The Chinese economy will without doubt suffer damage from forced economic actions. First of all, 20 percent or more of the surcharge tariff will drive a large share of Chinese exports out of the U.S. market and will significantly reduce external demands.
Second, a large number of workers in China's export processing zones will lose jobs, resulting in a slowdown of economic growth and social unrest.
Third, as more speculative capital enters China betting on the yuan appreciation, the asset bubble problem in China's economy will deteriorate and possibly spiral out of control.
A possible Sino-U.S. trade and currency war will strike a severe blow to East Asia's economy as a whole. The so-called "Made-in-China" miracle has actually been a collective of division of labor across the region. In the past 15 years, East Asian economies including Japan, South Korea, Singapore, China's Taiwan and Hong Kong moved their assembly lines to China's mainland to take advantage of its cheap labor costs, and continue to target their exports on the U.S. market.
These economies greatly reduced their trade surpluses with the United States. But it is China who takes the blame for creating the surplus. We can easily imagine the panic and damage that will ensue in East Asia regarding even the slightest possibility of a trade and currency war between these two giants.
A major setback will be caused to the faltering recovery of the global economy, too. Leading the world out of the recession, China has replaced the United States as the greatest engine of the economic growth. But the outbreak of a Sino-U.S. economic war will only lead to global economic turmoil.
Domestic concerns
The panic from a Sino-U.S. trade and currency war could drive capital holders to dump dollars to buy euros. And a substantial appreciation of the euro is definitely not what Europe wants to see right now.
When Obama took office in early 2009, his team proposed a series of ideas to strengthen the cooperation with China based on common interests over issues including North Korea, Afghanistan, Iran, antiterrorism, climate change and global governance reforms such as with the IMF and G20.
Despite frictions over American arms sales to Taiwan and Obama's meeting with the Dalai Lama, the basic pattern of common interests and attractive prospects of strategic cooperation between the two countries is still there. And the United States needs China's cooperation as much as it did before.
If Washington unilaterally triggers a trade and currency war, its relationship with Beijing will be severely damaged, and deteriorated domestic politics will make these and future collaborations more difficult.
The author is a professor at the School of International Studies at Peking University and director of the Center for International Political Economy
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