In spite of the strong opposition from the international community, the US and British governments bypassed the United Nations Security Council and started military action against Iraq on March 19.

This war will seriously affect the economy of Middle East countries as well as that of the United States itself, further hurting a global economy that is already in decline.

It will delay the recovery of the world economy by causing a negative chain reaction on the economies and trade of other countries in the world.

According to the World Bank, the average annual growth rate of the global economy in the 1990s was 2.6 per cent. But it was only 1.1 per cent in 2001 and 1.7 per cent last year.

World Bank economist Chen Guangyan said that if the Iraq war lasts three to six months, the global economy will decline further in 2003.

The World Bank also estimated that the recovery of the world economy would be delayed until 2004.

International tourism and civil aviation have already suffered great losses due to the immediate impact of the Iraq war.

According to World Travel and Tourism Council (WTTC) estimates, a prolonged war will cost the international tourism industry US$30 billion and 3 million jobs.

The International Air Transport Association (IATA) also estimated that aviation companies around the world will lose US$10 billion due to the war.

The United States may prove to be a winner militarily owing to its might.

But, economically, it could end up the biggest loser.

The war will have an enormous impact on the US budget. Owing to unbalanced revenue and expenditure, its financial deficit is growing.

The financial deficit of the US Government is forecast to reach US$199 billion this year. If the US$237 billion budget surplus from the Clinton administration is taken into account, the real deficit of the current government could reach US$463 billion.

The budget office of the US Congress estimated the cost of the war would be US$150 billion to US$200 billion, including the costs of post-war construction. The US Defence Department estimates it will be between US$80 billion and US$120 billion.

US tourism income and job positions have been reduced by 3.7 per cent and 400,000 respectively, according to WTTC.

The real economic loss for the United States could be an astronomical figure, which includes damage caused by military strikes, the cost of military occupation and re-building Iraq and other related expenses.

According to Chen Guangyan, the general loss could be US$1,924 billion - 19 per cent of the gross domestic product of the United States.

The Iraq war may also have a serious impact on the economies of Middle East countries, which are characterized by slow growth and a high unemployment rate (about 14 per cent).

Although oil resources in the region are rich, foreign direct investment attracted by Arab countries is less than one per cent of that of the world.

In comparison, the Iraq war and the wild fluctuation in the oil price will have less influence on China's economy.

First, oil consumption is less than one fourth of China's gross energy consumption. And imported oil is only 7 per cent of the gross energy consumption of China.

Last year witnessed substantial growth of China's energy industries, except the oil industry.

Under the circumstance that domestic energy supply is growing quickly, war will not cause an overall energy shortage in China. It will also fail to spark a substantial rise in energy prices.

The oil supply shortage is not the same as an energy supply shortage and the rise in the oil price is not equivalent to the rise in prices of other energies.

Second, the net import rate of oil is only 30 per cent in China. The rise in the international oil price does not mean the domestic oil price will rise accordingly.

Any rise in China's oil price is largely attributed to the suppliers who are taking this opportunity to "make a fortune."

Lastly, the major impact on China's economy of the Iraq war comes from a reduction in imports from the United States and the world as a whole.

Owing to the economic interdependence between China and the United States, the decrease in the US economic growth rate has more influence on China than the war.

According to Chen Guangyan, a decrease of 1 per cent of US GDP would result in a 4.6 per cent reduction of China's gross exports.

To offset this, China should adhere to the policy of expanding domestic demand.

China's economic growth mainly depends on domestic demand at present. China is therefore more capable of warding off external shocks than some medium and small-sized countries and those whose oil is largely dependent on imports.

China needs to accelerate the adjustment of its oil strategy and to promote plural import sources to ensure a stable oil supply.

China should enlarge its strategic oil investment in overseas markets to cultivate new energy supply bases.

China also needs to speed up the establishment of a nationwide oil reserve system and promote its energy-saving policy.

The author is director of the Centre for China Study under the Chinese Academy of Sciences and Tsinghua University

(China daily HU ANGANG 04/05/2003)