have felt the impact most. While
as the international currency, and gold did under the it would be a mistake to attribute this primarily to the
gold standard. In part for this reason and in part because trade war, the severe deterioration in foreign orders,
of the depth and security of US financial markets and especially in the export-sensitive Guangdong region,
the disproportionate weight of the US in the global stands out as a stark example of the pain the tariff war is
economy, the US can finance trade deficits indefinitely already causing. An added pressure of escalating tariffs
while most other countries cannot. Higher net exports on the Chinese economy may prove excruciating. China’s
for the US imply lower net exports somewhere else, but small and medium-sized manufacturing companies,
for many of the US’s trade partners, any reduction of net traditionally the backbone of the economy, are bearing
exports would imply unsustainable trade deficits. So, the brunt, according to Ye Tan, an independent
policies intended to improve the US trade balance are economist based in Shanghai. “Economic figures
likely to lead to lower growth elsewhere, imposing large have already started to reflect the downturn but we
costs on the rest of the world with little to no benefits to cannot tell exactly how awful it is,” Ye said. “For some
the US (Mason). technology companies or larger companies that have
bargaining power, the impact is not so big.”Yu Yongding,
According to Council on Foreign Relations’ Benn a former member of the central bank’s monetary policy
Steil and Emma Smith, protectionist policies would be committee, who has advised policymakers for years, was
especially counterproductive because blocking imports quoted by the China Business News as saying: “China’s
without changing underlying savings and investment experiences in the last 40 years have told us that all the
levels would simply raise the value of the dollar and problems will worsen if we can’t maintain economic
exports to fall while leaving the deficit unchanged and growth rate at a certain level. “Without a certain level
reducing overall trade, ultimately making the country of economic growth speed, structural adjustments or
poorer. Trade deficits do not magically disappear and tax economic system reform will be baseless,” said Yu, who
revenues soar because a country blocks imports. When is a senior research fellow at the Chinese Academy of
the trade deficit goes down, capital inflows from abroad Social Sciences (Inman and Kuo).
go down with it. And since foreign capital fills the gap
between savings and investment at home, savings must According to Business Insider, a trade war with China
rise or investment must fall. For the trade deficit to fall, is the biggest threat to the US economy in 2019, and
savings and/or investment have to change. The last two it’s making economists the most worried they’ve been
times significant fall in the trade deficits occurred were in years. While none of the Wall Street banks predicted
in 1988 to 1992 and 2006 to 2009. Then, investment a recession, they also suggested the economic risks
fell significantly more than savings, resulting in the two were firmly tilted toward the downside. The fear is that
largest recessions in the last 35 years. In short, “the idea keeping existing tariffs in place for a longer period of
that protectionism is the road to riches is logically and time, increasing those tariff rates, and imposing new
historically monstrous” (Steil and Smith). tariffs will drive up prices of imported goods for US
consumers and businesses. This would slow investment
and consumer spending, harming GDP growth (Bryan).
26
