Monday, May 27, 2019
As the U.S.-China trade war escalates, the prospects of US-China trade negotiations are becoming uncertain. The attack on Huawei by United States and the statement made by President Donald Trump that Huawei would be included as an element in the trade negotiation, have increased a possibility that trade friction between U.S. and China could worsen. According to the recent World Trade Outlook Indicator released by the World Trade Organization (WTO) in April 2019, the forecast for global growth is sharply lowered from 3.7% to 2.6%. The WTO report also warned that a further contraction in global trade could trigger a sharp slowdown in the global economy.

Under such context, what will happen if the U.S.-China trade negotiation falls apart and the two countries fail to reach an agreement? What kind of impact will befall the Chinese economy? Will there be an economic collapse? And lastly, what impact will this have on the global economy?

Anbound's macro research team has conducted various discussions and scenario analysis. One of our basic estimates is that under the situation where we can control and avoid a comprehensive economic and financial war, even if the U.S.-China trade negotiations fall apart or U.S.-China trade war and technology race breaks out, the Chinese economy will suffer serious impacts. However, China's economic growth will not baselessly decline. Even if the economic growth falls to the 4% level, the Chinese economy will not collapse.

Now, we would like to place emphasis on the fact that even if the Chinese economic growth does shrink to 4%, it will be regarded as an extreme situation for the Chinese society in peacetime, and China may undergo a series of complex changes:

First, China's economy will be a so-called "iron plate", which means it is incompressible and not afraid of any sanctions. Most of China's science and technology industries and their related products, which are now being attacked by the United States, aren't affecting the way the Chinese people today live their lives all that much. Even if these science technology products couldn't be produced due to American imposed restrictions, the Chinese society can still sustain itself without these technologies. For example, if 5G is not available, China can substitute it with 4G or even in dire cases 3G. As long as China's basic needs are satisfied, its basic economic growth can be sustained. This is equivalent to the "fundamental state" of China's economy.

Secondly, the main driving force of the Chinese economy will shift its focus internally to the domestic market. In the face of the trade and technology war initiated by the United States, China's economic external environment could take a turn for the worse, and it might possibly last for a long period of time. However, China has one of the biggest bargaining chips in its possession―1.4 billion people in the domestic consumer market. If the huge domestic consumer market could be utilized effectively, it will be able to support China's basic economic growth.

Thirdly, the trade war will accelerate the transformation of China's economy. In the context of economic globalization, China used to be a manufacturing country, relying on its robust manufacturing industry to produce low-priced products for the world market, which at the same time established China's position as a "world factory". However, in the era of overproduction, excess production capacity has become a burden for China. China's manufacturing and export capabilities are the main targets of the US-China trade war. Objectively however, there may be a certain result to this. To a certain extent, this will help China to reconstruct itself to shift from overproduction towards an economy supported by the development of domestic consumption. If the trade frictions are prolonged, it may accelerate China's transformation from a manufacturing society to a consumer society.

What we want to emphasize on is this: if the U.S.-China trade negotiation fails, China's economic growth will not decline endlessly. The 4% level may however be the new bottom line for China's economic growth, as well as the market's confidence in the Chinese economy. Of course, this bottom line is a result forced by Trump's administration and right-wing groups in the United States. However, the United States may also need to realize that should the situation of the Chinese economy force China into becoming a toughened "iron plate" country, it also signifies that China will turn into an increasingly tough "competitor" of the United States as time goes on. China may therefore use this as a foundation to promote social and economic integration. However, a consequence of this integration under such pressures also means that China will be depending more on its domestic market and will be further isolating itself from the U.S. economy. This is clearly not a good thing for the United States' global interests.

Final analysis conclusion:

A failure of the U.S.-China trade negotiations will definitely impact China's economy, but China's economic growth will not slide baselessly. China's economy will shift to rely more on domestic consumption, as well as strengthening social and economic integration. However, the results of such integrations and moves by China are certainly not beneficial to the global interests that the United States stresses.

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