The pains of a prolonged US–China trade war

China's President Xi Jinping, first lady Peng Liyuan, US President Donald Trump and first lady Melania attend a state dinner at the Great Hall of the People in Beijing on 9 November, 2017 (Photo: Reuters/Peter).

Author: Yuhan Zhang, Beijing

Reality once again demonstrates that in a trade war surplus countries like China hold a disadvantage against those with deficits such as the United States. But with little to show for its efforts, it is not in the best interests of the United States to fight with China. The best option for both sides is to reach an agreement.

US President Donald Trump’s trade war has not achieved its original objectives. First, the US total current account deficits will remain massive this year. The politically sensitive goods trade deficit with China in the first half of 2019 registered US$167 billion. Second, the trade war has failed to impede China’s technological enhancement. Despite the Chinese government and media renouncing the slogan ‘Made in China 2025′, China continued boosting investment and innovation in the strategic industries listed under the initiative. Geo-economic factors are also intensifying downside risks to the US macroeconomic outlook, as shown by the recent economic indicators.

But China still has more palpable losses. US tariffs have slowed China’s GDP by an estimated 0.6 per cent. The trade war also affects GDP through indirect channels. It has driven dozens of firms to shift their supply chains from China to ASEAN countries and deterred Chinese investment in the United States. Chinese global investment is decreasing, but investment in the United States has shrunk more significantly from US$24 billion in 2017 to US$9 billion in 2018 and US$3.2 billion in 2019.

China is shifting its strategic focus to the Belt and Road Initiative, particularly in Russia and Southeast Asian countries. The growth rate of foreign direct investment into China has also decreased from a growth …continue reading