China’s slumping economy adds new dimension to trade war

There’s good news and bad news from China. It’s the same news: China’s economy is slowing.

China’s retail sales are growing at the slowest rate in 15 years. Industrial production reportedly is slumping too.

Forecasts are for reduced economic growth. This year, reported growth will be around 6.6 percent. The forecast for next year is 6 percent, and many are now wondering whether it will reach that mark.

The case that this is bad news seems straightforward. We’re talking about the world’s second largest economy. If it slumps significantly, the effects will be felt worldwide, including in the U.S.

The Dow Jones average fell by 500 points yesterday on the bad data about China’s economy. Naturally, losses were even more pronounced in Asia.

So what’s the good news? It’s that China’s sagging economy gives President Trump more leverage in his confrontation with China over trade. China now has added incentive to accommodate the U.S. and other leading economic powers, lest a trade war and sanctions add to Chinese economic woes.

The Washington Post reports that China is now scaling back “Made in China 2025,” an industrial policy designed to produce dominance in ten high tech industries. It has also opened markets for financial services and automobiles. Specifically, it has eliminated the foreign ownership cap for life insurance, approved foreign financial institutions underwriting domestic bond offerings, and agreed to lift limits on foreign stakes in automobile joint ventures by 2022.

In addition, of course, China has rolled back newly imposed tariffs as part of a trade war truce with the U.S., conditioned on reaching a resolution of the dispute on tariffs. The deadline for a resolution is March 1. Bad economic news may inform China’s negotiating stance.

China’s economic slump creates an environment in which concessions are more likely. But there would be no concessions without President Trump’s demands for them. Absent external pressure, bad economic news would provide no incentive for China to be a better actor when it comes to trade and related issues. Indeed, absent such pressure, the incentive would be to double-down on objectionable practices.

The Post complains that Trump’s trade policies towards allies have alienated the nations we need to help us combat improper Chinese practices. This has concerned me, too.

But the Post concedes that these nations have plenty of incentive to pressure China, notwithstanding their displeasure over U.S. tariffs. As the former Mexican ambassador to China says: “Everybody’s tired of the way China games the trading system and makes promises that never amount to anything.”

Under President Obama, promises were good enough. Not under this president. And with Trump leading the way, the Post acknowledges that attacking Chinese protectionism now has bipartisan support in Washington, and the support of the EU and Japan. That support has translated into concrete measures by nations like Britain, Germany, and Japan to combat Chinese trade practices.

This doesn’t mean we couldn’t squeeze China harder through concerted action with our allies. Trump’s assault on Chinese protectionism could be fine-tuned. But the administration deserves considerable credit for making a major issue of abusive Chinese practices and for the progress it has achieved to date in combating them.

The big question for me has been how much pain Trump is willing to have the U.S. endure as part of this fight. He has made the state of the stock market a key metric for judging his administration. His China policy is hurting the stock market.

However, China must ask itself the corresponding question. And the bad economic news from China makes that question more pressing and more acute.

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