Why does China’s economic slowdown now rank as a key risk of a global recession? Which countries are most likely to be affected by China’s slowdown?

China’s economic slowdown would drag down global output growth because China buys so much from so many countries. For example, the U.S. stock market went down because Apple's profits were greatly reduced by the economic slowdown in China. The big decline in the amount  that China is importing means that the unemployment rate will definitely rise in many countries.

Countries that will be most negatively affected by China’s economic slowdown are located in East Asia, particularly its neighbors. Japan and Korea sell a tremendous amount of high value intermediate products to China. Since the Chinese customers are not buying the final finished products, there is less demand within the whole production chain.

 

Given that China imports many commiaodities, how will the slowdown affect the global commodities market? Will the slowdown of the Chinese economy have a different impact on developed countries than on developing countries?  How will countries that export commodities to China adjust?

The degree of adjustment will be more severe in developing countries. They are the ones that will not only face rising unemployment, but also face much lower prices in their raw commodity exports. The word ‘adjustment’ is an euphemism for the suffering that these countries will experience.  What the adjustment consists of is a decline in the standard of living, especially for China’s neighbors in Southeast Asia.

 

Many American companies, including Apple and Caterpillar, are forecasting lower profits because of China’s lower growth. What is the future scenario?

In the short run, China’s slowdown is bad for American companies as well as for China. The U.S.-China trade war has no doubt made China’s slowdown much greater than expected by China’s leaders. 

The economic situation in the U.S. however is not as dire as in China.  It could be said that the US-China trade war started on January 22, 2018 when Trump imposed a 30% tariff on foreign solar panels, in which China is the world’s largest exporter.  The US unemployment rate was 4.1% in January 2018 and 4.0% in January 2019.  As China is suffering much more from the trade war than the US, American businesses are hopeful that the deep slowdown from the trade war will make the Chinese agree to allowing easier entry of US goods and services into China’s domestic market (e.g. telecommunications) and allowing foreign investment in China’s monopoly sector (e.g. financial industry).  Overall, the American business community is cautiously optimistic that a recession in China will work to the advantage of the U.S. in the long run.

 

How is the U.S., in particular the Trump administration, reacting to China’s slowdown?

The Trump administration is gambling on the slowdown forcing Xi Jinping to make concessions to end the trade war. The situation is not so simple however.  While an economic slowdown weakens Xi Jinping politically, bending to the will of the U.S. is also bad for him politically. President Xi is caught in a difficult position. The resulting paralysis in decisive actions by President Xi will mean that the losses on both sides will mount.

The U.S. military is viewing China’s growth slowdown with glee, thinking it will slow down China's emergence as a military power. I think this glee is not justified. Look at how poor North Korea is, yet that has not stopped North Korea from making military progress. Even if China has a prolonged recession, China's military capability is not going to be significantly affected. China's emergence as a major military power is something that the recession will at best slow down, but will not ultimately stop.

 

China’s slowdown may hurt some countries, but are there countries that will actually benefit from China’s slowdown and why?

Some countries might expect to benefit in terms of national security, but they will nonetheless suffer in economic terms.

When China is not buying as much goods from a country, that generally means higher unemployment in that country. But China’s slowdown doesn't mean that China becomes less of a competitor in the global market. In fact, a slowdown in China means it has more to sell abroad, given the challenge of selling goods at home.  It is just hard to think of any country that will benefit in economic terms from China’s growth slowdown.

It is actually irrational to believe that that a country could definitely benefit from China’s slowdown in national security or geo-strategic dimensions. The example of North Korea should put this simplistic thinking to rest. 

The national security concern with China should be addressed by the formation of a military alliance to deter China rather than by trying to stunt Chinese economic growth with a trade war which is mutually destructive.  At the same time, the mandate of the United Nations in preventing and stopping war should be enhanced – this is the best way to address global national security.

I must note that lasting peace on the trade war front can be achieved only if two things happen.  First, China will have to adopt more reciprocity in its trade and investment relations with other countries.  China will have to fully honor the terms of the 1999 US-China agreement on China’s WTO accession, to acquire advanced technology at market prices (e.g. respect intellectual property rights) or through strengthening its indigenous innovation capability, and reduce the use of its WTO privilege as a developing nation in employing tariffs and subsidies to promote infant industries. 

Second, the United States and China will have to defend their national security interest, as far as possible, only with non-economic instruments.  The use of trade and investment restrictions must be limited to areas where economic interest and national security – both narrowly defined -- cannot be separated