A Fresh Look at the US-China Trade War and Its Impact on China's Economy
Prolonged consumer price decrease in China documented for third consecutive month
In a third consecutive month, China battles with deflation, as escalating trade tensions between the US and China add to already weak domestic demand. According to the Chinese National Bureau of Statistics, the consumer price index slid by 0.1% year-over-year in April, mirroring the decline in March. Factory deflation persists, with the producer price index revealing a decline of 2.7%, up from 2.5% in March.
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Deflation on the Horizon
With U.S. President Donald Trump targeting most Chinese exports with a 145% tariff last month, deflationary pressures could further intensify. The tit-for-tat trade war may prompt companies to offload their products domestically, intensifying competition and pushing firms to lower prices even more.
As noted by Bloomberg Economics economist David Qu (曲天石), ongoing policy efforts to boost consumption fail to show meaningful progress. To avert a prolonged economic slump, the government might need to rapidly increase fiscal support, especially in the event of unsuccessful negotiations with the U.S.
Consumer Spending at Risk
Losses in jobs and income due to U.S. tariffs could diminish the ability and willingness of Chinese consumers to spend. Consequently, manufacturers and service providers might be forced to reduce prices.
China's economy had already grappled with deflation during the first quarter of the year, reflecting an imbalance between supply and demand. The GDP deflator—a comprehensive measure of prices across the economy—decreased for the eighth consecutive quarter.
A Bumpy Economy
The US-China trade war inflicts complex and multifaceted effects on China's inflation rates and economic growth:
- Trade Disruptions have hindered global supply chains, impacting China's economic growth and export-oriented economy.
- Tariff Escalation has inflated costs for Chinese manufacturers, potentially impacting their global competitiveness.
- Supply Chain Disruptions could lead to shortages and price increases, potentially contributing to inflation if not addressed by domestic production or alternative imports.
- Tariffs on US goods might elevate prices, adding to inflation, but their overall impact on inflation rates may be limited if domestic production or imports fill the gap.
Recent de-escalation efforts, such as the temporary suspension of some tariffs and the establishment of a dialogue mechanism, may help alleviate some economic challenges. However, these measures do not signal a return to normal trade conditions. The long-term effects will depend on the development of trade policies and the ability of both nations to negotiate permanent solutions.
- As the US-China trade war intensifies with increased tariffs, businesses in China may struggle with rising costs, potentially affecting their global competitiveness in the finance sector.
- With continued deflation in China and a weakened domestic demand due to the trade war, the government might need to invest more in fiscal support to stimulate consumer spending in the general-news business sphere, thus averting a prolonged economic slump.
