China Is Not Trade-Dependent, So A Trade War Is Not Leverage
China's economy is no longer export-driven, so attempting to attack its exports will not inflict much pain.
Net exports (the value of a country's exports minus the value of its imports) account for just 2 percent of China's GDP, down from a peak of 9 percent in 2007. In contrast, domestic consumption now accounts for more than two-thirds of China's economic growth and more than half of its GDP.
Last year, Chinese exports to the United States accounted for only 19 percent of total Chinese exports, limiting significantly the impact of new tariffs applied only by the United States.
And much of the impact of new U.S. import taxes will not be borne by Chinese companies; about two-thirds of the 25 largest exporting companies based in China are foreign-owned.
It is also clear that Xi's government will step in to provide financial aid to companies that are hurt by the Trump tariffs. With fiscal revenue up more than 10 percent YoY during the first eight months of the year—the fastest growth rate in seven years— Beijing has the resources, as well as the political will, to support its exporters, just as it did a decade ago during the Global Financial Crisis.
As a result, I do not believe a trade war would cause significant damage to the Chinese economy, or provide the Trump administration with significant leverage over Xi's government.
The Chinese Economy Is Healthy
Larry, in August, you stated that the Chinese economy “looks terrible” and “business investment is just collapsing,” suggesting that this puts pressure on Xi to give in to U.S. demands. Unfortunately, your staff has not provided you with an accurate assessment of the Chinese economy.
The Chinese stock market may be weak, with the Shanghai Composite Index down 19 percent year-to-date through September 14, but earnings growth for larger industrial firms (including many not listed on a stock exchange) remains very healthy. Industrial profits rose 17 percent YoY during the first seven months of the year, an impressive pace given that earnings rose 21 percent during the same period last year. Margins are at their highest levels in eight years.
Manufacturing investment, far from collapsing, is up 7.5 percent this year, compared to 4.5 percent during the first eight months of 2017.
China is growing more slowly, on a year-over-year basis, as the economy matures and because the base has become very large. Policymakers in Beijing do face significant challenges, such as high debt levels and a weak social safety net. But, the macro numbers remain quite strong. Inflation-adjusted (real) retail sales rose 7.4 percent during the first eight months of this year in China, compared to a 2.9 percent growth rate in the U.S. (Online sales of goods in China rose 28 percent.) Real household income rose 6.6 percent in China for the first half of 2018, vs. 2.1 percent in the U.S. Over the last 10 years, real per capita income rose 123 percent in China, compared to 9 percent growth in the United States. We should not start a trade war based on the mistaken belief that we face an economically weak opponent.
In 2017, China accounted for 31 percent of global economic growth, compared to a 9 percent share for the United States. These numbers indicate that a healthy Chinese economy is a good thing for the global economy.
Engagement With China Has Worked—A Trade War Will Not