Trump’s arrival presents ominous signs for those who believe in globalisation and free trade
Trump’s protectionist stance could allow China to play a leadership role in global trade and commerce, but it could also become the prime target of the new president’s tariff attacks
Uncertainties about the future of US macro economic policies have plagued the market recently, as the initial euphoria over Donald Trump’s presidency subsided.
A degree of polarisation in expectations has started to emerge, with one camp fearing that Trump may under-deliver on his promises on fiscal stimuli in light of a tight fiscal budget, binding debt ceilings, and rising inflation in an economy that is already at or near full employment.
At the opposite end of the spectrum, meanwhile, some are concerned about Trump over-delivering, or at least fulfilling, his election promises on protectionism by shutting the door on trade and immigration, and exiting free-trade agreements that will cause a backtracking to globalisation.
With protectionist rhetoric featuring prominently in his inauguration speech, it is not surprising that one of the first decisions Trump made as he entered the White House was withdrawing the US from the Trans-Pacific Partnership (TPP).
These are clearly ominous signs for those who believe in globalisation and free trade.
But for China – a country which has benefited tremendously from trade and foreign investment in the past 30 years – Trump’s protectionist stance presents both an opportunity and a threat.
It’s an opportunity because the US’ exit from multilateral trade negotiations could allow China to play a leadership role in setting the standard for global trade and commerce.
President Xi Jinping’s speech at Davos positioned China as an alternative to the protectionist US for those who are willing to continue the path to global integration.
To accomplish that, Beijing is likely continue its push on the Regional Comprehensive Economic Partnership on the trade side, and the One Belt, One Road and Asia Infrastructure Investment Bank projects on the investment side.
There is even talk that in light of the US’ withdrawal, China may be invited to join the TPP discussion as the new rule-setter in the partnership.
At the same time, however, rising protectionism in the US can be a major threat to China, as the latter has been labelled the prime target for Trump’s tariff attacks.
Even though we continue to discount the chance of a fully fledged trade war, starting with the US imposing punitive (as much as 45 per cent) tariffs on all Chinese imports, frictions now seem very likely, given Trump’s hawkish stance and the make-up of his trade team.
To determine how these trade frictions may arise, we put ourselves in Trump’s shoes and design a tariff strategy that enables him to accomplish two economic goals: cutting the US’ trade deficit with China, and bringing jobs back home.
This exercise enables us to identify a few “high-risk” industries – such as clothing and apparels, electronic products and furniture – in which Chinese imports are vulnerable to Trump’s protectionist measures.
However, our conclusion fails an economic reality check, once we consider the negative feedback effect on the US economy.
In particular, our analysis indicates that large tariffs imposed on Chinese goods in these industries could lead to significant passing on of price rises, exacerbating inflation and undermining real purchasing power of US households.
The former may force the Fed to tighten its policy more aggressively and raise long-term interest rates, while the latter could undermine consumption and hit the industries concerned.
In addition, our analysis indicates that Chinese products dominate these“high-risk” industries whereas the US firms are uncompetitive.
Hence, forcing China out of the market may simply shift US demand elsewhere, benefiting countries such as Mexico (although it too is under Trump’s protectionist threats), and Vietnam.
In other words, launching a fight against China alone is unlikely to improve the US’ overall trade balance, but simply shift its deficit from China to elsewhere.
Because of these, we think Trump is unlikely to succeed in achieving his economic goals by relying on protectionism alone, without first shoring up the competitiveness of the US economy.
Eventually, it is likely to be the US consumer who has to foot the bill for Trump’s protectionist actions.
Which leads us to conclude that Trump’s “trade-war” rhetoric is most likely a threat to gain an upper hand in future US-China trade negotiations.
On the likely partial conflicts – targeted tariffs started by the US followed by China’s retaliation albeit on a small scale – we think that the overall economic impacts are manageable, although the industries that are hit will suffer.
The main manifestation of the conflict is likely be in the financial markets, where foreign exchange and stocks will bear the brunt of the shock, as fears of protectionism are realised.
Aidan Yao is senior emerging Asia economist at AXA Investment Managers