Siah Hwee Ang looks at gains and losses from the China-US trade war, US wine hanging by a thread in China, India steps up to the plate, the end of 'made in China' & more

Today's Top 10 is a guest post from Professor Siah Hwee Ang, the BNZ chair in business in Asia who also chairs the enabling our Asia-Pacific trading nation distinctiveness theme at Victoria University. 

As always, we welcome your additions in the comments below or via email to david.chaston@interest.co.nz.

And if you're interested in contributing the occasional Top 10 yourself, contact gareth.vaughan@interest.co.nz.

See all previous Top 10s here.

1. US tightens the screws.

The China-US trade battle has raged on for almost two years. Some threats have materialised, others may be on the horizon.

On top of the US$50 billion in goods that has already attracted increased tariffs, this week we will witness new tariffs on US imports from China worth US$200 billion. These tariffs affect close to half of all US imports from China.

It does not look like the trade battle will end soon, despite occasional talks between the two powerhouses.

2. Expect collateral damage from steel and aluminium tariffs.

Steel and aluminium are raw materials for many industries, such as construction, engineering, and transport.

Less obvious is that steel and aluminium are used in other industries for packaging. A less obvious one would be the food and beverages industry.

We can expect the rise in tariff costs to be transferred to food and beverage producers and ultimately on to consumers.

If this persists, many such manufacturers will have to look for alternative sources of supply or even for alternative raw materials sources for package.

3. US wine hanging by a thread in China.

China has announced a proposed 25 per cent tariff on US wine, among other products.

This will take the combined total tariff and taxes per bottle to in excess of 90 per cent. This is likely to cause US wine to double in price, making it a less attractive option for Chinese consumers.

Wine imports into China have risen by 17.96 per cent year-on-year in 2017.

The China-US trade battles will benefit wine producers from other countries seeking to capitalise on this growth market.

4. India to replace US for China.

India has identified more than 40 products, including fresh grapes, cotton linters, flue-cured tobacco and alloy steel seamless boilers which it can export to China should China continue to impose tariffs on US goods.

India runs a trade deficit with China (US$63 billion) so such an opportunity would narrow this trade gap.

5. “Made in China” to be gradually replaced.

China is actively moving along the value chain – towards “Made in China 2025” (associated with innovation and high quality) and leaving behind “Made in China” (associated with mass market and low quality).

The China-US trade battles do affect the extent to which “Made in China” will be used, in particular by US manufacturers.

There will be minimal impact if China is indeed ready for its own transition.

In the meantime, other countries such as Vietnam and Cambodia are likely to pick up a significant share of the gap that China leaves behind.

6. Soybeans are a big battle ground.

Soybeans were the first shot in the trade battle between China and the US.

In 2017, the US, the world’s second largest soybean exporter sold around US$12 billion worth of soy beans to China.

At US$20 billion, Brazil was the number one exporter.

Following the 25 per cent tariff slapped on US soybeans in July, US soybeans have literally lost ground in this market.

And Brazil is keen to pick up the slack.

While the South American country is primed to do so, its capacity may not be able to fill this major gap. The difference in harvest seasons makes it more challenging.

Nonetheless, as the country works towards this, it is also looking to secure future contracts to hedge growing risks around price differences between Brazilian and US soybeans.

7. Chinese Yuan internationalises further.

In July, the Chinese yuan’s share of global payments rose from 1.81 per cent to 2.04 per cent, making it the fifth most active currency used for global payments.

As China becomes more internationalised through its initiatives such as the Belt and Road Initiative and “Made in China 2025”, naturally we will see an increase in the use of the Chinese Yuan in the international arena.

As investors balance risks against the US dollar, we will see other, more stable, currencies used more often.

8. US companies are calling for the administration to back away from further trade battles with China.

Some US companies are feeling the pinch as a result of the trade battles.

The American Chemistry Council most recently called for the Trump administration to back away from imposing more tariffs on Chinese products.

It said the tariffs are harming chemical manufacturing in both countries.

We can expect more evidence to surface showing that neither economy will benefit from the trade battles.

9. American presence in China complains too.

A joint survey by the US Chamber of Commerce in China and the US Chamber of Commerce in Shanghai shows that two-thirds of US companies operating in China are affected by US tariffs imposed on US$50 billion worth of goods.

More than 70 per cent of those surveyed agreed that imposing additional US tariffs would have a negative effect.

Given the rise of foreign-owned companies in China and the increase in both import and export trades of China, US companies have a legitimate concern. Sooner or later their competitiveness will erode in the second largest economy in the world.

10. Asian economies are likely to be winners.

Before the China-US trade battles, Asia was expected to pick up most of the world’s economic growth in the next two decades.

