Centrally controlled Beijing has more economic sustenance levers to pull than free market America.
The general consensus among economists is that President Trump’s American economy is less robustly prepared for a trade war than China’s. This may or may not be true – there is a tendency to see the Chinese economy as monolithic (when in reality is appears that way largely because it lacks transparency) and the American as vulnerable. However, it is true that the worst fallouts from a trade war – job losses, mortgages defaulted on, businesses closed – will hit America first. Quite simply – from pump priming struggling businesses to issuing ‘no redundancies’ edicts, centrally controlled Beijing has more economic sustenance levers to pull in a trade war than free market America.
However, amid all this talk of trade wars it is important to remember two things about China. First, verifiable macro data for the second quarter reflects that economic fundamentals and corporate earnings in China remain strong. Secondly, domestic demand is still phenomenally strong in China, limiting the impact of a trade war.
Let’s look at some China numbers. Industrial profits rose 21.1% year-over-year in May, the most recent data available, compared to 16.7% a year ago. Industrial margins in the first five months of this year are at the highest levels in eight years for the same period. Industrial value-added rose 6% in June (versus 7.6% a year ago) and 6.6% for Q2 (versus 6.9% in Q2 2017). These numbers indicate a very healthy manufacturing sector that will only have a limited impact during any trade war.
Now consider the domestic consumption numbers. In the first half of 2018, domestic Chinese consumption accounted for 78.5% of GDP growth (up from 45.2% five years ago. Inflation-adjusted (real) retail sales rose 7.2% during the second quarter, down from 9.7% in the same period last year, but this is still a very fast pace by anyone’s standards. New apartment sales rose 3.6% (on a sq m basis) during the second quarter, showing that that long awaited China property bubble is still not apparent.
This is, quite simply, not a domestic economy that will suffer significantly from a trade war with the US. It is also unclear whether sourcing will drop considerably – the Trump tax rate is only 10% and many US manufacturers and retailers will simply pass this along to US consumers.
There is a another statistic that should always be remembered in this trade war; a war the president has decided to enter alone without any support from the EU, Australia, Japan, South Korea, New Zealand, Canada or anyone else. Last year, Chinese exports to the US accounted for only, at best, 19% of total Chinese exports. Combined with other countries it could have been closer to 50% (quite a larger percentage for Beijing to consider). Quite simply, China has diversified and America is not as all-important as it once was to Chinese imports. And in terms of oil it should be noted – not at all important.
This article first appeared on the Economy pages of Maritime CEO magazine, published this week to coincide with SMM in Hamburg. Splash readers can access the full magazine for free by clicking here.