Stratfor: Trump risks a trade war with China that cannot be won

Summary: Trump’s big promises won him the Presidency, much as Obama’s promises of “hope and change”. Here is a second article by Stratfor looking at Trump’s ability to do better than Obama at delivering on them. Will Trump fail gracefully, like Obama, or catastrophically?Stratfor

A Trade War That Cannot Be Won

Stratfor, 11 January 2017.

Forecast

  • Protectionist trade policies toward China would do little to achieve the incoming U.S. administration’s stated goal of reviving U.S. manufacturing.
  • Beijing would use various means — in particular, harassing U.S. companies that operate in China and depend on the country’s growing consumer market — to retaliate against protectionism in the United States.
  • President-elect Donald Trump’s administration will likely focus on curbing Chinese steel imports, a policy that could boost U.S. manufacturing without doing much damage to China’s economy.

Analysis

The trade relationship between the United States and China is a cornerstone of the global economy and a linchpin of the economic, social and political order in both countries. But in recent years, and particularly during the runup to the 2016 U.S. presidential election, the partnership has come under fire in the United States. Leaders such as President-elect Donald Trump have criticized Washington’s trade ties with Beijing as unfavorable, since China’s exports to the United States exceed its imports from it. Trump has decried the negative effects of this trade imbalance and promised to correct it, for instance by imposing a 45% tariff on Chinese imports. Despite the backlash that such a drastic measure would invite from Beijing, Trump argues that the United States is better poised to weather a prolonged trade dispute than is China, thanks to their lopsided trade relationship.

A closer look at U.S. trade activities with China casts doubt on this idea, however. Changes in the composition of Chinese exports to the United States, the structure of manufacturing supply chains and the aims of U.S. corporate investment in China have evened the field between Washington and Beijing. As each side tries to achieve increasingly contrary political and economic goals, neither would be immune from the fallout of a trade war. China has just as many options to retaliate against protectionist U.S. policies as the United States has to punish Beijing. The challenge is to understand which tactics the countries’ leaders are likely to choose — and to what end.

China - US relations

The Bigger Picture

At first glance, the United States appears to have the upper hand in its trade partnership with China. Beijing ostensibly has more at stake in the relationship than Washington, in part because China’s economy relies more heavily on exports. In 2015, exports made up about 22% of China’s gross domestic product, compared with 12.5% of U.S. GDP. Furthermore, exports to the United States — China’s largest single-country trade partner — accounted for roughly 3.8% of China’s GDP that year, while exports to China totaled just 0.65% of U.S. GDP. And though the United States imports a larger share of goods from China than China does from the United States, imports play a smaller role in the U.S. economy. This breakdown lends credence to the idea that the U.S. economy has less to lose in the unlikely event that trade with China comes crashing to a halt.

But trade figures alone do not reflect the complexities of the two countries’ trade ties or the leverage that they give each side over the other. A look at the kinds — and not the quantities — of goods traded offers a more complete picture. In order of value, electronics and electrical equipment, machinery, furniture, clothing and toys make up China’s top five exports to the United States. But even in most of these categories (except toys), exports to the United States account for at most 30% of China’s total exports. In fact, the United States takes in just 15.9% of China’s electronics exports, although electronics make up nearly one-quarter of U.S. imports from China. Doubtless, new trade barriers from the United States would hurt China, but Beijing could mitigate the damage by encouraging domestic consumption or increasing its exports to other markets.

China - US Trade

Unintended Consequences

When looking at trade in electronics goods, moreover, official statistics often obscure as much as they reveal. Many electronics registered as Chinese exports, such as the iPhone, are only partly assembled in China, and other points along the supply chain — including the United States, Japan and Taiwan — are responsible for the vast majority of their final cost. But because China is the final point of assembly before export to the United States, the full value of the finished goods is attributed to China. Given the extent of supply chain integration and the share of value that other countries contribute to nominally Chinese electronics exports, an attempt to limit U.S. imports of these goods would disproportionately hurt the United States and its regional allies.

