US President Donald Trump’s protectionist threats against China have spurred much concern. If he follows through on his promises and officially labels China a currency manipulator or imposes higher import tariffs, the short-run consequences — including a trade war — could be serious. However, in the longer term, a turn toward protectionism by the US could be a blessing in disguise for China.
China is going through a difficult phase in its development. After three decades of double-digit GDP growth the pace of China’s economic expansion has slowed markedly. The combination of rising labor costs and weaker demand for Chinese exports has reduced China’s annual GDP growth to 6.9 percent in 2015 and 6.7 percent last year. The Chinese government has now lowered its growth target for last year to 2020 to 6.5 percent to 7 percent.
This is still a respectable pace, but it is not the best China could do. As Justin Yifu Lin (林毅夫) and Wing Thye Woo (胡永泰) have said, in 1951 — when Japan’s per capita income relative to that of the US was the same as China’s is today — Japan was experiencing sustained growth of 9.2 percent.
One impediment to such growth for China is a heavy debt burden.
A stress-test analysis by the McKinsey Global Institute found that if China continued to pursue its debt and investment-led growth model, the ratio of nonperforming loans could rise from 1.7 percent today — according to official figures — to 15 percent in just two years. That said, the risk of nonperforming loans is not news to the People’s Bank of China, which will, the evidence suggests, take steps to mitigate it.
Unfortunately, debt is not China’s only problem. Its dominance in global exports — the main engine of its growth in recent decades — has eroded. India’s trade-to-GDP ratio overtook China’s last year. In addition, while labor productivity is rising steadily in China, it remains less than 30 percent of advanced-nation levels.
Given these challenges, it might seem strange to assert that China could be on the verge of ascending to a new level of global influence. However, because of Trump’s approach, China has a new and important opportunity to do just that.
While trade and capital flows require regulation, openness —on balance — does vastly more good than harm. Trump’s “neo-protectionist” policies — which aim to limit the flow of goods, services, and people to the US — are rooted in nothing other than myopic xenophobia. In the end, this will isolate the US far more than China or Mexico.
History bears this out. On the eve of World War I, Argentina was among the world’s wealthiest countries, behind the US, but ahead of Germany. Since then, Argentina’s economy has deteriorated substantially for two reasons: inadequate investment in education — a mistake that Trump might also make — and heightened protectionism.
The rise of nationalism in the 1920s culminated in 1930, when far-right nationalist forces overthrew Argentina’s government. The new government — which was bitterly opposed to liberalism, not to mention foreigners — raised tariffs sharply in several sectors. On average, import tariffs rose from 16.7 percent in 1930 to 28.7 percent in 1933. Jobs in traditional sectors were saved, but productivity declined. Today, Argentina is not even among the top 50 economies worldwide.