The Coming Trade War Between the US and China
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By Alvin Cheng-Hin Lim

The Coming Trade War Between the US and China

Jan. 04, 2017  |     |  0 comments

Asia watchers are anxiously awaiting US President-elect Donald Trump’s first actions after his inauguration on January 20, in particular whether he will carry out his threat of designating China as a currency manipulator on his first day in office. Such a designation will allow his administration to institute punitive tariffs on Chinese imports.


John Fraher, Flavia Krause-Jackson and Mira Rojanasakul sketch a possible scenario of how a Sino-US trade war might thus unfold: “Slamming what he calls #CrookedChina, Trump tweets at 3:17 a.m. on the morning of his inauguration that he’s planning to label the country a currency manipulator and slap ‘huge’ tariffs on incoming imports. By the time he’s on his way to the Capitol, China has already started to retaliate by devaluing the yuan, canceling orders for Boeing jets and blocking iPhone sales.”


In his scenario of a Sino-US trade war, James Wang, a professor with the City University of Hong Kong, predicts that the primary victims in China will be the “exporters of ‘Wal-Mart type’ goods, including clothing, furniture, footwear and textiles,” while the fate of producers in higher rungs of the technological ladder will be less easy to predict, since, for example, “the lion’s share of profit from an iPhone accrues to Apple Inc., instead of its Chinese suppliers.” Wang’s scenario sees China selecting from a range of targets for retaliation, including “aircraft orders from Boeing Co.” as well as “automobile and agricultural imports from the US.”


Is Trump serious about a confrontation with China over trade? His choice of appointees suggest this is indeed the case, with his trade transition team consisting of “veterans of the US steel industry’s battles with China”:


“Led by Wilbur Ross, a billionaire steel investor and Trump’s nominee for commerce secretary, Dan DiMicco, the former CEO of steelmaker Nucor Corp, and three veteran steel trade lawyers, the team is expected to help shift the US trade focus more heavily toward enforcement actions … Based on their past efforts, this could include more challenges to China’s trade practices through the World Trade Organization and more US government-initiated anti-dumping and anti-subsidy cases against a wider range of Chinese products.”


Trump has also selected the influential China hawk Peter Navarro to chair the new White House National Trade Council. Navarro, who is a professor of economics and public policy at the University of California at Irvine, argues that China’s trade practices are ruinous for the US in the long run:


“China helps individual US companies in the short term by providing them with cheap workers. Over time, however, China picks off US industry, jobs and know-how and uses them against the United States.”


All this begs the question: Is China a currency manipulator? As Tim Worstall reminds us, the “basic accusation” is that “China deliberately manipulates the value of the yuan down. This makes American exports to China more expensive and makes China’s imports to America cheaper.” While this did happen in the past, this is not what is happening now. As Worstall notes:


“China does have restrictions on who may exchange money and how. And those restrictions are currently being used to stop people moving capital out of China. That means that the exchange rate is stronger than it would be without those regulations. There’s manipulation, yes, but in the opposite direction to that being complained about.”


Under the US Treasury Department’s standards for designating a country as a currency manipulator, China only meets one of the main criteria — its “disproportionate trade surplus with the US,” which amounted to almost USD 289 billion in the first 10 months of 2016. However, China’s “current-account surplus narrowed to 2.4 percent of gross domestic product for the 12 months through June, putting it below the threshold for the watch list.” Even so, the former Treasury counselor Lewis Alexander points out:


“The process was set up by Treasury itself, but ultimately they can change it … Trump’s going to have a new Treasury secretary. I think they’ll have a big impact on the outcome.”


Indeed, thanks to Congress, the President enjoys “broad authority to impose trade sanctions.” This means Trump will have the authority to impose the 45 percent tariff on Chinese imports that he had promised during his election campaign. Should he do this, China may be expected to retaliate, given its “consistent record of retaliating against trade sanctions.” For example, “when the Obama administration slapped tariffs on Chinese tire imports in 2009 … China lashed back by imposing a tax on US chicken parts.”

Should a Sino-US trade war break out, some expect China to fare better than the US.

China’s state-owned Global Times has also warned that Beijing may adopt a tit-for-tat response should Trump impose his threatened tariffs: “A batch of Boeing orders will be replaced by Airbus. US auto and iPhone sales in China will suffer a setback, and US soybean and maize imports will be halted. China can also limit the number of Chinese students studying in the US.”


China may also be expected to appeal to the World Trade Organization in the event of the Trump administration’s punitive imposition of tariffs. As Zhang Xiangchen, China’s deputy international trade representative, warned: “After Mr. Trump takes office, he will be reminded that the United States should honor its obligations as a member of the World Trade Organisation … And as a member of the WTO, China also has the right to ensure its rights as a WTO member.”


What would the impact of a Sino-US trade war be like? Fraher, Krause-Jackson, and Rojanasakul suggest that the economic consequences are likely to be dire. For the US, the effects of the trade war “could be as devastating as what followed the 1930 Smoot-Hawley Tariff Act, when GDP, trade and the stock market all fell by half or more.” In their scenario, the devastating consequences of the trade war are not borne by the US alone: “China falls into its deepest recession of the modern era ... In Asia, a 1997-style currency crisis and recession ensue.”


Should a Sino-US trade war break out, some expect China to fare better than the US. The abovementioned Professor Wang from the City University of Hong Kong argues that the Chinese government is “better placed than the US to marshal state resources to cushion the impact on exporters,” especially given the democratic constraints faced by the US government:


“By design, decision-makers in a democracy face difficulties coordinating a relief effort and must eventually face a political backlash from impacted domestic producers. On this basis, the Chinese may have more runway to play the long game in a trade war.”


However, other analysts are not so sanguine. Kinger Lau, a strategist with Goldman Sachs, warns that Trump’s tariffs could potentially “knock off 3 percent from the country’s gross domestic product next year, and that means that China will go through a hard landing and the world economy will suffer … This will prompt retaliation measures from China on US goods.”


Kevin Lai, an economist with Daiwa Capital Markets, has an even more apocalyptic prediction, warning that Trump’s tariffs could “spark an 87 percent decline in China’s exports to the US — a decline of USD 420 billion. That would, over time and factoring in multiplier effects, mean a 4.82 percent blow to China’s gross domestic product, or about a half trillion dollars’ worth.”


With the 19th National Congress of the Chinese Communist Party scheduled to take place in the second half of 2017 — during which Chinese President Xi Jinping is expected to be voted to a second 5-year-term in office — the economic shock of a possible trade war between the US and China represents a significant external threat to President Xi’s reform agenda, and the social consequences of the resulting economic upheaval could in turn pose significant risks for China’s political stability. While a Sino-US trade war is not a “hot war,” the likely consequences are certainly not trivial.

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