News that China's gross domestic product growth had slowed to 6.2 per cent was celebrated last week by US President Donald Trump and his trade team: "China's 2nd Quarter growth is the slowest it has been in more than 27 years. The United States Tariffs are having a major effect on companies wanting to leave China for non-tariffed countries. Thousands of companies are leaving," Trump tweeted. Here, at last, was clear proof that his trade war was working.
Well, for Trump's base, maybe this storyline might strike a chord: the trade war is, after all, primarily a no-lose political ploy to improve chances of winning the 2020 presidential election. But, in reality, the conflict is harming everyone, from exporters worldwide to consumers, particularly in the US. And the longer it continues, the more harm it will do.
Singapore last week reported its economy shrank by 3.4 per cent in the second quarter, with a leading Singapore-based economist complaining of "a deepening manufacturing downturn for the rest of Asia." South Korea's exports fell sharply in June while the International Monetary Fund warned that the trade war is set to knock 0.5 per cent off global growth, or US$455 billion.
The slowing growth of China's economy deserves particular attention, but not for the reasons Trump is selling to his voters. US tariff measures have undoubtedly had some impact, but as James Kynge at the Financial Times accurately noted last week: "The reality is that China's dynamism these days comes mostly from within, from investment and consumer spending. Trade has long since ceased to be more than a bit player in China's growth story." As an investment strategist noted in the column, "Net exports accounted for less than one per cent of China's GDP."
Much more important than trade are China's debt levels, which, according to the Institute of International Finance, have surged from 150 per cent of GDP in 2008 to over 300 per cent (over US$40 trillion) today, largely because of massive stimulus binges launched since the 2008 financial crisis. As Kynge notes, it is of concern that "much of China's golden decade was borrowed rather than bought".
Last week's report on China's slower growth showed how important the crackdown on shadow finance aimed at reducing debt has been in slowing the economy. Trump's trade war has hurt Chinese business and household confidence, but its role has been small compared to the crackdown on debt.
Many " including myself " have argued that slower growth would be both good for China and necessary for long-term stability. It is hard to imagine the structural stresses created in an economy managing double-digit annual growth rates for most of the past three decades.
For perspective, note that in 2007, when China's growth hit a record high of 14.2 per cent, its GDP was just US$3.55 trillion. That meant growth amounted to around US$798 billion in dollar terms.
Last year, China's economy was measured at US$13.6 trillion, almost four times bigger. The 6.6 per cent growth recorded last year added more than US$1.4 trillion " the biggest single contributor to GDP growth worldwide, and equivalent to adding a new Australia or Spain to the world economy. Even at a reduced growth rate of 6.2 per cent in 2019, this would still add more in dollar terms to the global economy than was added in 2007 when growth was over 14 per cent.
China's growth has, for most of the decade since the 2008 financial crisis, been the single most important contributor to growth worldwide. Without China's debt splurges, recovery from the crash would have been much slower, both worldwide and in the US. Between 2012 and 2014, China's growth accounted for between 40 per cent and 58 per cent of global GDP growth, according to the World Bank. Even last year it accounted for 29 per cent.
So, putting Trump's electoral rhetoric aside, China's economy has indeed slowed, with harmful spin-off consequences for other trade-dependent economies in Asia that are heavily integrated into the long and complex supply chains that end in Chinese assembly plants. But most of China's contraction is the result of efforts to reduce unsustainably high levels of debt and has very little to do with Trump's tariff game.
The claim that the trade war has also resulted in companies moving operations out of China seems also to be a political chimera. There is as yet no statistically measurable evidence of a migration of production out of China. Companies have been pushing low-value assembly operations out of China to countries like Vietnam and Cambodia since the mid-2000s, as minimum wages in Chinese provinces have in recent years been raised by over 10 per cent on average annually in efforts to build a middle-class consumer economy, but this is quite unrelated to the trade war.
For Trump to frame a convincing narrative of the trade war bringing gains to the US economy, he must also show evidence of flows of companies back to the US and of new jobs being created. US payroll processor ADP reported that the US added fewer jobs in May than at any time in the past nine years. Although jobs growth picked up in June, the results were still lower than expected.
The chief economist of Moody's Analytics commented: "Job growth is moderating. Labour shortages are impeding job growth … and lay-offs in bricks and mortar retailers are hurting." China's trade surplus with the US remains as large as ever.
In short, the evidence of two years of trade war is that everyone loses, from the US to the euro zone, South Korea, Southeast Asia and, of course, China. If sustained, a fully-fledged global recession is a real possibility. Destruction of global supply chains will raise prices for consumers everywhere and will accelerate efforts in countries like China to build greater self-sufficiency in all sensitive or critical technologies. What you are watching worldwide is nothing to celebrate, whether you are in Shanghai, Singapore or San Francisco.
David Dodwell researches and writes about global, regional and Hong Kong challenges from a Hong Kong point of view
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