2018 in Review: How China is Fighting the Trade War？
As the calendar turns to 2019, the trade war between the US and China appears far from reaching a resolution. Despite Chinese President Xi Jinping and US President Donald Trump striking a deal to call a trade truce at the G20 summit, significant gaps between the two sides remain. Rather than pour in billions in financial stimulus, the Chinese government has introduced several targeted measures to reduce costs for businesses and consumers, and more crucially, advance and expedite its broader reform agenda. Here are the five aspects of how China is bolstering its economy to mitigate the impacts of the trade war.
Diversifying trade linkages
Since the trade war erupted, China has slapped additional tariffs ranging from five to 25 percent on US$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 percent 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. Mutual interest in hedging against US trade actions even led to a rapprochement between China and Japan, who are traditionally regional competitors.
Simultaneous tariff cuts, tax reforms
In addition to deepening links with alternative trade partners, China has cut costs for both businesses and consumers to cushion the impact of the trade war. On July 1, China’s tariff cuts on 1,449 categories of goods came into force.Then, as of November 1, China cut tariffs on a further 1,585 taxable items. For companies struggling under trade war pressure and considering downsizing, China recently announced incentives that would enable them to lower their unemployment insurance obligations. Moreover, China has expedited its individual income tax (IIT) reform to lessen the burden on low-and middle-income earners and encourage consumption.
Key business reforms
China has made great strides in improving its business environment over the past years. With the trade war speeding up, most of China’s improvements have come as a series of small but impactful measures to cut red tape and streamline business administration. The Chinese government is hoping to combine such improvements to the business environment with targeted incentives to attract investment. China has even made moves to improve its intellectual property (IP) rights, which is an issue on the forefront of US complaints of China.
In response to the uncertainty caused by the trade war, China has accelerated stimulus to spur its economy – to an extent. For example, in late October, China’s central bank made plans to provide RMB 10 billion (US$1.4 billion) in credit support to stimulate private lending, and previously announced new infrastructure spending increases. Further, in November, the State Council encouraged government departments to boost lending, especially to small and micro businesses. What’s more, reducing debt and financial risk has been one of the highest priorities of the Chinese government over the last two years, and remains so despite China’s current economic pressures. That means local governments and financial institutions are faced with the contradictory goals of simultaneously boosting lending and reducing debt.
Speeding up domestic reforms
Nearly half a year into the trade war with the US, China’s efforts to bolster its economy are relatively targeted and restrained.
Some measures, like export tax rebates and incentives to avoid layoffs, are clearly designed as interim relief measures for firms impacted by tariffs and trade friction. Many other measures, however, appear to be speeding up the government’s pre-existing reform agenda. RCEP, tariff and tax cuts, and the IIT reform are among policies that were already planned, but likely fast-tracked due to the trade war. These policies may offer tangible benefits to reduce the pain felt by companies hurt by the trade war. Additionally, China’s strategy could be beneficial to the country’s economic outlook beyond the trade war.
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