AS the US-China trade war escalates, the prospects of trade negotiations between the countries are becoming uncertain.

The attack on Huawei by the US and the statement by President Donald Trump that the company will be included as an element in the negotiations have increased the possibility that trade friction between the countries could worsen.

According to the World Trade Outlook Indicator released by the World Trade Organisation (WTO) in April, the forecast for global growth has been sharply lowered, from 3.7% to 2.6%. The WTO report also warned that a further contraction in global trade could trigger a sharp slowdown in the global economy.

Under such a context, what will happen if the US-China trade negotiations fall apart and the countries fail to reach an agreement? What kind of impact will befall the Chinese economy? Will there be an economic collapse? And lastly, what impact will this have on the global economy?

Anbound’s macro research team has conducted various discussions and scenario analyses. One of our basic estimates is that, in a situation where we can control and avoid a comprehensive economic and financial war, even if the US-China trade negotiations fall apart or their trade war and technology race break out, the Chinese economy will suffer serious impacts.

However, China’s economic growth will not baselessly decline. Even if economic growth falls to the 4% level, the Chinese economy will not collapse.

Now, we would like to place emphasis on the fact that even if Chinese economic growth does shrink to 4%, it would be regarded as an extreme situation for Chinese society in peacetime, and China may undergo a series of complex changes:

First, China’s economy will be a so-called “iron plate”, which means it is incompressible and not afraid of sanctions. Most of China’s science and technology industries and their related products, which are now being attacked by the US, aren’t affecting the way Chinese people today live their lives all that much. Even if these science and technology products can’t be produced due to US-imposed restrictions, Chinese society can still sustain itself without these technologies.

For example, if 5G is not available, China can substitute it with 4G, or in dire cases, 3G. As long as China’s basic needs are satisfied, its basic economic growth can be sustained. This is equivalent to the “fundamental state” of China’s economy.

Secondly, the main driving force of the Chinese economy will shift its focus internally to the domestic market. In the face of the trade and technology war initiated by the US, China’s economic external environment could take a turn for the worse, and it might possibly last for a long period of time.

However, China has one of the biggest bargaining chips in its possession – 1.4 billion people in the domestic consumer market. If this huge market can be utilised effectively, it will be able to support China’s basic economic growth.

Thirdly, the trade war will accelerate the transformation of China’s economy. In the context of economic globalisation, China used to be a manufacturing country, relying on its robust manufacturing industry to produce low-priced products for the world market, which, at the same time, established the country’s position as a “world factory”. However, in the era of overproduction, excess production capacity has become a burden for China. Its manufacturing and export capabilities are the main targets of the US-China trade war.

Objectively, however, there may be a certain result to this. To a certain extent, this will help China reconstruct itself, to shift from overproduction to an economy supported by the development of domestic consumption. If the trade frictions are prolonged, they could accelerate China’s transformation from a manufacturing to a consumer society.

What we want to emphasise is this: if the US-China trade negotiations fail, China’s economic growth will not decline endlessly. The 4% level may, however, be the new bottom line for China’s economic growth, as well as the market’s confidence in the Chinese economy. Of course, this bottom line is a result forced by Trump’s administration and right-wing groups in the US.

However, the US may also need to realise that should the situation of the Chinese economy force China into becoming a toughened “iron plate” country, it also signifies that China will turn into an increasingly tough “competitor” to the US as time goes on. China may, therefore, use this as a foundation to promote social and economic integration. But, a consequence of this integration under such pressures is that China will depend more on its domestic market, and will further isolate itself from the US economy. This is clearly not a good thing for the US’ global interests.

Conclusion

A failure of the US-China trade negotiations will definitely impact China’s economy, but its economic growth will not slide baselessly. China’s economy will shift to rely more on domestic consumption, as well as the strengthening of social and economic integration. However, the results of such integration and moves by China are certainly not beneficial to the global interests of the US. – June 4, 2019.

* Anbound Consulting is an independent think-tank with its headquarters based in Beijing.

* This is the opinion of the writer or publication and does not necessarily represent the views of The Malaysian Insight. Article may be edited for brevity and clarity.