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Keyu Jin says that although China exports more to the US than the US exports to China, Chinese leaders are unlikely to yield to Trump pressure on trade

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Keyu Jin says that although China exports more to the US than the US exports to China, Chinese leaders are unlikely to yield to Trump pressure on trade

By Keyu Jin*

China exports more to the United States than the US exports to China. That makes US President Donald Trump furious – so furious, in fact, that he may be willing to start a trade war over it.

Trump has leveled tough protectionist threats against China. As he attempts to consolidate his presidency, he is unlikely to back away from them. And with the Communist Party of China’s 19th National Congress set to take place in Beijing in November, Chinese leaders are unlikely to yield to US pressure.

A trade war would undoubtedly hurt both sides. But there is reason to believe that the US has more to lose. If nothing else, the Chinese seem to know precisely which weapons they have available to them.

China could stop purchasing US aircraft, impose an embargo on US soybean products, and dump US Treasury securities and other financial assets. Chinese enterprises could reduce their demand for US business services, and the government could persuade companies not to buy American. The bulk of numerous Fortune 500 companies’ annual sales come from China nowadays – and they already feel increasingly unwelcome.

Beyond being America’s second most important trading partner, China is America’s main jobs supplier. A trade war could thus cost the US millions of jobs. If China switched from Boeing to Airbus, for example, the US would lose some 179,000 jobs. Reduction in US business services would cost another 85,000 jobs. Soybean-producing regions – for example, in Missouri and Mississippi – could lose some 10% of local jobs if China halted imports.

Moreover, though the US exports less to China than vice versa, it is China that controls key components in global supply chains and production networks. Consider the iPhone. While China provides just 4% of value added, it supplies the core components to Apple at low prices. Apple cannot build an iPhone from scratch in the US, so it would have to search for alternative suppliers, raising its production costs considerably. This would give Chinese smartphone businesses an opportunity to seize market share from major players.

Today, 80% of global trade comprises international supply chains. Declining trade costs have allowed firms to splinter their production lines geographically, with goods processed and value added in multiple countries along the chain. If China threw a handful of sand in the gears of these chains, it could disrupt entire production networks, doing serious damage to the US (and, indeed, all the countries participating in such networks).

An escalating trade war, with each side erecting symmetric import barriers, would fuel inflationary pressure in the US, potentially driving the Federal Reserve to raise interest rates higher and faster than it would otherwise. That, together with diminished growth prospects, would depress equity markets, and declining employment and household income could lead to a sizeable loss of GDP in both the US and China.

A more likely scenario, however, is that both countries would initiate disputes in specific sectors, particularly traditional manufacturing industries like iron and steel production. Meanwhile, Trump will continue to accuse China of manipulating its exchange rate, ignoring the recent downward pressure on the renminbi (which indicates that the currency was actually overvalued), not to mention the simple fact that many governments intervene to manage their exchange rates.

Both Japan and Switzerland have engaged in outright currency intervention in recent years, and the US itself may well join their ranks, when the strong dollar’s impact on US export competitiveness becomes untenable. In any case, China can probably forget about achieving “market economy status” under World Trade Organization rules until after Trump is out of the White House.

The trade confrontation between the US and China will also affect bilateral investment flows. The US may cite national security concerns to block Chinese investments. It may also stop government purchases from Chinese companies like Huawei, and force Chinese firms and wealthy individuals to reduce investments that have hitherto bolstered US asset prices.

A high-quality US-China bilateral investment treaty would create a level playing field for American companies, giving them better access to China’s large market. But those talks will invariably be pushed back, while disputes over intellectual property rights and cyber security will be reinvigorated.

For now, China’s leaders seem convinced that they have little reason to bend to US pressure. For one thing, Trump seems more concerned with other priorities, such as repealing the US Affordable Care Act, reforming the tax system, and investing in infrastructure.

Even if a trade war does happen, China’s leaders assume, it probably would not be sustained for long, given the income and job losses that both sides would suffer. In any case, they have no intention of sending any signal of weakness to a leader so intent on testing other’s limits.

For the past five years, China has sought to establish a growth model that is less reliant on exports and more reliant on domestic consumption. But China often needs a crisis or an external shock to drive reform. Perhaps Trump is that shock. While his policies will be bad for China in the short term, they may also provide the impetus China needs to stop subsidizing exports and perpetuating distortions in the domestic economy. If this happens, China may actually emerge from the era of Trump better off than before.


Keyu Jin, a professor of economics at the London School of Economics, is a World Economic Forum Young Global Leader and a member of the Richemont Group Advisory Board. Copyright: Project Syndicate, 2017, published here with permission.

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8 Comments

Hmmm. The US doesn't need China. The US is a highly self sufficient country, exports are just 12% of GDP. China has far more to lose in a trade war. The regime is threatened already, hence the centralisation of power under Xi's current systematic purge of his political competition ("anti-corruption drive" in double speak). The regime is desperately trying to maintain their legitimacy by pumping more and more money into the system. Interesting times ahead.

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It would hurt the Waltons though and the lack of cheap tat might make the US peasentry even more revolting, though having said that the current policy has given rise to Trump much as the Treaty of Versailles spawned Hitler.

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Bill Clinton worked hard to allow China into the WTO , and that turned out to be a Trojan Horse if ever there was one .

Since then China has broken and cheated every WTO free trade rule including:-

Currency manipulation
illegal export manufacturing subsidies ( we in NZ call this Dumping )
Exporter payroll subsidies
Exporter income - tax subsidies
Unfair labour practices in terms of wages and hours
Effectively banning collective bargaining
Massive environmental control breaches of their own rules
Use of illegal substances causing harm such a Melamine in Milk powder and lead in kids toys paint
Widespread understatement of values of goods being exported ( thus reducing GST payments to the importer country )

And this list is far from comprehensive .

Its way past time to get China to tidy up its act

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There seems to be some sort of post office subsidy too. I buy low value stuff from Aliexpress and it gets couriered to my door by NZ Post. Total cost of goods and postage is less than $10.

I think the history is largely a great powers play. So the US sought to strengthen China and weaken Russia when Russia was strong, and will now seek to weaken China now China is strong. These things persist well past the point where they make sense, as everything adjusts to them; thus setting up an overshoot and eventually a policy reversal.

To my mind the Chinese government made a collosal blunder a couple of years ago when they encouraged people to set fire to Japanese factories after the Japanese government bought the Senkaku islands from their private owner. Typical arrogance of those in charge, they think they don't need the Japanese anymore. No sensible Japanese corporation will make a big investment in China for a decade at least.

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There already is a trade war - just the US is fighting back. China isn't a market economy and, therefore, never should be allowed to be designated one at the WTO. China does manipulate its currency - this time to keep it up but before to keep it down. There is no real private sector in China as the CCP and their henchmen have their greedy fingers in everyone's business.
If the US actually starts fighting a trade war I think we will see a lot more instability in China and, hopefully, the collapse of the CCP. I have no problem with a wealthy China but no one that is controlled by the CCP - the murderous regime ever in the history of humanity.

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If the USA is going to go down this track they would be wise to disentangle themselves from these vulnerabilities first. In other words take some time to lay the ground work first before attacking it head on.

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Yes don't forget that the US has it's own slave, I mean low paid worker economy that it can exploit! https://www.youtube.com/watch?v=V66F3WU2CKk

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How long would it take Apple to replace China in their supply/assembly chain?

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