On top of that, import controls on items such as electronics, clothing and toys would have tremendous social and political repercussions in the United States, where household consumption is equivalent to 68% of GDP. Though Chinese exports account for only a small portion of that consumption — about 4% — they are heavily concentrated in everyday consumer goods for which shortages or price spikes would be highly visible, if not economically crippling.

Imposing a steep tariff on Chinese imports would create problems for consumers in the United States — and, by extension, their elected representatives. More important, it would not help the incoming administration fulfill its goal of restoring manufacturing jobs to the United States, or even slowing the flight of existing jobs overseas. High labor costs and a lack of production and assembly capacity in the United States, along with the level of supply chain integration in East Asia, will prevent a renaissance in U.S. manufacturing of high-end consumer goods, much less textiles or toys. A tariff hike on Chinese goods would likely drive the Chinese and Taiwanese companies that dominate electronics assembly to move their operations from China to an even cheaper country to circumvent U.S. restrictions. Although Chinese export businesses would suffer in the process, and employment levels in parts of coastal China could drop, the effects would hardly devastate China’s economy, nor would they necessarily invigorate that of the United States.

China - US Relations as interlocking puzzle pieces

An Enemy Within

Perhaps the greatest constraint on any Trump administration effort to impose punitive trade measures on China is corporate America’s deep interest in the country’s burgeoning consumer market. For now, consumption is equivalent to only 37% of Chinese GDP, according to official estimates. Nonetheless, by virtue of its size, China is already the world’s largest market for a range of consumer goods that are mainstays of U.S. companies, from personal electronics to cars. But because U.S. companies manufacture many of the goods they sell in China there or elsewhere in Asia, export statistics do not reflect those transactions or the extent to which U.S. companies depend on Chinese demand.

This poses another challenge for the Trump administration. In the past, most U.S. foreign direct investment into China was intended for export back to the domestic market. Today, by contrast, most major U.S. corporations sell much of what they manufacture in China to Chinese consumers. That leaves the incoming administration little leeway with which to pressure these companies or, for that matter, Beijing. Tariffs or other import penalties on goods that U.S. companies produce in China will work only if the products make their way back to the United States. Meanwhile, reliance by U.S. companies on Chinese markets gives Beijing significant leverage over them. U.S. companies eager to capitalize on existing and future demand in China would be loath to jeopardize their access to the country’s consumers by defying Beijing’s wishes.

Trump's war with China

Trump’s Steely Resolve

Considering the limitations and consequences of imposing tariffs and other controls on Chinese exports, the Trump administration will likely pursue targeted protections, for instance on steel. In 2015, the United States sourced just under one-third of its imported steel from China — satisfying about 10% of domestic demand for steel that year. Heavy tariffs on Chinese steel could encourage U.S. companies instead to buy domestic steel, for which the United States has retained a sizable production base. Higher import tariffs would probably take a meaningful toll on Chinese steel exporters, too, since about 20% of China’s total iron and steel exports go to the United States.

But though these measures would go some way toward Trump’s goal of rebuilding, or at least stabilizing, one sector of U.S. manufacturing, they would not offer Washington much leverage over Beijing. Under President Barack Obama, the United States has taken action against Chinese steel exporters for allegedly selling steel abroad at artificially low prices (a practice known as “dumping”), and the World Trade Organization has instituted protective measures. Further restrictions on Chinese steel imports would represent merely a continuation of existing policy and not a departure. And because steel makes up only half a percent of China’s total exports, redoubling tariffs on Chinese steel — or even instituting an embargo — would do little to rattle the country. Beijing’s efforts to consolidate its steel industry may well bring an end to Chinese steel exports to the United States, regardless of Washington’s policy decisions. In the meantime, China could probably divert its steel exports to other markets, thereby offsetting the effect of a change in U.S. policy.

China dragon
Image from Forbes.

