“China's leaders have long known that the economy has outgrown the world market and is desperately in need of rebalancing. But, thanks to Donald Trump’s trade war, they are now pursuing that goal with a new sense of urgency, suggesting that US pressure may well end up being a blessing in disguise for China.” (Yu Yongding, Project Syndicate, How Trump Is Helping China, Oct 30, 2018)

“Consumption is, at last, becoming the most important driver of demand in the Chinese economy. This is a long-awaited and desirable adjustment. It promises to shift China away from its excessive reliance on inefficient, debt-fuelled investment. But it still has a long way to go.” (Martin Wolf, Financial Times, April 2018)

President Donald Trump has been escalating America’s trade war with China. Trump believes that since the US is running a substantial goods trade deficit with China ($375 billion US in 2017), the US is being taken advantage of by that country. Currently, America’s tariffs affect roughly one-half of the products that China sells to the US (about $250 billion). 

China's Ministry of Commerce has promised to hit back proportionately against the American tariffs, particularly against US agricultural products that are very sensitive to Trump’s political rural base. The Ministry has stated that "in order to safeguard our legitimate rights and interests and the global free trade order, China will have to adopt countermeasures at the same time." China’s government  did not elaborate on what the countermeasures would be, but China had previously imposed tariffs on $60 billion of US goods

Ironically, China’s leaders have for a long time been aware of the need to rebalance their economy away from the mercantilist emphasis on large foreign trade surpluses towards a greater reliance on domestic demand.

China’s economic authorities realized that their investment-driven model was reaching the point of diminishing economic and political returns. They recognized that some rebalancing away from the heavy reliance on massive domestic savings and investment towards domestic consumption was both necessary and inevitable.

On his side, The President doesn’t recognize or understand that over the many years that the US recorded large trade deficits with China, the US also gained some advantages from the trade deficit. Most economists believe that the costs that the US incurs from trade with China are substantially outweighed by benefits. i.e. American consumers were able to purchase goods at a much lower price than they would have otherwise.

In addition, the US runs current-account deficits not only with China but with all trading partners combined.  In order to finance its trade deficit, the US is forced to borrow more from its foreign counterparts, especially China, than it is lending.

Complicating the matter further is the fact that China is a large holder of US government Treasury securities. Without the inflow of China’s capital (i.e. purchase of US Treasuries) the cost of borrowing in the US, and the cost to the US Treasury, would be much higher.

Although many are not aware, economic rebalancing in China has already gone some distance in terms of shrinking its total current account surplus. Prior to the global financial meltdown, China’s current account surplus reached a peak of 10% of GDP. The CA surplus has recently declined to around 3% of GDP.

Domestic rebalancing from investment to consumption has also made some headway. China’s domestic rebalancing goal is to reduce its reliance on investment and to increase consumer spending.  At the same time, the government intends to maintain enough economic growth to guarantee political stability.

In a related way, as the IMF projections illustrate, as China’s investment moderates and consumption increases as a percentage of GDP, household savings will decline gradually. Consumer spending in China now accounts for more than two-thirds of GDP growth.

In closing, Donald Trump’s latest tariff war with China has re-energized that country to forge ahead on its rebalancing objectives.