The new tariffs proposal by U.S president Donald Trump has intensified the trade wars between the two nation, but the chances of China cutting its trade surplus with the US in response to the new tariffs is absolutely nil. The 25% increase in trade tariffs proposed by Washington puts China in a debt crisis and cutting trade surplus would not be a suitable option to help the situation.
The imposition of new tariffs on low-value exports involving Asian value chains is seen as a strategy employed by the U.S to cut down on the trade of cheap imports rather than leveling offshoring. The 25% increase in trade tariffs is also a means of reducing the country’s account deficit which is currently lower than 6%. The effects of the increase in trade tariffs are already caused an economic crisis in China evidenced by the current exchange rate which is at 6.725 to the U.S dollar, the lowest rate this year.
Nevertheless, the increase in trade tariffs is not easily felt thanks to China’s stable and centrally controlled currency. The uncertainty of yuan’s stability has caused China’s investors to start exporting money leading to a decline in the foreign-exchange reserves. The impending economic collapse is evidenced by a weak currency in combination with falling employment rates, trade, and product consumption. The massive decline in The Shanghai Composite Index by close to 7 percent is also vital evidence of an impending economic crisis. The drop in property prices in major cities points to a financial crisis despite with the government moving in to contain the situation by stopping property transactions.
The exact extent of the economic crisis cannot be estimated as the government tries to mask the situation by commanding financial institutions to push debts into alternative, opaque channels. Nevertheless, the ailing economy evident with economic analysts empathizing an impending economic collapse. It is difficult to understand how China being the world’s biggest exporter and playing a central role in the global economy can undergo an economic crisis. However, the economic crisis currently being witnessed in China is widely linked to the presence of uncontrollable currency exchange in the country where cheap dollars are realized to financial markets through legitimate and illegitimate channels. This leads to a structural surplus in the economy without a corresponding increase in yield from the U.S. The current economic crisis is also attributed to inflation where the central bank releases more yuan than the justified amounts of dollar inflow creating an economic crisis.
The trade wars initiated by the U.S is seen as a strategy to dominate the global commerce by running trade deficits in an attempt to own the currency, therefore, evading China’s predatory policies. In the near future, China’s central bank will have to lower the exchange rate to the U.S dollar to save China imports relying on the capital account.
China’s economy is still holding up to date thanks to massive capital inflows which have continually serviced nonperforming debt in addition to alleviating the dollar pressure. China’s impending economic collapse would have a negative impact across the globe and wouldn’t benefit anyone let alone the U.S. Therefore; president Trump should reconsider his decision and lower the trade tariffs to save China’s weakening economic situation.