China Can No Longer Rely on The US Market as a Source of Stability For Its Exports

Decades before the return of Hong Kong to the rest of China in 1997, a young Lee Kuan Yew carefully studied the Hong Kong economy which even in the 1960s was in many ways far more flexible, open and dynamic than those of Europe and the wider geopolitical west. Speaking in 1992 about what he learned from Hong Kong and later applied to his own nation of Singapore, Lee stated,

“Through Hong Kong watching, I concluded that state welfare and subsidies blunted the individual’s drive to succeed. I watched with amazement the ease with which Hong Kong workers adjusted their salaries upwards in boom times and downwards in recessions. I resolved to reverse course on the welfare policies which my party had inherited or copied from British Labour Party policies”.

It was this spirit of flexibility in times of crisis or geo-economic change that has allowed both Singapore and China as a whole to weather many international storms. China is widely regarded as being an international economic anchor of stability during the 2008 global economic recession and yet today, many of the same commercial sectors that benefited from China’s stabilising influence on the 2008 recession are now almost giddily speculating against China with many stating that the US led trade war could do irreparable harm to China.

First of all, in a holistic sense it is wise to remember that ever since China’s opening up to economic reform in 1978 under the leadership of Deng Xiaoping, many have predicted that the Chinese economic miracle was always a bubble ready to burst. Those who have made such prognostications have been consistently proved incorrect as the maturing Chinese economy continues to grow in spite of global trends which are weakening the position of many developing nations – a status China is still officially classed under according to the World Trade Organisation.

China’s own domestic press has been very frank about the challenges facing China in 2018. A piece in the pro-government Global Times has explained current issues in the following way:

“Recent external pressures, a general global trade malaise and bold new domestic reforms are putting some extraordinary pressures on China’s economy, but economists say positive indicators far outweigh the negative ones and predictions of doom and gloom will soon be prove wrong.

Analysts say people and prognosticators should be more prudent and optimistic as the economy remains strong and resilient.

“Every country’s economy has cycles and can’t continuously grow at a fast rate. The outside world shouldn’t be pessimistic about China’s economic development just because growth is slower than during the miracle China had achieved over the past 30 years,’ said Wan Zhe, chief economist of the International Cooperation Center of the National Development and Reform Commission.

Western media reports predicting bad outcomes for China’s economy have ramped up recently. Even the Seattle Times reported on Tuesday that the China-US trade spat has rattled China’s economy and if the trade war escalates, ‘some worry that the Chinese public’s faith in the economy could be shaken.’

Indeed, China’s economy has encountered some new challenges that have produced some negative statistics. The A-share market has slumped about 25 percent this year as the looming trade war saps investor confidence. The value of the yuan has declined nearly 6 percent in 2018 as the US dollar continues to suck cash out of the economies of many developing nations and rising real estate prices are putting pressure on reforms aimed at increasing domestic consumption.

All of the issues have unique root causes that have little to do with the foundation that underpins China’s maturing economy. 

‘As the world’s second-largest economy undergoes structural transformation, difficulties can be expected. The way ahead will be increasingly bumpy because just like an adult, things get more complex,’ Wan told the Global Times on Thursday, stressing ‘market fluctuations shouldn’t be politicized.’

‘China is growing stronger amid these difficulties… China’s economy will not be stricken by one external shock,’ Cong Liang, spokesperson for the National Development and Reform Commission, the country’s top economic planner, said at a press briefing on Wednesday.

In the first half of 2018, China’s GDP grew 6.8 percent year-on-year, staying within the 6.7 to 6.9 percent range for consecutive 12 quarters.

Despite many indicators that show China’s economy continues to be one of the world best performer, The New York Times said in an editorial on Wednesday that ‘China also faces a serious risk of capital flight’ and the fate of the world depends on how China deal with this.

Wang Tao, head of China economic research at UBS, told the Global Times that to avoid large-scale capital flight out of China, the People’s Bank of China will likely stabilize the exchange rate as necessary. Wang said that the yuan is likely to stand at around 7 to the US dollar by the end of 2018″.