Has the picture changed since the trade battles? Probably not so much.

Given the growth rates of most Asian economies, they have a small buffer to work with despite the uncertainty coming out of the China-US trade battles.

Asian economies will start to have more intra-trade, and will pick up more benefits from the gaps created by the China-US disputes. This makes it likely that those Asian economies that are on the moderate-to-high growth curve will keep up their contribution to the world economy.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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23 Comments

Thanks Siah. A good read

When you look at the tariffs in comparison to the size of the US budget deficit the numbers pale into insignificance when billions are compared with trillions.

'On top of the US$50 billion in goods that has already attracted increased tariffs, this week we will witness new tariffs on US imports from China worth US$200 billion. These tariffs affect close to half of all US imports from China.'

After the full establishment of BeiDou Navigation Satellite System

After having the ability of designing and mass producing computer chips

After the third and the fourth aircraft carrier hitting the water to protect all vital sea routes for transportation

RMB will finally be able to rival the USD. And China will become a fully fledged super power.

A nice resource for understanding NZ's trade profile: http://tradeintelligence.mbie.govt.nz

North Korea (sorry, typo) China rules!

Isn't that the problem? China has abandoned the wisdom of Deng Xiaoping to tread softly and practice crossing the river by feeling the stones. It has chosen to confront America's control of the sea lanes, the very basis of it's power according to naval theory. America is firing a warning shot.

America is always like a constantly paranoid teenager and ready to punch out whoever against his mighty. And no one in the world can say no to it.

These days will end soon.

Hopefully not.

Just realised that this is actually a very long read. my apologies, it does however make sense though if you have an attention span and can read. BLSH may fall short on both counts!

It's a strange thing isn't it Xingmowang to assess where your loyalties really lie as a human being... I am happy/accepting that I am English, I was there too long for me ever not to be English, my wife (a 6th gen kiwi) is a real New Zealander20 years in England and was always a new Zealander, my kids are all kiwi's and their loyalties are All Black. The hand that rocks the cradle is a powerful weapon and I have watched and cheered the English beat the AB's and suffered silence from my family for days afterwards....

I will always support England over the All Black's and anyone else England are put up against. I still misguidedly support the Home nations against anyone else (other than England).. I will always be a Lions fan (to be fair part of that is also that any Lions tour you ever get the chance to go on is a lifetime memorable event) Do the Welsh, Scots and Irish feel the same (apart from the Lions) about England? Nope, they'll celebrate a French win, South African win, Aussie win over the English.

History runs deep is my general view of the world...and if you have a lot of it.... A few thousand years worth as China does, some good memories, some bad, but you are probably more ingrained over that time span than the nation that only has a couple of hundred years worth of history.

I may need to stop philosophising but roots are roots after all - and that's different to the the Aaron Smith type of root...

New Zealanders have a choice about how fast they want to grow, or how quickly they want their history absorbed....

If you support England against the All Blacks you have had very few happy moments. Agree with you that the last Lions tour was superb and ended with the perfect result.
I am English with English parents and grandparents etc and lived most of my life in England but my roots must have been cut since I never support them at Rugby or Soccer. Your own roots appear to stop with you and your kids have new roots.
But there is much to be said for your idea about roots, Xingmowang has his wonderful history as does any Iranian/Persian or Indian. It is a pity that the PNG side of my family have no equivalent ~ easily the most complex mix of cultures but with no written history to tie it to the 100,000 years they resided in PNG (just a tenth of that time England was covered by Ice sheet).
New Zealand has real problems with its roots; both our Maori and our British empire roots are woefully distorted. The trouble being an underlying embarassment. Whereas there is so much to be proud of because just surviving to produce our generation was a near miracle.

"protect all vital sea routes for transportation" or start harassing normal shipping in international waters now that the artificial reefs have been militarised?

start harassing normal shipping in international waters ?

Your statement must be based on "Free" American media, don't you?

Go and check some facts to see if any insurance premium for sea transportation passing the South China Sea have gone up or not as a result of those man made islands.

Strawman argument X...my comment has nothing to do with insurance rates. And yes my comment is based on the ability to research whatever I like without any censorship at all (well lots of eyes watching me do the research I suppose).

China Claims that, under international law, foreign militaries are not able to conduct intelligence-gathering activities, such as reconnaissance flights, in its exclusive economic zone (EEZ). According to the United States, claimant countries, under UN Convention of the Law of the Sea (UNCLOS), should have freedom of navigation through EEZs in the sea and are not required to notify claimants of military activities. In July 2016, the Permanent Court of Arbitration at The Hague issued its ruling on a claim brought against China by the Philippines under UNCLOS, ruling in favor of the Philippines on almost every count. While China is a signatory to the treaty, which established the tribunal, it refuses to accept the court’s authority.

