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How a Trump trade war with China could do the US more harm than good

Five ways the Trump administration could attack China through trade policy, and how they risk collateral damage to the US

PUBLISHED : Friday, 16 December, 2016, 3:48pm
UPDATED : Friday, 16 December, 2016, 10:50pm

Fans of Donald Trump say we should take him seriously but not literally. They say the media – and all those others who failed to see his victory coming – did the opposite: they made the mistake of taking him literally, but not seriously.

But now, that advice is no longer sufficient: as Trump moves ever closer to putting his feet up on the desk in the Oval Office, the urgent imperative is both to take him seriously and to take him literally.

As members of his administration begin to emerge, and as his campaign-trail fondness for outrageous and off-the-wall tweets continues unabated, any foreign ministry around the world that has not been plunged into radical scenario planning is asleep at the wheel.

There are still careful observers who believe he may be reined back on some of his more lunatic ideas – like the wall between the US and Mexico, withdrawal from Nato and the national register of Muslims – but in other areas, nightmare seems likely to become reality, and perhaps sooner after January 20 than many of us think. Think China. Think trade.

At home in the US, China has always been an easy scapegoat, and current anti-trade sentiment in red-neck America runs livid. China’s colossal trade surplus with the US – US$290bn last year – makes a little spat with China on trade seem like a quick, easy and low-risk way of delivering on some Trump campaign-trail promises.

Many US states would be mightily peeved to lose the job-stimulating investment [from China] that has been made in more practical sectors of the economy

So I think we must take it as a certainty that some very senior brains in Beijing are at this very moment doing some serious scenario planning: what initiatives could Trump take, and what harm could they do? What retaliation would be appropriate and how painful would that be for key US political interests? And what should China do anyway to “hedge” the near-certainty of more difficult times ahead in economic relations with the US?

I plan today to look at the initiatives Trump might take and the harm they might inflict. Then in Sunday’s column I will explore China’s possible retaliations, and the harmful places this spat might lead us into.

I can see at least five trade policy attacks on China that Trump’s team can consider: impose tariffs; put pressure on US companies to pull operations out of China and back to the US; block Chinese investment in the US; frost China out of multilateral and plurilateral trade agreements; and exert pressure for a stronger Chinese currency.

The first – tariffs – are almost certain. But if they are carefully aimed at highly specific targets (like the current massive tariffs on certain Chinese steel products) then they will do very little practical harm to trade while at the same time winning Trump some valuable positive publicity. Imposed more broadly, they would have ruinous impact on US companies (like Apple) operating inside China, and inflict massive cost pain on US consumers – so I think those are less likely.

Pressuring US companies to “bring jobs home” might work for a tiny handful of companies whose main market is the US itself, but will quickly inflict much more pain on US companies than on the Chinese economy. The higher cost of manufacturing at home would ruin the international price competitiveness of US companies looking to sell more in world markets.

On an assumption that many US investors have gone into China at least in part to capture opportunities in the country’s massive market, withdrawal would hurt US companies more than any others. There are many mainland and European companies who would be only too happy to see US competitors disappear from the domestic market. And it is a naïve US company that believes its technologies are so extraordinary that China’s manufacturers would be hobbled without them.

The third measure – blocking Chinese investment in the US – is likely, but will again probably hurt the US more than China. For sure, whether a Chinese company invests in a Hollywood film company, or a US sports team, matters neither here nor there. But many US states would be mightily peeved to lose the job-stimulating investment that has been made in more practical sectors of the economy.

In so far as Beijing is likely to be perturbed by any of these sets of measures, the risk of collateral damage to the US itself is high

The fourth strategy - blocking China out of global trade deals – already seems a high US policy priority, whether it is the TPP, or the Trade in Services Agreement. Refusing to grant China market economy status (which was promised in 2001 when China joined the WTO, to take effect after 15 years – which is in two weeks time) is another stick with which to beat China. This has certainly got under Beijing’s skin. It has lodged protests in the WTO – not that this will do China much good.

But is this likely to inflict any real harm? Probably not. China is active and well protected in the WTO itself. It is active in the Association of Southeast Asian Nations (Asean)’s Regional Comprehensive Economic Partnership (RCEP). It has a large number of significant free trade agreements of its own – not least that with Asean. It is active in the formation of the long term vision for a Free Trade Area of the Asia Pacific (FTAAP). And a primary casualty of such a frost would be the finely-balanced US-China Bilateral Investment Treaty, which would make it easier for US companies to invest in China, and for which US companies have been clamouring for several years.

Finally there is the attack on China as a currency manipulator, with pressure for Beijing to strengthen the renminbi. Since China has been pouring billions over the past two years into trying to stop the renminbi (RMB) from falling, the currency manipulation case would be virtually impossible to make. Since the beginning of 2013, China’s currency has weakened by 10.75 per cent against the US dollar. Compare that with a 30 per cent fall in the yen, a 40 per cent decline in the Australian dollar, and a 36 per cent descent in the Indonesian Rupiah. In a context where the US dollar has strengthened against virtually every currency worldwide except the euro, picking China out as a manipulator is nothing short of ludicrous.

In so far as Beijing is likely to be perturbed by any of these sets of measures, the risk of collateral damage to the US itself is high – but that takes us into possible retaliations, and Sunday’s column. More then.

David Dodwell researches and writes about global, regional and Hong Kong challenges from a Hong Kong point of view