At GTR Asia‘s Trade and Treasury Week in Singapore recently, economist Richard Duncan spoke of the dangers to China’s economy posed by economic sanctions from the US.

The nuclear threat of North Korea has been stealing many headlines recently, but the threat of US sanctions on China is real and still very much a tool in Donald Trump’s armoury. Given the complexity of Asia’s supply chains and the fact that many of the products produced in the region end up in China, any embargo would have a huge impact on trade.

Duncan, who runs the website Macro Watch, says that the push for US sanctions is coming from those who feel China’s rise has unfairly penalised US trade. China has benefitted from an enormous trade surplus, on the other side of which is the US and other developed economies.

“If President Trump really carried through with his threat to impose 40% trade tariffs on Chinese goods, then it would have a catastrophic impact on China’s economy. Last year China’s trade surplus with the US was more than US$350bn, a third of a trillion dollars. That money flowing into China has been the thing that transformed China from a very poor developing country in 1990 to now, when China is the second largest economy in the world and fastest growing economy in absolute terms,” Duncan says.

He adds that China’s banking sector would also suffer, saying: “If this trade surplus was to all of a sudden disappear, the deposits would start piling up in Chinese banks. Of course, the surplus money goes on deposit in Chinese banks when it goes back to China. That funds future loans. Future loans make it possible for borrowers to repay interest on the funds they borrowed last year because the things they invested in are loss-making and don’t provide enough cash flow to pay the interest on their loss-making investments. So if we were to see large trade tariffs or a trade war with China, it would have a horrendous impact on China’s economy and I dread to think what the geopolitical consequences of that could be.”