Returning Fire

China, on the other hand, has many economic tools that it could use to damage the United States. Whatever path Trump chooses to take toward China, Beijing will be poised to retaliate. For a start, the Chinese government will continue to use its anti-monopoly law to make life hard for U.S. multinational corporations operating in the country. In doing so, Beijing can count on U.S. manufacturers and technology companies to pressure their government to preserve the status quo with its trade and economic policies. Even if their pleas do not deter the Trump administration from taking action against China, they would likely influence his policies. Beijing will also threaten to procure goods from other countries to compel U.S. companies to lobby Washington on Beijing’s behalf.

If trade relations falter, China and the United States would make ample use of more traditional weapons of trade warfare as well. Each side would take trade dispute cases to the World Trade Organization in an effort to gain international support for their policies and delegitimize those of the other. Notwithstanding the imbalances in their trade relationship, neither Washington nor Beijing would escape the fallout of a trade war.

A Trade War That Cannot Be Won” is republished with permission of Stratfor.

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11 thoughts on “Stratfor: Trump risks a trade war with China that cannot be won

  1. This is a timely topic, and one that will be given a lot of analysis and commentary over the next several days and weeks. This dispute is taking place in the middle of a number of transitions, trends, and related developments that will make it all much more interesting.

    Many companies are moving factories out of China into Mexico, to shorten supply chains for sales inside the US. This is true for companies based in the US, Europe, and even for Chinese companies. Also see “Why Manufacturing is Moving from China to Mexico“, North American Production Sharing Inc (they help companies move to Mexico), 11 August 2015.

    What is worse for China, advanced automation in North America (US-Canada-Mexico) is likely to lead to more Chinese loss of exports than movement of factories out of China to benefit from cheaper labour. (See chapter 1 of this 359 pp 2017 PDF document)

    In other words, even without the influence of Trump, the movement away from China has already begun. Some of those “lost factories” will end up in the US, although most will probably target Mexico or Southeast Asia.

    It may be true that China is approaching a climactic debt crisis. Certainly its State Owned Enterprises (SOEs) are increasingly defaulting on bonds and being forced to borrow money to pay interest on loans — many of which were already using debt as collateral. But a wounded dragon can lash out twice as fiercely. And a wise analyst considers more of the factors than an analyst who is merely producing copy.

    As it happens, George Friedman’s (formerly of Stratfor) analysis of this issue is markedly different from that of the Stratfor article posted above in many aspects.

    I suspect that Trump’s trade team is not as clueless as the Stratfor team suggests, and that the Stratfor team is not nearly so perspicacious as they believe themselves to be on this particular issue. Otherwise, there would have been no need for Stratfor to include so many unsupported assertions and trite truisms (they are not hard to find).

    1. Alfin,

      Thanks for the citations and links,and mention of these important trends!

      “Otherwise, there would have been no need for Stratfor to include so many unsupported assertions and trite truisms (they are not hard to find).”

      Geopolitical analysis, like most analysis, consists largely of “trite truisms” (nice phrase). It’s useful padding. Is there anything in this you believe to be false?

  2. Little background here. With China, everything the USA does is in context of this, the ‘Sphere’s of influence’ before the revolution. When you talk about opening up China as a market, it is triggers all kinds of post-colonial shock. The USA negotiated the ‘open doolr policy in China’ in 1899. Chinese are not going to let this happen again, not without war.

    Foreign imperialism in China” at Alpha History.

    [caption id="attachment_101915" align="aligncenter" width="600"]Spheres of influence in China Click to enlarge[/caption]

    1. I don’t quite get the relevance here? A lot of the “market” in China is, from what the article is saying, stuff that American companies are making in China and then selling to Chinese consumers, which complicates the picture and thus the economics that would motivate American companies to move production back to the USA, which is presumably the point of the entire operation.

      Since things have gotten to that point, presumably the Chinese – in a general sense – have gotten over these matters. If American brands or companies were unacceptable to Chinese consumers, presumably they would not have grown to the point where this is a factor.

    2. It’s relevant because the article is about a trade war, and basically for Chinese ‘trade’ is a highly charged subject due to these historic humiliations. For them it’s going to be ‘another trade war’, even in spite of the KFC restaurants and Buicks. People in China know all this stuff, they know about the Opium war and the open door policy, and I don’t think they’re over it. Anti-colonialism is still deeply felt in China and they are going to see any trade war as a continuation of colonialism.

