Can China win trade war with Trump's Divided States of America

America's incoming unstable president, Donald Trump, continues his bromance with Vladimir Putin, the Russian leader, and the latest targets of his criticism are Angela Merkel, German chancellor, the NATO alliance, BMW — the German car company, and of course China.

The United States has had a continuous trade deficit every year since 1976 and the current account (balance of payments) including both the trade balance and international financial transactions with the rest of the world, has been in persistent deficit since 1982 with just one exception: 1991. Since 2006 the US current account as a ratio of GDP has ranged from 6% to 2.6% in 2015 when the value was $477bn. 

Xi Jinping, China's president, this week will stress China’s support for global cooperation and free trade at a keynote speech on Tuesday at the World Economic Forum in Davos, Switzerland, and in an address to the United Nations in Geneva on Wednesday, the Foreign Ministry said last week in Beijing. He will be the first Chinese head of state to attend the Davos forum.

The Wall Street Journal says Xi will assert that China is a responsible country and will “contribute China’s wisdom” in his meetings with political, economic and academic leaders and the media, said Vice Minister Li Baodong. Xi also will address the bigger questions of “where mankind came from, where we are and where we’re going.”

Last week in an interview with the Journal, Trump said that that the longstanding policy, under which the US agrees not to recognize Taiwan diplomatically, was up for discussion with China. He said he wouldn’t commit to the policy unless he saw progress from Beijing on issues such as trade practices and currency.

“Everything is under negotiation, including ‘one China,’” he said.

Chinese foreign ministry spokesman Lu Kang said the policy was the foundation of US-China ties and was nonnegotiable.

The China Daily on Monday warned in an editorial that the US President-elect was “playing with fire.”

When it comes to tolerance, it is our tradition to display a big heart. That is why one can normally get away with making the same mistake twice, as one will be given the benefit of the doubt...If Trump is determined to use this gambit in taking office, a period of fierce, damaging interactions will be unavoidable, as Beijing will have no choice but to take off the gloves.

Trump had said during the election campaign that he would label China a currency manipulator after he takes office. In the interview with the Journal, he said he wouldn’t take that step on his first day in the White House. “I would talk to them first,” he said.

In recent years China has been intervening to increase the value of the renminbi.

In a joint interview published on Sunday with German tabloid newspaper Bild and British newspaper The Times, Trump criticised Chancellor Merkel's open-door policy on refugees.

"I think she made one very catastrophic mistake and that was taking all of these illegals, you know, taking all of the people from wherever they come from,” he said. "And nobody even knows where they come from. So I think she made a catastrophic mistake, very bad mistake.”

Trump warned that other EU countries besides the UK would quit the Union because of immigration.

"I think it's very tough,” he said. "People, countries want their own identity and the UK wanted its own identity.”

"If refugees keep pouring into different parts of Europe ... I think it's going to be very hard to keep it together because people are angry about it."

Trump also said the European Union had become "a vehicle for Germany.”

To cheer up Putin, Trump described the NATO alliance as an "obsolete" organization and he threatened BMW with a border tax of 35% on cars that it planned to build at a new plant in Mexico and export to the US.

Merkel criticised Trump's protectionist policies on Saturday, and earlier said there was no guarantee of cooperation between the two countries.

"From the point of view of some of our traditional partners — and I am thinking here as well about the transatlantic relations — there is no eternal guarantee for a close cooperation with us Europeans," Merkel told an audience in Brussels.

On Friday the outgoing US ambassador to the EU warned about Trump supporting the breakup of the EU, saying it would be "sheer folly."

Michael Gove, the former British government minister and leading Brexit campaigner,  who lost his bid to be leader of the Conservative Party and prime minister, conducted the interview for The Times.

Tim Cook, Apple CEO, in China May 2016 after Apple invested $1bn in the Chinese ride-hailing service Didi Chuxing

A US-China trade war

Last year Donald Trump compared the US trade deficit with China to rape.

"We can't continue to allow China to rape our country, and that's what they're doing," Trump said.

He has selected trade officials who are China critics and whether he imposes a 45% blanket tariff on imports from China — he will have the authority to do that by declaring an emergency — or imposes restrictions on particular sectors, the relationship with China is set for at least a lot of turbulence.

By explicitly raising the Taiwan issue, he appears to be more interested in confrontation than a deal.

Trump is a hypocrite as many of his branded products are made outside the United States. Most Donald J. Trump ties are made in China. Some branded suits are also made in China as well as other products.

Robert Lawrence, Harvard professor and trade expert, analysed over 800 items in the Ivanka Trump fashion line and all were imported.

China is the biggest trading partner (exports + imports) of the US and the US had an estimated goods trade deficit with China of $344bn (exports of $110bn and imports of $454bn) in 2016 compared with a deficit of $10.4bn in 1990. The United States ran a $33.3bn services trade surplus with China in 2015, which was the largest services surplus of any US trading partner.

From 2006 to 2015, US exports to China increased by 110%, which was the fastest growth rate for US exports among its top 10 export markets. China was the second-largest US agricultural export market in 2015 at $20.2bn, half of which were soybeans.

The US-China Business Council estimates that China is a $400bn market for US firms, based on US merchandise and services exports to China, re-exports of US goods from Hong Kong to China, and sales by US affiliates in China.

In addition, the direct deficit is exaggerated.

When an Apple iPhone is exported from China to the US, the cost of assembly and components are included in the export price but most of the components come from other countries in Asia.

