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The economic relations of US and China started shaking in mid-2017 when US President Donald Trump increased tariffs on Chinese imports and from the beginning of the first day of 2019, the trade war between US and China takes a point from where, resolving the problem seems next to impossible. Despite the US tariffs taking their toll on Chinese economy, the response shown by China is regarded as relative restraint.US trade representative office formed a list of $200 billion worth of Chinese goods that can be exposed to 25% increase in duty, instigating China to threaten further retribution.
Here is a look on Chinas reaction in form of both international and domestic reforms:
Expanding Trade and Free Trade Agreements
Chinese exporters are bewildered with heightened tariffs when selling to US while the importers of US goods are strangulated with Chinas own retaliatory tariffs. Since the trade war emerged, China has been hit with additional tariffs ranging from 5% to 25% on US$110 billion worth of US exports, this has pushed the Chinese consumers and businesses to face an extra cost on almost every product imported from US. In response to this Chinas imports from US has declined at a rate of 25% year on year reflecting Chinas efforts to bond with other trade partners like Sri Lanka, India, Bangladesh, South-Korea and Laos. Beginning from 1 july2018 the tariffs on a total of 8549 targeted goods imported from five Asian countries have been reduced or cut to zero. China has also upgraded its free trade agreement with Singapore, i.e. CSFTA, in November 2018, finally closing a series of back and forth negotiations for three years.
Tax Reforms and Incentives
For companies who are considering trimming due to the wrath of trade war, China has recently announced incentives to help them lower the unemployment insurance obligations. To ease the tension on China based importers, who are hardest hit by the tariffs – China first increased the export tax rebate for 397 products and later announced the export tax rebate increase more broadly. Along with this China has also expedited its individual income tax reform to lower the pressure on low- and middle-income earners and increase the consumption. The aim of new IIT law is to ease the burden on low to middle income earners while taking a tougher stance on both foreign workers and high-income earners (China Briefing, September 2018).
Enticing Investment to Pawn the Trade War Effects
China has made great efforts in improving its business atmosphere over the past year and with trade war speeding up its forecasted improvements. Some of the highlighted measures are:
- New policies to facilitate investments and trade like streamlined custom procedures.
- Response by regional governments in the form of policies like one-time cash rewards, infrastructure investments and reduced business costs at both provincial and municipal level.
- China has taken significant steps to improve its intellectual property (IP) rights, a major issue in US complaints against China. Changes in this regard are the creation of a special court for intellectual property rights at the national level and stricter penalties for intellectual property infringements.
Encouraging Chinas Economy
To tackle the ambiguity caused by the trade war, China has fast-tracked the stimulus to splurge the nations economy to some extent. An example of this is the decision by China central bank to provide RMB 10 billion (US$1.4 billion) in credit support to enhance private lending and previously announced infrastructure spending increases. Also, strenuous efforts are being made to boost small and micro businesses through extended financial support and lending by government departments. Instead of these rigorous efforts, China is unwilling and somehow unable to take large steps to improve the economy, the reason being the large debt due to massive spending during the global financial crisis. Data suggests that Chinas total debt surpassed 300 percent of GDP IN Q3 2008 (Institute of International Finance). This has led to a dilemma for local governments and financial institutions between boosting lending and reducing debt. Although the priorities are unclear at the local level, still the Chinese government had made sure not to overspend and be precarious and more goal oriented.
Speeding up Domestic Reforms
Measures like export tax rebates and incentives to avoid layoffs are mainly focused on interim relief for firms affected by tariffs and trade fiction. On the other hand, policies such as RCEP, tariff and tax cuts and IIT reforms that were already planned are being fast-tracked in order to speed up governments pre-existing reform agenda due to the trade war. These policies can reduce the pain felt by the companies hurt by the trade war but dont compare to the scale of governments response to its massive economic challenge last year. This strategy of the Chinese government to move forward with a structural transition towards domestic consumption and high-tech innovation have high dividends in the mid to long term.
Conclusion
President Donald Trumps lack of diplomacy and aggressiveness and business-like approach is noteworthy on the other side the assertive approach of Chinas president Xi Jinping repents the new era of US-China trade relations. With taxes and restrictions China tried to repatriate all the belongings of the American nation with protectionist measures. The Chinese government choose a nifty way to go around tariffs by letting the Yuan weaken against the US dollar. At this point it is difficult to make speculations about who will come out as a winner, but currently US-China trade war is a significant threat to rule based multilateral trading system. Chinas targeted and more conscious measures also indicates the lesson learned by them during the global financial crisis which made the nation indebted due to pouring billions in financial stimulus. Trade war has also affected the goals set by Chinese government for the national plan Made in China 2025. The main concern growing out of trade war is for Chinas intellectual property environment. This has led to an urgent need to reform Chinas IP system from different aspects. As the time passes the impact of trade war gets more real and shorter-term emergency measures could jump up high in the agenda.
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