[SINGAPORE] Beijing’s bet on domestic consumption to revive its flatlining economy may not stand much of a chance in the face of the American tariffs, which could wipe out millions of jobs and slash its economic growth by half – especially if the current US-China talks in Switzerland end up deepening the rift.
A four-fifths reduction in Chinese exports to the US is expected to axe 6.4 million jobs – a figure that could swell to 7.8 million in a scenario where the US also restricts Chinese exports to other destinations, such as in South-east Asian countries like Vietnam.
These employment estimates were presented by economists from Natixis Corporate & Investment Banking at a media roundtable on Wednesday (May 7), titled “Trump-led tariffs and supply chain reshuffling: Zooming into China’s reaction and sectoral consequences”.
“The ultimate impact on the Chinese economy could be even bigger,” said the bank’s senior economist for Greater China, Xu Jianwei.
He noted that the spillover effects from the trade shocks could hit the country’s export sectors, leading to cuts in jobs and wages, which would in turn weaken the purchasing power of Chinese households and hurt consumption.
Xu estimated China’s gross domestic product (GDP) to fall by 1.9 per cent from a reduction in net exports, 0.4 per cent from weakened consumption, and another 0.2 per cent from a slump in investment.
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This adds up to a total GDP loss of 2.5 per cent – almost half of China’s first-quarter economic growth this year of 5.4 per cent.
In mid-March, Beijing revealed a 30-point action plan aimed at stimulating the stubbornly low consumer demand in the world’s second-largest economy, and achieving a growth target of around 5 per cent this year. It plans to do this, for example, by raising pension benefits, improving access to paid leave, reforming the property market and stabilising the stock market.
US President Donald Trump’s tariffs of 145 per cent on China put a spoke in the wheel.
In an Apr 28 report by Nomura estimating the impact of American tariffs on China, economists forecast that China might lose around 1.1 per cent in GDP in the near term, assuming that its exports to the US are halved.
These estimates, if correct, could see China’s GDP sink to low single digits.
But as far as Natixis’ Xu is concerned, it is “politically impossible” for China to report such a number; he foresees the unleashing of more policies by the government to stimulate the economy.
He suggested that these could include two or three more additional reserve requirement ratio (RRR) cuts this year. There could be interest rate cuts, likely implemented at a softer pace than the cuts to the RRR; Beijing could also run a larger fiscal deficit by carrying out government projects.
Xu predicts that the US-China relationship will continue deteriorating: “Mistrust has already been built, and it’s very difficult for two countries to go back to normality”.
But something has to give in the short term, he added, pointing out that the US’ largest pain point is inflation, and that China’s is the flip side of the coin – overcapacity.
Bilateral reliance
Xu noted that both superpowers have already reduced their reliance on each other over the years, and that the trade relationship has been deteriorating since the first trade war.
As to how much worse it can get, he said he believes there is a ceiling on how far the trade retaliation can escalate in the short term.
China is a leading exporter of electrical and electronics goods, machinery and transport equipment, among other things, to the US.
“It’s really difficult for China to find alternative markets without bearing very big costs… It is impossible for China to (replace) the world’s largest market,” he said.
Dual dependence
And while most Asia-Pacific markets depend on the US for final demand, China feeds their factory floors.
Natixis’ chief economist for the Asia-Pacific, Alicia Garcia Herrero, said: “If the Trump administration tells (Asia-Pacific markets) to close the door on China, they just can’t, because their intermediate goods come from China.”
Gary Ng, the bank’s senior economist for thematic research into the Asia-Pacific, said that the “two-way trade exposure” experienced by countries such as Vietnam and Cambodia makes it challenging for them to avoid upsetting either China or the US while trying to ink trade deals.
Short-term gains
Nevertheless, Natixis’ senior economist for emerging Asia, Trinh Nguyen, believes South-east Asia is in “a better tough spot than previously”.
She suggested that it had been “game over” for Vietnam, which was in a “very weak” position when reciprocal tariffs hit on Apr 2, given that it was levied a duty higher than that on China.
But worsening ties between the two superpowers mean that the position of the rest of the world improved, said Nguyen.
She concluded that if the outcome of the talks is unfavourable, the US tariff on China could drop from 145 per cent to potentially 60 per cent, which is still “pretty high”, and there will be “some business for South-east Asia to do”.
However, a slowing China will still hurt the region in the long run, she added.
