On Monday, May 5th, an expert who has been closely following China’s economic issues wrote a warning that it is a “dangerous fantasy” for countries to try to have it both ways in the US-China trade war and to maintain good trade relations with the Chinese Communist Party.
George Magnus, a research fellow at the Oxford University China Centre and economist, penned an article in The Times, stating that the tariffs imposed by both the US and China have reached as high as 145% and 125% respectively, resembling more of a trade embargo. This could have profound implications on bilateral trade and might even lead to a collapse.
Magnus pointed out that from the current situation, Beijing is under pressure but also waiting for an opportunity to test the political vulnerability of the Trump administration to unfavorable economic and financial news. At the same time, Washington hopes to reach new trade agreements with countries like India, Japan, South Korea, and Vietnam to secure more favorable trade arrangements in exchange for reducing tariffs on American goods.
He observed a prevailing misconception in the West of wanting to have it both ways and attempting to foster good trade relations with China.
“There is a general misconception, even advocated by the UK Treasury, other governments, and many commentators, that seeking closer trade ties with Beijing in the face of erratic tariff hikes and an unreliable United States can bring comfort, even relief,” Magnus pointed out. “This misconception is a fantasy and a dangerous one.”
He cited data indicating that while China’s export volume growth rate is four times that of global trade growth, its import volume has been consistently declining.
Magnus explained that this phenomenon is determined by China’s state-led mercantilism and industrial policies, which run counter to the goals of other countries hoping for China to boost domestic consumption and increase imports.
He stated that the Chinese economic model is unlikely to change and will continue to primarily export to other countries rather than import from them. Furthermore, regardless of China or any other country, no one can replace the U.S., which holds a 30% share of global consumption.
China’s economy is on a downward trajectory. In March, a key indicator measuring new export orders in the Purchasing Managers’ Index fell to the lowest level since the 2022 pandemic. Coastal provinces, which are major sources of China’s export business, are likely to see production cuts and potentially millions of job losses. In 2024 alone, exports contributed almost one-third of China’s economic growth, and the impact of the trade war will further dampen an already subdued economy.
Magnus warned that many stimulus policies for China are constrained and may not be effective. For example, further monetary easing policies could weaken the yuan exchange rate, while more fiscal stimulus measures would add to China’s already heavy debt burden.
This means that China’s economy, heavily reliant on export growth, will need to continue seeking new export markets to offset income losses from the U.S.
Magnus cautioned that Europe, the UK, and several middle-income countries need to be vigilant against the influx of Chinese goods. He noted that around 50 major trading nations have already implemented restrictions on Chinese exports to protect their domestic steel, automotive, or other industries, as these countries are highly sensitive to further influx of Chinese goods.
In the long term, tariffs will affect bilateral trade balances, but will not have a direct impact on global trade imbalances.
Magnus explained that global trade imbalances are determined by a country’s domestic savings and investment trends. In the short term, the U.S. will continue to maintain a sizable trade deficit, while China will uphold a significant trade surplus. However, U.S. tariffs will “alter the geographical distribution of deficits and surpluses.”
It can be inferred that amidst the backdrop of the trade war, Chinese goods may be rerouted or transshipped through third countries to enter the U.S. again. This is why the Trump administration is monitoring the transshipment of Chinese goods and engaging in separate negotiations with various countries. China has previously utilized countries like Mexico, Canada, Thailand, and Vietnam as third-party routes to export to the U.S.
Magnus is the author of the book “Red Flags: Why Xi’s China is in Jeopardy.”