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How China is Responding to the Trade Dispute

As we near the second half of 2019, the trade war between the US and China appears far from reaching a resolution. While Chinese President Xi Jinping and US President Donald Trump struck a deal to call a trade truce at the G20 summit, significant gaps between the two sides remain.

Yet, despite the US tariffs on China taking their toll – the country’s biggest economic challenge since the 2008 global financial crisis – the Chinese response has been characterized by relative restraint.

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Rather than pour in billions in financial stimulus, as it did a decade ago, the government has introduced several targeted measures to reduce costs for businesses and consumers, and, more crucially, advance and expedite its broader reform agenda.

Here, we look at how China is bolstering its economy to mitigate the impacts of the trade war.

Diversifying Trade and Free Trade Agreements

Chinese exporters are staring at heightened tariffs when selling to the US, while importers of US goods have been hit with China’s own retaliatory tariffs.

Since the trade war erupted, China has slapped additional tariffs ranging from five to 25% on $110 billion worth of US exports. This has meant that Chinese consumers and businesses face extra costs for importing almost any product from the US.

The extra tariffs are becoming a significant deterrent to Chinese importers: in November, China’s imports from the US declined by a drastic 25% year-on-year. The dramatic decline partly reflects China’s efforts to deepen relationships with alternative trade partners.

For example, beginning July 1, 2018, China cut tariffs for imports originating from India, South Korea, Bangladesh, Laos, and Sri Lanka. Among the products affected by these cuts were soybeans – a product that China imported $13.9 billion worth of from the US in 2017.

More recently, in its ongoing attempts to broaden trade partnerships, China pledged to import more agricultural products from India. Mutual interest in hedging against US trade actions even led to a rapprochement between China and Japan, who are traditionally regional competitors. Prime Minister Shinzo Abe paid his first visit to China – the first official visit by a Japanese leader in seven years – and said the two countries were shifting from competition to cooperation.

Further Opening-up

Chinese President Xi Jinping delivered a keynote speech at the Boao Forum in April of 2018 and announced certain major initiatives will be introduced in expanding reform and opening up.

In the end of 2018, China announced a new draft Foreign Investment Law, which indicates the government’s willingness to further open up its markets to foreign businesses and address complaints that have been prevalent among foreign investors.

It is significant that it has been released while China and the US have been engaged in a serious trade dispute and can be expected to alleviate some of the outstanding issues.

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