The U.S. Trade Representative’s office Monday released a list of about $300 billion worth of Chinese goods including children’s clothing, toys, mobile phones and laptops that Trump has threatened to hit with a 25% tariff. If Trump proceeds with the tariffs, it would see almost all imports from China covered by punitive import duties.
From what I’ve read so far it looks like Xi and the standing committee genuinely believed the Trump Administration would capitulate in the 11th hour even if they rewrote key terms of the deal, as past administrations did when similar tactics were used. That appears to have been a massive miscalculation, Lighthizer has literally been preparing for a showdown with China his whole career, he probably knows the inner workings (and pressure points) of China’s political and economic system better than many in the politburo. He’s said for a long time the US is done letting China get away with not following its WTO obligations, its literally been 20 years. Rampant IP theft, non tariff barriers and unfair subsidies have been used by China for decades and everyone tolerated it until recently, even those who don’t support Trumps tactics agree China needs to reform some of the predatory parts of its economic system if it wants continued free access to global markets (which it’s very dependent on), something it denies other countries within its borders.
The real challenge for the CCP is the deterioration of relations with the US is coming at a point where the economy is extremely vulnerable as it try’s to transition from its current unsustainable debt heavy, high growth model to one based on consumption (like America). Back in 08 the CCP launched a larger stimulus plan than TARP to keep chinas economy from collapsing, it worked. The unfortunate byproduct of near constant stimulus since then has lead to massive pockets of dead or unproductive capital within China’s financial system (like ghost cities). Because the system is so opaque it’s impossible to get an accurate read on how bad things are under the hood. China’s state owned enterprises have become bloated and inefficient behemoths that are addicted to debt and eat up stimulus capital at the expense of China’s much more efficient private sector (which also responsible for most of China’s new employment growth).
The CCP badly needs to reform the current system if it wants to avoid long term stagnation, like japan, or a total collapse within the system. They’ve exhausted the tools needed to bail the economy out, debt to GDP is upward of 300% but even more frightening to me is the Chinese state is on the hook for trillions in USD denominated debt that needs to be serviced as US interest rates rise. At the same time it’s current account surplus is evaporating which could lead to a shortage of USD within China, thats potentially a massive problem.
If investment is state directed you can target any GDP figure because an empty city still counts toward GDP growth even though it created no sustainable economic activity. Right now China spends $3.5 in debt to generate $1 of GDP, before 2008 it was under a $1 spent per $1 of GDP. The constant stimulus means they’ve mostly exhausted their economic tool box. Now time to reform….
In order to continue thriving the economy has to go through some painful reforms in the short term, This is where China is caught between a rock and a hard place.
Even under the most ideal circumstances China was never going to stay above 8% GDP growth indefinitely. US demands for reform would actually be beneficial for China long term, it would help correct many of the structural issues that it’s house of cards economy is built off of. Only challenge being is the reforms mean that the communist party would have to relinquish control over some key areas that help it maintain its grip on power.
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