Why Donald Trump is missing the mark by focusing on goods instead of services

David Dodwell says by zeroing in on the trade imbalance between China and the US, Trump is ignoring the huge potential for US exports in services such as tourism

PUBLISHED : Saturday, 25 August, 2018, 4:01am
UPDATED : Saturday, 25 August, 2018, 7:07am

With US trade sanctions against China having come into effect, it is a good time to conduct an audit of the “America first” trade war as it focuses on China.

What have the practical impacts been so far? How likely is the strategy to achieve its declared aims? And what are likely to be the unexpected consequences?

First, the practical effects so far in dollar terms are quite small, which is probably as intended ahead of critically important US Senate and House of Representative elections in November. If negative consequences don’t start to be felt until after the midterm elections, so much the better.

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Tariffs on US$50 billion a year of Chinese exports means the policy will, in practice, potentially impact goods worth about US$4 billion a month.

If US importers go ahead and buy these goods anyway, they will cost up to 25 per cent more. Pain may be acute in certain areas, but we need to remember that US imports amount to about US$200 billion a month. So the effects of tariffs inside the US are likely to be modest.

Watch: Trade war fears for Chinese pork

So, too, inside China – first, because more than half of the goods targeted by tariffs are exports from the US and other foreign-invested companies from places like Hong Kong and Taiwan, and second because even where the export value of items is high, very little of this export value is being captured inside China.

When the value of an export from China is broken down, at the end of a long production chain that might embrace more than 10 economies, discomfort will be shared across all economies in the chain.

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So at this stage, practical effects are small, but provide dramatic publicity for important US elections. US President Donald Trump’s core can praise him for sticking to campaign pledges and for “putting America first”.

The serious and perhaps long-term harm done to the US reputation as a reliable or trustworthy trading partner and as a champion of rules-based international trade cannot yet be measured.

Second, how effectively will the tariff strategy achieve defined aims? On the surface, Trump’s goal is simply to reduce China’s exports to the US, to raise US exports to China and to “bring jobs home”.

The more economically literate in the US administration are attacking Chinese pressure on US companies to transfer technology, intellectual property theft and unfair government support for state-owned companies or companies operating in specific sensitive sectors.

As for Trump’s simple agenda, the trade expert consensus is that his strategy is wildly off-target. The only jobs the strategy would “bring home” would be low-pay, low-value-adding ones that have been shifted offshore by US companies for very good reason.

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Bringing them home to an economy that is growing strongly and with full employment would be powerfully inflationary, and harmful to the international competitiveness of thousands of US companies.

The second agenda – to tackle unfair competition inside China’s economy – is a reasonable one, for which a tariff war is irrelevant. Guns are being pointed in the wrong direction and ill will is being created that can only make it harder to win reforms inside the Chinese economy.

Watch: Are Chinese consumers less willing to buy American goods?

Third, whatever small gains are achieved in goods exports will come at the expense of much bigger losses elsewhere. US goods exports to China amount to US$130 billion, but sales inside China by US companies now amount to more than US$220 billion a year.

Future prospects for this much more important business is being put gratuitously in danger.

By ignoring services trade, the tariff war on goods is putting hundreds of billions of dollars of critically important business inside the US in jeopardy

Also, by ignoring services trade, the tariff war on goods is putting hundreds of billions of dollars of critically important business inside the US in jeopardy. The US has a handsome US$255 billion surplus in global services trade and massive upside potential – in particular with China. But the present strategy is putting this at risk.

For example, look where these services exports come from. Over US$290 billion of services exports (about 40 per cent of total services exports) came from tourism – 76 million foreign tourists visited the US in 2016, underpinning close to 10 million jobs.

China is today the source of more international travellers than any other country – more than 150 million last year – and this total is growing at more than 5 million a year.

In 2016, just 3 million of these travellers went to the US – but they spent US$33 billion, by far the highest per capita spending of any country worldwide, according to the Germany-based China Outbound Research Institute.

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At this rate, attracting an extra 1 million Chinese visitors would lift US tourism exports by US$11 billion a year. Add 10 million over the coming decade – not an unreasonable target – and this amounts to services exports worth an extra US$110 billion a year, adding literally millions of new jobs in the US.

By poisoning relations with China, Trump’s trade war is putting much of this potential at risk: imagine how easy it is for China to suddenly make it harder to get US visas.

Watch: Top 10 destinations for Chinese travellers in 2017

It is intriguing that Trump is so keenly obsessed with US goods exports to China worth US$130 billion a year, while wholly neglecting the upside potential of tourism and other services worth twice as much.

Trump’s defence would probably be that the structural imbalance in the US trade relationship with China is so serious that short-term pain is a price worth paying. His administration would argue that present tactics may be regrettable, but are necessary for the long term.

Sadly, that is not the view from outside the US. Trump has undermined – perhaps permanently – America’s reputation as a trustworthy trade partner and a champion of rules-based trade. His assault on the multilateral trading system is likely to be firmly rebuffed.

The effort to persuade President Xi Jinping to back away from his “Made in China 2025” industrial policy will fail, as will the attempt to slow Chinese efforts to build a more hi-tech, high-value-adding economy. China will probably liberalise, more slowly than we would like, but in a multilateral framework, and not bowing to bilateral US pressure.

As Henry Kissinger, perhaps the US’ foremost diplomat over the past half-century, noted: “We are in a very, very grave period.”

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