US Could Be In A Better Position To Put More Pressure On China On Trade

China has to face some challenges to maintain its economic growth rate over the 5 per cent mark through the next few years. The second largest economy of the world should not pin its hopes only on the continuance of the recovery of the global economy to drive its economic growth.

But it is a fact that the economic growth rate of China is already below what Beijing would have liked and the near trade war with the United States and the end to fiscal stimulus to the global economies nearing their end are challenges that aggravate the situation further.

A fast pace of internal growth and strong external demand for its exports have been corner stones of Chinese economy for a long time – which have bene encouraged by rapid domestic investment and changing consumer needs. While there changes apparently appear to be for the long-term, it can be stated that the pace of such change would be much slower in the future.

A 6-8 per cent growth in GDP cannot be everlasting and there are strong chances that the rate would slip to 5 per cent or even below in the near future unless corrective measures are adopted fast by Beijing.

A full blown trade war with eh US is the biggest challenge which has the potential to retard growth for both the sides. It is unlikely hat there would be a backtracking from Donald Trump especially after the very encouraging second quarter results of the economy noting the fastest growth in the last four years at 4.1 per cent. Further he Trump would be further emboldened by his strong current approval ratings which would make him believe that he is on the right path politically.

Trump is probably aware that he enjoys an upper hand because compared to the US, the potential exposure to a trade war is higher for China. Compared to the extent to which the US depends on China for its exports, there is far greater reliance on US exports for China – by about five times.

The International Monetary Fund estimates that anything between 1 to 1.5 per cent could be knocked off China’s growth rate because of a full blown trade war.  On the other hand, the impact on the American economy would be much less – affecting about 0.1to 0.3 per cent of its economy. this is because of the relatively higher domestic dominance on the US economy. This difference in potential impact could spur Trump to accept the damage to his economy to put more pressure on China.

Apart from the impact on the export sector of China in terms of lost output, investment and jobs, consumer confidence and retail spending could also be affected in the country. this can impact the domestic demand as parts of multiplier effect.  China could end up caught between a rock and a hard place in terms of available policy options.

(Adapted from SCMP.com)

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