China has more to lose in the Trade War game, and, therefore, it will have no choice but to concede to Washington’s demands. But it must lose the trade war gracefully, as was the case with the US-Japan trade war back in the 1980s.
“When China entered the war, the question became ‘who will lose more’," says Renee Mu, a currency analyst for DailyFX. “That's why China tried hard to avoid the war, until the first US tariff move on $34 billion Chinese goods went into effect on July 6. “
Once, the ‘first shot” of the trade war was fired, it set off three scenarios, according to Mu.
“Based on US Vice President Mike Pence's recent speech, the trade war is moving from scenario 2 to scenario 3,” adds Mu. “The longer China stays in this trade war, the more it will lose; same for the US. China's slowing growth may make it less resilient than before: the third-quarter GDP came in at 6.5% today, weaker than 6.6% expected.”
Meanwhile, China isn’t well prepared to fight a trade war with America, as it tries to cope with the “middle income trap” and the “Lewis turning point.”
The income trap is a situation where an emerging economy’s growth rate slows down as it reaches middle income. The Lewis point is a situation where the excess labor trapped in agriculture shrinks, pushing wages higher, and eroding the country’s competitive advantage in labor intensive industries.
Chinese labor has become expensive vis-à-vis India, Vietnam, and Indonesia. And that places additional pressure on the country’s slowing growth.
That’s why China has begun blinking in the trade war.
Last month, Beijing announced that it will lower tariffs on 1,585 products. The policy will take effect on November 1, and will bring overall tariffs level down to 7.5% from 9.8% last year. It covers textiles, metals, minerals, machinery and electrical equipment. These are goods that have been the target of US tariffs.
The new tariff reduction came a few months after China cut tariffs on most imported medicines, vehicles and auto parts.
So it looks like the US will win the trade war. But it must to be done gracefully, in a way that allows China to save face, as was the case with Japan back in the 1980s.
How was that done?
America admitted that part of its trade deficit with Japan was its low savings rate and large government deficits. Then it agreed to pursue policies that raised savings/cut the government deficit, as Japan agreed to slash tariffs and open up its markets to American products.
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