Wed, Mar 01, 2017 - Page 8 News List

Trump may trigger Chinese growth

By Keyu Jin 金刻羽

China exports more to the US than the US exports to China. That makes US President Donald Trump furious — so furious, in fact, that he might 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. In addition, with the Chinese Communist Party’s 19th National Congress to take place in Beijing in November, Chinese leaders are unlikely to yield to US pressure.

A trade war would undoubtedly hurt both sides. However, 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 US products. The bulk of numerous Fortune 500 companies’ annual sales come from China — and they already feel increasingly unwelcome.

Beyond being the US’ second-most important trading partner, China is the US’ main jobs supplier. A trade war could thus cost the US millions of jobs. For example, if China switched from Boeing to Airbus, the US would lose about 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 about 10 percent of local jobs if China halted imports.

In addition, although 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 percent of added value, 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.

At present, 80 percent 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 US 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.

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

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