As Wall Street reels from the shock of a trade war exploding to new heights in the form of tariffs and counter tariffs, there’s another reality that is setting in — that China seems happy to walk away from trade talks.
That’s the upshot after China first rolled back some concessions — prompting a new escalation in tariffs — and then showed up to Washington without any other compromises.
“Until a week ago, it looked likely that a far-reaching trade deal would be struck between the U.S. and China within a matter of weeks. But negotiations hit a severe impasse, as the U.S. side accused the Chinese side of having reneged on key concessions,” said Stephen Gallagher, U.S. chief economist at Societe Generale, in a note to clients.
Whether Beijing has miscalculated or not, China’s policy makers are betting that they can absorb a blow to the nearly $400 billion of exports that the country, on net, sells to the U.S. each year.
“Between loose credit and loose fiscal policy, China did rebalance away from exports,” said Brad Setser, senior fellow for international economics at the Council on Foreign Relations.
According to World Bank estimates, consumption in China last year contributed 4.6 percentage points to growth, up from 3.6 points in 2013. Investment, meanwhile, declined to 2.3 points in 2018 from 4.3 percentage points in 2013.
Apart from an usually strong March, industrial production in China has slowed markedly as well.
“Trump’s escalation comes at an awkward time, but if push comes to shove, they’re quite capable of supporting growth through more investment and credit,” he said. He added that China has the capability of borrowing more, particularly if it’s through the central government and not more debt-saddled provincial governments.
In fact, China has already done so.
“China has stepped up its stimulus measures aggressively since the start of the year, which suggests mature policy appreciation of the risks,” added Lena Komileva, chief economist at G-Plus Economics, in a note to clients.
That’s not to say China would escape unscathed from a full-fledged war. SocGen, for instance, says the drag from the trade war for China can be as high as 1.2% of its GDP. And that’s without modeling the greater impact on global confidence as well as China’s relations with key counterparts like the European Union and Japan.
Even with the downturn in global markets, there still seems to be a belief that one or both sides will blink.
Even with the heavy losses on Monday, the Dow Jones Industrial Average DJIA, -0.11% is still up nearly 9% for the year, hardly the market pricing in of a global economic collapse.
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