China's recent purchase of US soybeans signals its willingness to buttress the truce agreed in Buenos Aires, but the truce is unlikely to last for long. The past year has witnessed the United States' sustained economic offensive towards China, with a rapid crescendo of trade tariffs, new legislation on inbound foreign investments, and – less noted – the inclusion of China-specific clauses in the renegotiated North American Free Trade Agreement and future US trade deals. In short, the White House aims at reducing Chinese trade surpluses, amending China's market distortions and curbing its technological and economic advance. Pressure on US allies to ban Huawei's involvement in new 5G networks, and the US-mandated arrest of Huawei's Chief Financial Officer are further proof of the United States' concerted efforts. Within the Beltway China is now chiefly understood as a strategic rival, and small concessions are unlikely to appease a belligerent Trump administration.
Beijing is bracing for the negative spillover effects of tariffs to kick-in, but they add up to preexisting issues in the Chinese economy. In recent years, China has been shifting gears away from the high growth of the early 2000s given the smaller returns on capital investment, higher costs of labor, and the greying of its population. A smaller labor force will have to sustain higher welfare costs for an ageing society, not unlike what other developed economies in East Asia are experiencing, first and foremost Japan. For these reasons, economic forecasts suggest that economic output in 2019 will settle around 6.3% in 2019, which is surprising and slightly below the Chinese Communist Party's 6.5% target. After all, and contrary to widespread beliefs, exports to the US account for only 4% of its GDP and overall exports account for less than 20% of the economy: internal demand is the leading engine of growth.
Key indicators point at Chinese consumers' bearish sentiments – especially with regard to automobile and real-estate acquisitions. For this reason, Beijing is pushing ahead with fiscal and monetary stimulus packages to prop up sluggish domestic demand. Last October, the government has kick-started a new income tax system that raises the cap on individual revenues susceptible to domestic levies and new measures that provide incentives for households with children. China has also loosened its monetary policy, but with greater circumspection. A devaluation of the Chinese yuan would play perfectly well into the hands of the Trump administration's misled accusations of China as a currency manipulator. For this reason, the People's Bank of China has not touched its base interest rates and preferred, instead, to decrease the reserves imposed on commercial banks by 1%. This has allowed Chinese banks to inject $109 billion into the market to the benefit of businesses and private individuals, which will lend money more easily and devote it to either consumption or investments. At the same time, Chinese authorities will tread carefully with government stimulus to avoid deepening its major economic woes: overcapacity, shadow banking, over-indebtedness, and an exaggerated importance given to inefficient state-owned enterprises.
At any rate, China will double down on new industries deemed to be of strategic value - such as artificial intelligence, electric cars, big data and the internet of things. The so-called “fourth industrial revolution” promises an economic boon given the major productivity gains brought by networked machines that can improve their computation abilities exponentially. Given the concomitant political and military potential of said technologies, Beijing will push ahead with its “Made in China 2025” industrial policy, while minimizing the document's importance to foreign audiences. China can take advantage of its enormous consumer market to insulate its national champions from foreign competition and providing them the necessary economies of scale to compete with Western technological giants. A clear example of this logic is Alibaba.
Neither China nor the US want a prolonged trade war, but the calculus in both capitals is typical of a game of chicken: Washington won't back off because it smells Chinese weakness, given the importance that economic performance plays to regime stability. Until recently, Chinese leaders thought that it could have contained Trump's protectionism with the support of traditional US allies, such as the EU and Japan. Moreover, Trump constituencies hit by Chinese tariffs would have weakened his political prospects during last October's mid-term and 2020 presidential elections. Yet, the Senate still has a Republican majority and the US president has proven that he can act unilaterally without Congressional approval. Trump's bullying tactics towards friends and foes alike have alienated the EU, which together with other parties, including China, has initiated a WTO complaint against Trump's steel and aluminum tariffs. Yet, Trump is hollowing out the WTO. Little-noticed, Japan did not join forces in denouncing steel and aluminum tariffs there; this hints at Trump's effective leverage over Japan, much of it in the security realm (and with China in mind), and the lack of depth to the recent Japan-China overtures. For these reasons, China has been somewhat accommodating towards Trump.
The trends are not promising given these dynamics. The trade skirmishes may well turn into a very harmful trade war. China's domestic response to the Trump offensive may need to be boosted in the face of a slowing economy. Yet, the relationship between Xi and Trump is reportedly on friendly terms and both leaders have consistently allowed the other to save face. There are ways to ameliorate the tensions while the two parties negotiate. As anybody in Europe or Japan has witnessed, Chinese tourism has boomed in recent years. Not by chance, in the first quarter of 2018, China registered a current-account deficit, brought by widening trade deficits in services, which in turn depends on China's “export” of tourists worldwide. For this reason, small symbolic steps such as people exchanges or the removal of tourist visa requirements with China might well provide a boon for the US economy given the positive spillover effects in the tourism sector. To be sure, the Chinese economy is likely to prove more resilient than expected in the White House: let's all brace for winter while waiting for spring.