All of the issues addressed in the article are done so through the prism of confident realism as are the subsequent suggestions offered in the piece. But even more important than fiscal reforms, a continued emphasis on economic openness, corporation tax reductions and domestic capital management is a long term plan that many far weaker economies have had to face with urgency.

The reality of the new era in global economics signifies the United States transforming from a largely predictable economic giant to a more capricious economic power and as a result an unreliable economic partner for both long time allies and countries which the US labels as rivals. Because China is a substantial exporter of goods into the US market, America has more to lose than China during the initial course of the current trade war. However, in the long term, China must apprehend the new reality that much though many US businesses and consumers depend on Chinese products, the US is not a sustainable economic partner given the tendencies of the current administration to use tariffs, sanctions and non-tariff trade barriers as aggressive weapons against other nations rather than as mild corrective mechanisms that have no wider strategic bearing on future relations.

Turkey which quite unlike China runs a trading deficit with the US has learned this lesson the hard way as the US abruptly increased punitive tariffs on Turkey while threatening further tariffs and sanctions against Ankara over the comparatively obscure matter of the suspected terrorist collaborator Andrew Brunson – a US citizen currently under house arrest in Turkey. But as I have previously written, the Brunson matter simply provided the Trump administration with the optics necessary to justify an economic war on Turkey. If it weren’t for Brunson the US would have found something else. The fact that the US is currently engaged in either a tariff or sanction war (or both) against the European Union, Russia, China, Japan, India, Pakistan, Iran, Turkey, Canada, Syria, Mexico and both Korean states, makes it is clear that when it comes to economic warfare, no excuse is needed for the White House other than vague statements about being treated “unfairly” by major and medium sized trading partners. Any further rhetorical justifications for the policies of economic aggression are in reality surplus to requirement so far as the US is concerned.

Because of this, China must be prepared for the reality of a medium to long term future where access to the US market cannot be taken for granted in any sense. Because of this, it is essential for China to radically adjust its long term export strategy along the lines which China is already taking. In addition to expanding the sustainable potency of the Chinese domestic market – the world’s largest national market based on purchasing power party, China is working on securing new free trade deals with a variety of partners including the de-facto Russian led Eurasian Economic Union. China is also working with multiple African countries to help expand national economies that in the future will become important consumers of Chinese products as African purchasing power and living standards continue to rise as a result of Chinese investment and cooperative developmental endeavours.

Beyond this, if the European Union continues to feel the heat from its traditional US ally, even major European businesses will have little choice but to defy the parochial history of Brussels’ policies on trade. To put it bluntly, the EU has no real opportunity for sustainable long term growth without a free trading arrangement of some kind with China. Such a line of thinking has already gained much traction in the powerful German industrial sector. But while the US is still a large and therefore crucial market to all major exporters including China, it is far from a bedrock of stability even though previous decades tended to suggest otherwise. In this sense, any and all exports sent to the US not just by China but by the rest of Asia, Latin America and Europe must be thought of as a substantial economic bonus rather than something which can be easily factored into a long term sustainable trading strategy.

Even if Donald Trump proves to be an anomaly compared to his eventual successor (almost certainly in the year 2024 rather than 2020), the geo-economic precedents he has set will likely continue for the foreseeable future as countries throughout the world adjust their trading strategy away from the United States.

China is better prepared than any other nation to meet this challenge. The only novel element to recent events so far as China is concerned is the rapidity with which the present shifts are occurring. China will in fact have to weather a mild storm in the same way that a pre-1997 Hong Kong did so in the manner that Lee Kuan Yew accurately observed. Likewise, China’s ability to weather this storm will not only be to its own long term advantage, but to the advantage of both major developing economies throughout Asia, Latin America and Africa as well as the strong but far too often stagnant economies of Europe who are all looking for a global anchor as a trading and financial partner in an era where the US market remains attractive but is, for far too many nations, hostile and partly inaccessible in comparison with recent decades.

By strengthening existing partnerships and by working with new partners, China can help shape a new economic era for the wider world based on trust, transparency and economic openness in order to replace the zero-sum mentality of the Trump years with the win-win security of the parallel Xi years.

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