China Economic Restrictions & Effects Globally
We are in a global community with all nations interrelated so when a major contributor to the global economy has economic restrictions it impacts the world economy significantly. Global growth has slowed and US and China (the 2 top GDP contributors to the world output) have large impacts. Thus, China’s economic restrictions will most likely contribute even further to global slowdown.
During this time of global challenges and tightening, we need growth-enhancing structural reforms to help economic activity including strengthening trade policies such as reduction in tariff & nontariff barriers to aid in facilitating international trade and alleviating global pressures. These policies could also help to reduce inflation by reducing import costs. Therefore, China’s economic restrictions come at the most inopportune time and only compound our global challenges.
In order to effectively collaborate together in a global community, I would also like to mention transparency is an issue. We can only work with the data that is provided to us so we should account for varying margins of error with potential inconsistencies should they emerge.
I would like to provide a backdrop for this discussion for the listeners and attempt to simplify these global issues.
First, we need to discuss what contributions China provides to the global economy and its role among the players to assess these impacts. China now has the 2nd highest GDP with significant growth in the past decade. It is the #1 exporter of goods since 2009, based on low-cost manufacturing, investment, and exports which seemingly reached its limits and has led to imbalances economically, socially, and environmentally. It is plausible that a shift in the foundational structure of its economy from manufacturing to more high value services, investment to more consumption and from high carbon to low carbon intensity could facilitate reducing these imbalances. There is no doubt that China’s growing economy is an important source of global demand and economic restrictions will only further negatively impact the global economy already under serious pressures. Moreover, both exports (less production) and imports (less consumption) will be under pressure thus affecting other countries with their exports to China as well as their imports from China.
China is responsible for a significant proportion of global trade in telecom, tech, semiconductor parts & equipment as well as natural resources. These equipment and commodities serve as essential materials for many goods and services worldwide so limitation should cause more short – mid term supply chain strain on these necessary materials further adding pressures to worldwide supply chain challenges and, depending on the demand at that time, prices could rise further accordingly. Thus, adding to the existing global inflationary pressures.
Furthermore, if there are reduced exports due to the restrictions, this could potentially provide opportunities for other emerging manufacturing exporters and may eventually reduce some of our reliance on China. It can also serve to aid China in eventually balancing their economy to more high-quality growth and reducing their per capita emissions while hopefully not exacerbating financial risks. The key here for the world economy is they may be forced to reduce reliance on China while reallocating the manufacturing of these goods that were “China manufacturing dominant” to other countries. A quick example is semiconductors as we see with the US enacting the CHIPS Act. Therefore, this could encourage other economies to grow and increase global participation. So, while there may be short to mid-term volatility, eventually, we are hopeful there could be long term benefits. Maintaining and improving global trade and investments is our goal.
No doubt there will be volatility on the global economy and additional constraints on supply chains and global trade while we are already amidst high inflation, geopolitical issues, energy crisis, food shortages and more. Therefore, the greatest risk facing the global economy near term may be further elevated inflation causing central banks to continue raising rates thus maintaining a higher cost of debt and capital for consumers and businesses which will further slow growth. This elevated inflation, which undermines growth, needs to be curbed in order to avoid entrenchment which can anchor high inflation affecting labor and price settings which affects financial and household decisions.
These international tensions going on with Russia and China and the rest of the world not only add to inflationary pressures but also to our energy and food shortages. Food scarcity is a very real concern. Of course, I am hopeful and prefer that, as a result of these challenges, we shift to more renewable sources of energy and invest in more resilient and productive agriculture while providing support for the farmers.
Short to mid term pain to hopefully offset greater pain ahead.
In conclusion, challenges bring forth new opportunities and solutions. We always find a way to improve and be better. Adaptability and innovation. I believe in humanity. These short – mid term global challenges from China’s economic restrictions should bring forth opportunities in the global economies for others to emerge and grow that may help elevate their cost-of-living status with improved food supply chains and lower carbon footprints for the future as well as maintain and improve global trade with a new equilibrium.