The economy today, facing steeper tariffs, finds itself in a precarious position compared to the 7.5%-25% devied during Trump’s first presidency.
Reuters
07 November 2024, 12:35 pm
Last modified: 07 November 2024, 12:39 pm
FILE PHOTO: Former US President Donald Trump delivers remarks on the day of his court appearance in New York after being indicted by a Manhattan grand jury following a probe into hush money paid to porn star Stormy Daniels, in Palm Beach, Florida, US, April 4, 2023. REUTERS/Marco Bello/File Photo
The Looming 60% Tariffs
Former US President Donald Trump, now reelected, contemplates imposing a whopping 60% tariff on Chinese imports into the United States. These proposed levies threaten to inflict substantial growth risks on the world’s second-largest economy. The situation today is starkly different from his first term when tariffs ranged between 7.5% and 25%.
Property Market Crisis
Back in 2018, the Chinese property market was robust, accounting for nearly a quarter of economic activity. That strength allowed China to weather the tariff storm without much turbulence. However, by 2021, the real estate sector nosedived, and with it, so did local government revenues. Overbuilding left the market saturated, and it’s doubtful whether this sector will regain its past prominence.
The Debt Burden
As the property sector stumbled, local governments found themselves entangled in unsustainable debt. While Beijing prepares fiscal support for these regions, the extent of their liabilities presents significant limitations. The IMF estimated government debt at 147 trillion yuan at the end of 2023. Including household and corporate debt, the total surges past 350 trillion yuan. That’s about triple the country’s GDP, according to BIS.
Weak Domestic Demand
Domestic demand remains lukewarm due to low wages and pensions and weak social safety nets. Consequently, household spending is less than 40% of GDP, lagging behind the global average by 20 percentage points. Addressing this involves either accruing more debt or redefining income distribution to prioritize households. Countries around the world have successfully bolstered domestic demand through reforms and economic adjustments. A great example of this approach is Singapore. For insights into taxing and spending strategies, see Fiscal Policies.
Deflationary Pressures
Weak domestic consumption paired with property turmoil and ballooning debts contribute to mounting deflationary pressures. China’s resource-shift strategy—from property to manufacturing—led to what many western nations view as industrial overcapacity. Factory gate prices exhibit deflation; producer price inflation stood at negative 2.8% in September 2024. Contrarily, it was positive 4.6% in July 2018. Such deflation could dampen economic growth further, especially if external trade demand dwindles.
Limited Scope for Currency Depreciation
The yuan yet confronts limitations regarding depreciation. In the past, the yuan weakened by about 10% against the dollar amid earlier tariff threats. Those measures offset the tariff impacts back then. Current conditions, however, suggest a need for the yuan to plummet by 18% against the dollar if Trump’s proposed levies go through. Analysts predict this could anchor the yuan at 8.5 to the dollar—a scenario reminiscent of the 1990s Asian financial crisis. However, fears of capital outflows prevent authorities from facilitating such adjustments.
Other Pertinent Factors
The USA’s stimulus packages during Covid, alongside Russia’s estrangement from Western markets, spurred unexpected demand for Chinese goods. Nonetheless, these temporary boons are not likely to be replicated. In sum, while past strategies and markets provided some resilience, today’s economic landscape renders China far more susceptible to potential tariff blows.
