China’s biggest global risk
Of course, China’s global challenges now entail a new and serious risk — mounting trade frictions with the United States.In his inaugural address in 2017, US President Donald Trump asserted that “… protection will lead to great prosperity and strength”. The Trump administration has now moved from rhetoric to action in its avowed campaign to defend US workers from what the US president calls the “carnage of terrible trade deals”. And China is clearly the target.
Significantly, the Trump administration’s narrow fixation on the US’ outsized bilateral trade imbalance with China continues to miss the far broader macroeconomic forces that resulted in a US multilateral trade deficit with 102 countries in 2017. Lacking in domestic savings and wanting to consume and grow, the US must import surplus savings from abroad and run massive current-account and multilateral trade deficits to attract foreign capital.
Contrary to tough talk from the Trump administration, there is no winning strategy in a trade war. Of course, there are two sides to every dispute, and mounting economic tension between the United States and China is an obvious case in point. The ongoing structural transformation of the Chinese economy is not without important consequences for its codependent partner, the United States.
As China shifts from surplus savings to savings absorption —drawing down its 45 percent domestic saving rate to fund the safety net of the Chinese people — it will have less savings to loan to the United States and to subsidize the safety net of the American people. Yet with the large and growing budget deficits of “Trumponomics” likely to require more surplus savings from abroad, China’s shift to savings absorption comes at a particularly vulnerable time for the United States.(https://www.daowen.com)
Consequently, a growing disconnect is increasingly evident between the US and Chinese economies. Resolution of the twin contradictions facing both nations seems increasingly unlikely.America shows little inclination to address its own contradictions — especially, with the Trump administration and Congress willing to exacerbate America’s savings dilemma in the years ahead.
China, by contrast, seems determined to tackle the imbalances and strategic challenges of the new era.
In the end, China’s powerful economic takeoff was very much a levered play on globalization, global trade, and ultimately the global economy. Yet the lessons of Japan, the Asian financial crisis, and the global financial crisis all underscore the systemic perils of an externally focused growth strategy.
Escalating trade tensions with the United States only reinforce this conclusion. By recognizing the “unbalanced and inadequate” characteristics of China’s great successes in the first stage of its development, Xi and the Party leadership seem to understand the pitfalls of staying this course. Following a new course becomes all the more urgent.