  3. Cathryn: Fascinating line of thought and fabulous map!

    Fleshing in the more recent historical events, I suspect that the Japanese occupation and rape before and during WWII occupies a more prominent position in Chinese minds than feuds with dead European colonials. Memories are long in China, among particular strains of intellectuals, but the great famine of Mao and the horrific Cultural Revolution resonate far more strongly among the people at large, or so I suspect.

    And one cannot overstate the cultural impact of the one-child policy, resulting in a society where uncles, aunts, cousins, siblings, and other extended relatives have been endangered species. Alienation of that magnitude can induce a short-sightedness toward history along with a “whatever it takes” attitude toward accumulating and holding onto tokens of wealth.

    Growing evidence of forced and fatal organ transplantation from members of dissident groups to wealthy and influenctial Party officials also can tend to leave a bad taste in the mouth of those who pay attention to current events in the corrupt workers’ paradise.

    Editor: The Stratfor article seems to go out of its way to paint an image of equivalence of economic influence between China and the US when it comes to bilateral and global trade. But few people who have looked at the numbers and the trends can truly buy into such an equivalence. The Stratfor authors may also be placing imaginary constraints on Trump’s actions which largely exist inside their own heads. The media have already portrayed Trump as a cross between Hitler and the Devil. Paradoxically, such an extreme portrayal gives Trump more degrees of freedom.

    Consider, as an illustration, that when China, Russia, Iran, or North Korea commit horrendous atrocities, no one pays very much attention. No one expects any better from such atavistic regimes. But should modern Germany, the UK, or the US do anything half so barbaric, the commentariat is occupied for many years of infinitely recursive analysis.

    No one is surprised when “the devil” behaves in a demonic fashion. But when one declares himself to be “the good guy,” every imagined infraction and misdeed becomes magnified to Hitlerian proportions.

    1. Criticism by western regimes is seen as an extension of imperialism. Everything is seen through the history of colonialism. Westerners didn’t like that women in China had foot binding or other practices like ths, and then this becomes a justification to overthrow the government and expand western empires. Colonialism has two sides, first is the judgement, that these cultures, these practices are inferior or barbaric, need to be taught Christianity religion, and then the war, where the armies come to kill people, take over the governments. We see this today, the Assad must go talk. There is criticism, and then there is the war and the death. These days, nobody in China is going to care about western criticism, say of eating dog meat, or other common media tropes, because they are going to presume imperialist intentions.

      The term ‘barbaric’ itself implies a war between the Romans and the barbarians. The barbarians had barbaric customs, they needed to be conquered. So when the west calls someone barbaric, this is what is presumed. People who have been on the receiving end of colonialism are going to understand this.

    2. Cathryn,

      “The term ‘barbaric’ itself implies a war between the Romans and the barbarians. The barbarians had barbaric customs, they needed to be conquered.”

      I’d like to see a supporting citation for that. The term “barbarian” is from the Greek βάρβαρος, meaning from another society — with an implication of them being inferior or primitive (see Wikipedia, which notes that “Comparable notions are found in non-European civilizations, notably China and Japan.”

      I don’t believe the implication is that the barbarians “need to be conquered”. For much of history the assumption was that the barbarians were potential invaders to be kept at bay. We see that in the popular media image of “barbarian”, who is tough, strong, and aggressive. Like biker gangs.

    3. I would agree, yes, WW2 and Japanese occupation is a stronger influence, just based on Chinese television. There is a whole lot of WW2 re-enactment all over Chinese TV, one channel seems nearly devoted to this. They see the islands dispute as an extention of Japanese colonialism.

      It’s just most Americans are going to be quite aware of WW2, but have less knowledge of European colonialism prior to this. That’s why it needs pointing out. European colonialism is part of the consciousness too, it’s not gone. European colonialism wasn’t that far back in history. It’s more of a dotted line of western power, that continues with Korean war, then French colonialism in Vietnam to the US war in Vietnam, to Taiwan, to US bases, to the South China Sea dispute, etc.

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