In recent decades the sharp rise in US imports from China (and hence the growing bilateral trade imbalance) is mainly the result of movement in production facilities from other (primarily Asian) countries to China.

US government data show that in 1990, 47.1% of the value of US manufactured imports came from Pacific Rim countries (including China); the total was at 46.8% in 2015.

In 1990-2015, the share of total US manufactured imports that came from China rose from 3.6% to 26.1%. In 1990, China accounted for 7.6% of US manufactured imports from all Pacific Rim countries, but by 2015, this figure had risen to 55.8%.

Simply, China took over from Japan as the main exporter of electronic exports to the US. It is estimated that Taiwan, one of the world’s leaders in sales of information and communications technology (ICT), produces over 93% of its ICT products in China.

There is nothing new in complaints made to the World Trade Organization by both the US and China.

Last week the Obama administration accused China of funneling artificially cheap loans from state-run banks to Chinese aluminum producers, helping the companies upgrade their facilities and expand production. It was additionally claimed that China also subsidises aluminum production by providing producers with cut-rate coal and electricity.

US states and cities also subsidise business and mainly in response to China's strategy to develop an indigenous semiconductor industry, last October President Obama appointed a panel that included the heads of Northrop Grumman and Qualcomm, and former industry heads such as Paul Otellini of Intel, to report on competitiveness issues.

The panel in its January report "found that the US semiconductor industry faces major challenges with broad implications for the economy and national security. Innovation is already slowing as the semiconductor industry faces fundamental technological limits and rapidly evolving markets. Now a concerted push by China to reshape the market to favor their needs threatens the competitiveness of US industry and the national and global benefits that an innovative US industry brings."

National security is a protectionist's dream!

Costs of a trade war

The Peterson Institute for International Economics based in Washington DC estimated last September that Trump's proposals on international trade (including a 35% tariff on imports from Mexico), could unleash a trade war that would plunge the US economy into recession and cost more than 4m private sector American jobs,

The Hong Kong-based South China Morning News says Kevin Lai, research head for Asia excluding Japan with Daiwa Capital Markets, has written in a research note that punitive tariffs of 45% would lead to an 87% fall in China’s exports to the US, while HSBC economists led by Qu Hongbin predicted they would result in a halving of Chinese shipments to the US.

The US is China’s biggest export market, accounting for 18% of total exports, and China’s overall exports would be expected to shrink at least 9% if Trump carried through with his tariff threat. There would also be significant suffering due to the collapse of businesses and job losses, with Lai estimating that China’s gross domestic product could be trimmed by 4.8%.

The newspaper says Shen Jianguang, chief Asia economist at Mizuho Securities, estimated that China’s exports had created 120m jobs, including 20m making products for the US market. More broadly, a full-blown trade war between Beijing and Washington could encourage other countries to become hostile to Chinese products, thus wrecking China’s powerful export machine, warned Professor Yu Miaojie, from Peking University’s National School of Development.

“What is more worrying is that other countries may follow suit,” he said. “As a result, Chinese exporters may not only lose the US market but also the wider market in advanced countries.”

Rising import prices would spark a rise in US inflation, and the Federal Reserve would raise interest rates while China would push down the value of the renminbi.

While there have been more losers in western countries from globalization than what economists expected, there have also been gains for low income people from cheaper imports.

The Economist wrote last year:

Excluding food and energy, prices of goods have fallen almost every year since NAFTA (North American Free Trade Agreement of 1994). Clothes now cost the same as they did in 1986; furnishing a house is as cheap as it was 35 years ago.

George Will, the conservative Washington Post columnist wrote last month:

According to a Ball State University study, of the 5.6m manufacturing jobs lost between 2000 and 2010, trade accounted for 13% of job losses and productivity improvements accounted for more than 85%: “Had we kept 2000-levels of productivity and applied them to 2010-levels of production, we would have required 20.9m manufacturing workers [in 2010]. Instead, we employed only 12.1m.” Is this regrettable? China, too, is shedding manufacturing jobs because of productivity improvements.

Douglas A. Irwin of Dartmouth College notes that Chinese imports may have cost almost 1m manufacturing jobs in nearly a decade, but “the normal churn of US labor markets results in roughly 1.7m layoffs every month.” He notes that there are more than 45m Americans in poverty, “stretching every dollar they have.” The apparel industry employs 135,000 Americans. Can one really justify tariffs that increase the price of clothing for the 45m in order to save some of the 135,000 low-wage jobs? Anyway, if tariffs target apparel imports from China, imports will surge from other low-wage developing nations.

The profile of the typical US manufacturing worker is also changing according to the Congressional Research Service: "The changing occupational mix within the manufacturing sector is mirrored by changing educational requirements. In 2000, 53% of all workers in manufacturing had no education beyond high school. Between 2000 and 2015, that share dropped by seven percentage points, even as the proportion of manufacturing workers with bachelor’s degrees or graduate degrees rose by eight percentage points."

In the longer term China would likely win a trade war; it can buy aircraft from Europe and soybeans from elsewhere; it could squeeze American universities by diverting students elsewhere and Credit Suisse research in 2015 showed that China overtook the United States to become the country with the largest middle class at 109m adults (with wealth between $50,000 and $500,000); the US level was estimated at 92m — why would the US gain by alienating the world's biggest middle class population that will continue growing for many years more?

Be careful what you wish for Donald!