Why a trade war poses no major threat to China
Having long foreseen the unsustainability of its export-driven growth, China has been reducing its dependence on foreign trade for almost 10 years
In the Chinese media, business commentators are all talking about the same thing: The coming trade war with the United States.
Whether or not there will be a full-scale trade war is up to President Donald Trump, because that is what he said he wants. The business commentators have been explaining to readers why a trade war won’t be a good thing. But they should do more than just talk.
Business owners and the Chinese government can do many things to make the economy less vulnerable to outside influences and stronger to resist an imminent trade war.
No matter how seemingly powerful the trade war and across how many fronts, its impact will be from the outside, after all. And how much resistance an economy can mobilise depends primarily on its internal factors.
Having long foreseen the unsustainability of its export-driven growth since the 1990s, China has been gradually reducing its dependence on foreign trade for almost 10 years.
Not only has its export volume been declining, but the ratio between exports and total GDP fell from 37 per cent 10 years ago to around 20 per cent in 2015, according to the World Bank. Although this is higher than the US ratio, it is still lower than the level of many trading nations in Asia and Europe.
Admittedly, by volume, China’s exports to the US are still much larger than its imports, at $482 billion versus $116 billion in 2015, the Office of the US Trade Representative reported. But a large proportion of those exports are made for US consumer brands.
Should US businesses discard their partners in China and ship production home, that would be worth around 2 trillion yuan ($292 billion). But this represents less than 3 per cent of China’s total GDP of some 74 trillion yuan in 2016.
It may not be hard for China to redirect that amount of productivity into other markets, domestic and foreign. Chinese society has changed significantly over the past 20 years. A rise in income levels in coastal cities has boosted middle-class consumer spending, which is also reflected by the increased spending of Chinese tourists abroad.
With smart management, China can better utilise this new potential and provide its middle-class consumers with better quality goods and services.
One good example is the rapid expansion of the country’s high-speed rail network. At the start of the rail modernisation programme, doubts were voiced about its commercial viability. And, indeed, many of the long and hugely expensive rail lines cannot be expected to generate a profit in the next few years.
But the nation’s consumer behaviour has evolved rapidly, with increasing numbers of people lured by faster trains to spend holidays and weekends in cities other than their hometowns.
In 2015, by serving 4 billion visitors, the nation generated 4 trillion yuan in tourist revenue, a far higher amount than its trade surplus with the US.
Major high-speed railways are now linking the more developed coastal cities with the scenic towns in China’s mountainous western regions. With good security protection and more entrepreneurial initiatives, the country’s high-speed rail economy alone could generate enough services, if measured in monetary terms, to compare with the GDP of a medium-sized country.
So, in the face of Trump’s trade war, the best defence that China can have is not to get distracted by his attacks and deceit, and to be steadfast in pursuing its own economic reform. This is the most effective way for China to win any future trade war.
The government should do a better job of not only investing in large infrastructure, but also in protecting small enterprises and private initiatives – with good laws and policy terms. And it should start acting now.