Trade pressure can motivate China’s development
When people were discussing the global economy at the beginning of this year, there were some optimistic sentiments being expressed. This optimism had a sound basis. Last year, there were widespread signs of growth in the post-financial crisis era, driven by investment and a pickup in industrial production. The Organization for Economic Co-operation and Development noted positive growth in 45 economies, pumping the 2018 global economic growth rate outlook to 3.8 percent. An increase in trade of goods and services was also expected.
But there have been more signs of protectionism as this year has continued. With the mantra of “America First,” President Donald Trump has taken a unilateral approach and has provoked trade friction with various countries by building tariff barriers. The US has restricted imports by imposing higher tariffs. This trade protectionism has overlapped with other kinds of potential risks and has magnified the uncertainties in the global economy. This has interrupted the recovery in the world economy.
The global economic prospects released by the World Bank in June predicted major adverse consequences from the higher tariffs, with global trade set to drop by 9 percent. Higher tariffs affect emerging markets and developing countries the most, especially for those countries deeply involved with the US in trade or the financial markets. The IMF also forecast a less stable economic situation.
The global multilateral trade system is facing unprecedented challenges. The WTO was founded over 70 years ago, building a cooperative and winwin platform for all members. The US, as the founder and leader of this organization, has benefited from making and pushing through international economic and trade rules. However, in recent years, the US has been blaming an “unfair trade system” for its labor market disparity, shrinking middle class and wider income gap, even though these problems have been caused mainly by its own domestic policies. The US has been setting up obstacles for the multilateral trade system, even seeking to replace the system. When its demands are not answered, the US wields its hostile trade policy as a stick to threaten other countries.
The global value chains will be damaged as well. As the trade friction escalates, global production chains, value chains and supply chains will be shaken. This generates uncertainties for multinational enterprises. To balance the risks, some companies are being forced to boost their internalization strategy and reduce the number of suppliers – this could result in the global supply chain becoming fragmented. Tariffs will disrupt the global value chain, slow the spread of new technology and reduce global production power and investment. This impact will spread to companies all over the world.
Other potential risks are also casting doubt on the global economic recovery. Major developed economies have sped up their monetary policy normalization. The US Federal Reserve will continue lifting interest rates and unwinding the balance sheet. The European Central Bank and Canada are also pulling out of quantitative easing. These policies will lead to tightening of liquidity and further interest rate hikes. Asset bubbles will be squeezed out but bubble breaks could potentially trigger domino effects.
The global debt risk is also climbing, with the solvency pressure in emerging markets having increased sharply. Some countries with higher debt levels, like Turkey and Argentina, have already experienced huge depreciation in their currencies as well as large capital outflows. This could be a trigger for the next financial crisis. The China-US trade dispute will continue to affect China’s exports, employment and economic growth. More importantly, China is carrying out deleveraging and transferring toward a quality-driven economic model. The trade friction has made this process more difficult. China does not wish to get involved in a trade war. But the best way to deal with trade pressure is to turn it into domestic motivation. China is further opening up its services and financial sectors, canceling the restrictions for foreign investors. Many measures have been taken to expand imports, including cutting tariffs on 1,449 consumer goods. China has also been working on providing a better environment and improved intellectual property protection for investors. I believe the opening-up process is a strategic choice based on China’s own development, and that it will bring new opportunities for countries worldwide.