It is not China that fails Americans, but US taxation, as evidenced by Apple. https://www.sott.net/article/396270-The-Apple-Story-Trump-Tariffs-Penali...

This is the battle of our age, alright. Fundamentally opposed cultures both wanting the largest slice of the pie (planet) going forward. It will split the planet in my view. It probably already has. As the EM's fall away from their promises to the West, the East will pick them up on their own terms. When you're poor, you don't mind where the money comes from, as long as it keeps on coming. What will be very interesting to watch is how these poorer countries deal with their Eastern promises and indeed, how the 'big' East deals with them.
At the current numbers, there are more than 70 million Asians living in the West, with less than 10 million Westerners choosing to live in the East.
China may have better luck in Africa or the Middle East but, to be honest, they're welcome to them.

China's issues may spring from an inability to extend military power to far reaches - most especially, the supply chain behind it. Stealing the Spratley Islands from a weak Duterte is one thing, but it'll be interesting to see what happens when nations in Africa decide they don't like the less than favourable terms they've been extended, that have seen them lose control of key assets and infrastructure.

You may have point Rick. So African nations default on their debt to China, the Chinese decide to move in and help themselves, which the Africans won't particularly fancy the idea of happening again. US can then step in and have a bit of a ding dong with China in Africa. Hopefully no nukes needed but it should stimulate a bit of growth in the arms industry.. The few positives from this are that at least it removes the battlefield from China and the US, and Europe will be delighted to get a break this time!. Afterwards the rebuild of Africa could be really good for improving infrastructure and administration. Maybe the contracts could be split between the Chinese and Americans to keep it fair, hell it worked for very well for the Japanese and Germans...

I am of course only kidding.

Reflect on a simple question: why are there No Mo' Somali Pirates? Answer - China 'sanitised' 'em....without, it should be noted, bothering the ICC to ask it was OK.

And do read James Fannel's testimony, especially the paragraph (see below) where it states that the interests in overseas ports right across the world includes specific military use....

Further, while the PLAN’s forays by flotillas into European and African waters have drawn public attention, of greater concern is the PRC’s increasing ability to sustain those forces from a widening web of PRC-controlled naval logistic bases. In developing the so-called Maritime Silk Road, Chinese firms have snapped up control of ports in Australia, Cambodia, Indonesia, Malaysia, Brunei, Myanmar, Bangladesh, Sri Lanka, Pakistan, Djibouti, Tanzania, Mauritius, Namibia, and Greece. These ports have been developed for military purposes, and many will control strategic choke points such as the Straits of Malacca and the Suez Canal. Most of China’s port deals are for a period of 99 years or more.The Commander of U.S. Pacific Forces warned Congress earlier this year that China’s naval “presence and influence are expanding” thanks in large part to the commercial network created by the Belt and Road Initiative. The PRC is using stateowned companies and politically linked private firms to create a network of facilities designed to provide logistical support to deployed PLAN warships, employing a “first civilian, later military” approach to port development across the region.

That's from an experienced military observer. To be given greater weight than an airy assertion about 'inability to project'. Assumptions, assumptions.....

Thanks waymad, interesting article.

Airy assertion not so much, more a reflection of earlier discussions had with Americans interested in military and diplomatic issues too. They are aware China is working on its ability to project power to distant locations. Heck, the build up of navy is highly visible.

Plenty of that discussion has been around whether China will be able to respond adequately when countries decide they're not quite sure they're happy with 'debt trap' diplomacy and losing control of their key assets...again: https://www.straitstimes.com/world/africa/africa-looks-to-china-for-loan...

African countries borrowing more than can ever be repaid. Gosh.

Maybe they pay it back in elephant ivory and rhino horn :(

Big is beautiful after all and apparently rhino horn is a lot less painful than surgery. Not for the Rhino though!

Good on the Chinese for making the shipping lanes safer.

That whole pirate thing was ludicrous. Western navies were catching them and letting them go. Ships were sitting at anchor for months waiting for ransoms to be paid. One coastal city was practically pirate central.

I would have thought the existence of pirates was like all your Christmases coming at once for a navy. What could be more fun than slaughtering pirates and bombarding and sacking pirate towns? Almost no risk, not the battle of Jutland is it?

Maybe the Europeans could outsource patrolling the Mediterranean to the Chinese instead of letting their navies collude with people smugglers and fortune hunters?

Most importantly, what's the off-ramp look like? Some interesting thoughts in here - although a couple of months old now but the points are still valid;

https://www.vox.com/policy-and-politics/2018/7/8/17544460/trump-china-ta...