How would the Chinese trade war affect the world?

China is today finalising a deal that will see the country trim the size of its state-owned enterprise sector. Meanwhile, the wider world is bracing itself for the prospect of a global trade war…

How would the Chinese trade war affect the world?

China is today finalising a deal that will see the country trim the size of its state-owned enterprise sector. Meanwhile, the wider world is bracing itself for the prospect of a global trade war as the US decides how to respond to tariffs imposed by China.

We wanted to find out what the impact on the world’s economy would be if the fall hits China harder than expected. The models are not that fanciful. If the current economy is included, they show how the world’s economy might react to a 20% fall in China’s exports to the US and other G20 countries such as Germany, Australia and Canada.

Economists at Capital Economics also took a snapshot of what the impact might be. We calculated what the current economy is weighed down by, then all the numbers were added together to create a higher standard of economic model, the standard deviation.

The world’s largest exporter, China, could face the largest loss under the models, thanks to what they estimate to be a direct loss of more than $400bn (or £288bn) in exports to the US and the rest of the G20.

What do China’s trade partners get? Estimates for loss in international trade can vary, because they don’t always account for the effect of the trade slump on a country’s banks, for example. Several of the models we looked at also assume a greater rate of growth for trade with China over time.

As the models show, if the fall was substantial, there would be plenty of cause for concern about economic performance outside China. Average industrial production in Germany and Australia would decline by as much as 6% in a 20% fall.

By contrast, the most pessimistic estimate we could find for Mexico, for example, came in at zero.

Even with that scenario, their world aggregate growth would still rise by 0.8%.

We’ve prepared the bullet points for what the models also suggest would happen if the fall is rather less dramatic. Some analysts are even suggesting that a short-term trade war with the US could benefit the world economy – but only if this kicks off a long-term revamp of global trade.

So why does China, or its leaders, think it should want to do this? The argument for small state ownership is that, as opposed to US firms with hundreds of millions of employees, Chinese firms can rapidly expand when they set up shop overseas, which would remove a hurdle that could prevent companies from making major investments overseas.

The knock-on effect, though, would be that Chinese manufacturers would shift production from China to places such as Vietnam, Thailand or Indonesia, where labour is cheaper. Then both parts and finished goods would be exported back to China, where the fall in exports could deepen.

Read the full models here

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