We recently asked Shaoyu Yuan, author of Amazon bestseller Panda Not Dragon: Why the Rise of China Is Not a Threat, what the worst-case scenario of the current trade war with China would be. Here’s what he had to say in response.
What’s the Worst-Case Scenario of a Trade War with China?
The worst-case scenario of the trade war could certainly be a real, kinetic, armed conflict; however, that is unlikely to happen since the goal is not an actual war. What could happen is a full-on total trade war between the two great powers if both sides are reluctant to back down.
Both economies are hurting, but the Chinese economy is hurting more in this trade war. The trade war is relatively new to the Chinese, but not to the US. This trade war is happening in China’s transformation from an export-orientated economy to a consumption-oriented economy, which is terrible timing.
If the transformation fails, it is possible that China will enter an era of stagnant growth. In fact, the country’s economy has been slowing down gradually during the last couple of years as its exports are tumbling and labor is getting more expensive. If more tariffs are to be added on the Chinese goods and the current tariffs cannot be withdrawn, China’s economy might have to embrace its own “lost decade.”
What Can be Done, Then?
Therefore, the Chinese appear more eager to achieve deals with the US. However, if the Trump administration keeps pushing and breaking its agreement, President Xi Jinping might just take a different approach–a kamikaze-style retaliation. This would hurt the US deeply in the short term as the country would have a hard time to find another buyer that is as large as China for many of its products, such as soybeans and cotton.
Nevertheless, such substantial retaliation could put China into an economic crisis. In any case, China is losing the trade war while the US economy is suffering simultaneously. It is the best for both nations to cancel the upcoming tariffs and work on new deals that could resolve the concerns of the United States.
If not, the continued trade war between the largest and the second-largest economy on earth may just lead to a global recession.