US-China Trade Tensions Could Dampen Entire World Economy, Observers Say
If investments stall because of tariffs between the U.S. and China, the World Bank projects that the rate of growth will fall over all over the world. If the impacts are largely concentrated between the two global giants, China will be hurt worse than the U.S., and other countries will benefit, said Caroline Freund, the director of trade at the World Bank. Freund, a Chinese trade economist and a domestic China expert, spoke about the trade war Oct. 26 at a George Washington University conference on U.S.-China relations.
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The World Bank estimated that the U.S. gross domestic product growth would fall by 0.4 percent three years from now compared to where it would have been without the conflict; losses would be more painful in the mid-term, because it will take time for supply chains to adjust. "This is a very, very risky strategy in order to change the system," Freund said.
Jiandong Ju, a trade economist at Tsinghua University, suggested that the trade war was started by the U.S. because it does not want the Chinese economy to become the largest in the world -- it has been projected to reach that status in about eight to 10 years. Ju acknowledged that China and the U.S. should talk about industrial policies and intellectual property protections, but said China's rise cannot be contained over the long term. Even if tariffs remain in place, he projected that in about seven years, China's development would return to its earlier trajectory. "China has become the largest automotive market in the world, that will not change," he said at the conference. "If the U.S. wants to isolate itself from the largest country in the world, who will be more hurt?"
Mary Lovely, an economist with China expertise from Syracuse University, shared a paper that showed that sweet deals -- such as discounted land or preferential treatment to skilled labor -- both increased the amount of foreign investment in high-tech sectors and shifted Chinese exports away from labor-intensive sectors and into high-tech. In a short time, the proportion of high-tech exports went from 60 percent to 67 percent -- high-tech includes cell phones, consumer electronics, computers and aerospace. "Honey works," she said. "That effect is affecting global trade patterns."
Lovely said politicians may ask the Committee on Foreign Investment in the United States (CFIUS) to examine not just inbound foreign investment, but also U.S. firms' investments in China. She thinks that the tariff increases the U.S. imposed, though they are drawing support from Congress now, will be constrained by Congress eventually. "As the pain gets bigger, I believe they I'll listen as the screams get louder."