China’s economy caught in trade dispute crossfire

Cutting global ties could threaten productivity, a main growth driver

In the hunt for global talent, China’s Huawei will not be poaching engineers from US technology giants such as Qualcomm or Apple anymore. “If they are connected to the US, the long arm of US jurisdiction can reach our company,” Huawei founder Ren Zhengfei said earlier this year. “If they have a US identity, we will not hire them.”

His decision to sever the link between the world’s largest telecoms equipment maker and the world’s largest pool of tech talent is just one symptom of a much larger battle over trade and technology that is playing out between China and the US — and causing growing damage to the Chinese economy.

The Trump administration’s decision last week to declare China a “currency manipulator” — a response to Beijing letting the renminbi slip through the symbolically important level of seven to the dollar — was just the latest evidence that both sides are digging in for the long run.

Economists worry that if China’s international links wither, so too will the productivity of its workforce and its capital, a casualty of its narrowing access to foreign technologies and talent.

“A disengaged China — whether it’s by China’s choice or the choice of others — is not good for productivity

growth,” said Scott Kennedy of the Center for Strategic and International Studies in Washington. “I’m quite worried about China’s economy in a disengaged world.”

The trade war comes at a difficult moment in China’s modern economic history. Huge returns generated by its young, vigorous labour force are starting to fade as the population ages.

Investment-led development over the past two decades produced double-digit growth but also created a pile of corporate, household and government debt equal to nearly 300 per cent of gross domestic product. It has become a drag on economic growth, which hit a 30year low in the second quarter of this year.

That leaves growth in total factor productivity — which measures innovation-related efficiency gains — as the main driver of future growth.

China’s total factor productivity fell by 0.6 per cent in 2017, according to a calculation by BNP Paribas Asset Management.

Most economists agree that the economic and political reforms China embarked on in the late 1970s have boosted the effectiveness of its workers and capital deployment. As foreign companies enter the country, they bring with them new technologies and talented people and fuel competition, all factors that either rub off on local businesses or drive them to do better.