Will Trump Lose US-China Trade War?

The US–China trade war originated from US President Donald Trump’s ‘America First’ agenda. It is the centrepiece of his administration’s challenge to multilateralism. It also reflects the country’s failure in global leadership.

As noted by Assoc. Prof. Yan Liang of Willamette University, the trade war is based on an overestimation of the damages it will inflict on China. China’s economy is no longer heavily dependent on trade, as it was just 10 years ago. In 2008, China’s net trade surplus accounted for 8.3 per cent of GDP. By 2018, that figure was only about 1.3 per cent.

China’s household consumption share of GDP has grown rapidly. But is still quite low at around 40 per cent (compared to 68 per cent in the United States). The average growth rate of private consumption was 8 per cent between 2000 and 2018. This is compared to just 2.2 per cent for the United States.

Since 2015, consumption has contributed to over 60 per cent of China’s GDP growth, while net exports have contributed to less than 10 per cent. Given China’s demographic changes, urbanisation and the growth of the digital economy, a mass consumer society will emerge in China’.

Declining exports to the United States will cause half a percentage point of growth from China’s GDP. More importantly, the Chinese government has enough policy space to bolster domestic demand and offset the negative impacts of trade. China’s debt-to-GDP ratio of 50 per cent.

The Trump administration overestimated the impacts of the trade war on foreign investment in China. Despite outcries over companies moving away from China, such claims are not significant. In a US–China Business Council survey, 97 per cent of US businesses in China stated that they are profitable. Of this, 87 per cent had not relocated or had no plans to relocate their activities. Some companies which moved from China to countries like Vietnam soon found themselves facing skilled labour shortages or limited infrastructure and had to move back to China.

Export-oriented investors may consider leaving China due to heightened export costs as a result of the US tariff hike. But market-oriented investors produce and sell in China to avoid tariffs. Around 35 per cent of US companies are adopting the ‘in China, for China’ strategy, including Tesla and Microsoft. There is simply no evidence that companies are leaving China in droves.

Meanwhile the Trump administration’s departure from multilateral globalism has involved attacking several trading partners. It has distanced itself from strategic allies, even calling Germany and Canada national threats for sending their steel to the United States. The United States also backed out from the Trans-Pacific Partnership, giving China more room to ally with important trading partners. Even though China’s exports to the United States dropped by 8 per cent in the first half of 2019, its overall exports inched up by 0.1 per cent.

The trade war undermines Trump’s own economic and political bases of domestic support as tariffs on imports are a tax paid by US importers and consumers. It is estimated that Trump’s tariffs on Chinese imports will cost US households on average US$1000 annually.

One could argue that jobs will be saved or created if the tariffs reduce imports and persuade US companies back home. Unfortunately, this is wishful thinking. The United States has transitioned out of a manufacturing economy since the 1980s. Between 1980 and 2000 the manufacturing sector shed 2 million jobs, while from 2000 to 2016 it lost another 5 million jobs. The US economy has transitioned into a service-based economy and it is this structural transformation that accounts for the great majority of manufacturing job losses.

While tariffs imposed on Chinese imports may cause US companies to shift some production locations away from China, they are not returning to the United States but to Vietnam, Cambodia or Malaysia . Moreover, US companies rely heavily on Chinese suppliers for their global supply chain. The added tariff costs will force them either to relocate the global supply chain — a costly move — or cut back on investment and expansion. By some estimates, Trump’s tariffs would shed half a percentage point from US growth.

China’s retaliation has focussed on US agricultural exports, undermining Trump’s electoral base. Between July 2018 and June 2019, the number of farms that have filed Chapter 12 bankruptcy increased by 13 per cent. The real, prolonged economic losses faced by US farmers will perhaps weaken public support for Trump’s China agenda.

The US trade war with China is driven by Trump’s intention to contain China’s growth and outcompete the presumed superpower. But while China embraces multilateralism and forges ahead with further market reforms, the Trump administration is retreating from global economic leadership. The US–China trade war is bringing short term pains to both the United States and China, but the long term gains are a mirage. The Phase 1 Agreement on trade is a sham, it is just rolling back the tariffs and nothing more. The U.S. has to focus on productivity and intellectual property rights rather than tariffs.

The key to all this, for Malaysia, is to balance the trade repercussions by a very neutral stance. We need both China and the U.S. It is perhaps best for us to “speak softly and carry a big gift” to both (paraphrased Theodore Roosevelt’s doctrine of “speak softly and carry a big stick”).

References:

1. Trump might lose the US-China trade war, Yan Liang, Willamette University (htpps://www.eastasianforum.org)

2. The US will badly in the trade war with China and imperil the world economy if both countries don’t cooperate, David Brown (www.scmp.com)

3. Three reasons Midwest farmers hurt by the US-China trade war still support Trump, The Conversation, November 4, 2019