US Trade War with China

Aston, PA, USA - September 22, 2016: Republican presidential nominee Donald Trump delivers a speech at a rally in Aston, Pennsylvania.

It was a hot topic of the Presidential debate last year between Hillary Clinton and Donald Trump: rethinking the United States’ 70-year-old tradition of free trade.

As the new Presidential elect, Donald Trump’s views on US trade are now causing an international spark. Donald Trump has stirred the pot making some very bold statements about policy changes, with policy aimed at making it much more difficult for companies to manufacture products in foreign markets (especially China) to then sell on to American consumers. In the lead up to the election last year, Trump outlined his trade plans, which included:

  1. Renegotiate or withdraw from the North American Free Trade Agreement and Trans-Pacific Partnership.

“I’m going to tell our NAFTA partners that I intend to immediately renegotiate the terms of that agreement to get a better deal for our workers. And I don’t mean just a little bit better, I mean a lot better,” said Trump. “If they do not agree to a renegotiation, then I will submit notice under Article 2205 of the NAFTA agreement that America intends to withdraw from the deal,” he added.

On June 22 in New York City he stated that the TPP would “ship millions more of our jobs overseas – and give up congressional power to an international foreign commission.” At a campaign stop in Ohio that same day he took it further, stating, “The Trans-Pacific Partnership is another disaster done and pushed by special interests who want to rape our country, just a continuing rape of our country. That’s what it is, too. It’s a harsh word: It’s a rape of our country.”

  1. Trump also intends to impose double-digit tariffs on goods made in China and Mexico.

During his presidential announcement speech, Trump suggested that if a company like Ford built a factory in Mexico, he would respond by calling Ford’s CEO to say, “Every car and every truck and every part manufactured in this plant that comes across the border, we’re going to charge you a 35-percent tax.”

Trade War With China

It appears that Donald Trump is starting to put his words into action, with plans to put tariffs as high as 45% on certain Chinese goods sparking international debate. As a member of the World Trade Organization, it is expected that China would likely retaliate against these unfair measures being put in place by the new US Government. Trump’s focus on bringing American manufacturing jobs back from China have prompted a lot of speculation that he is seeking to launch a trade war. What is unclear is whether the U.S. under Trump would adhere to WTO rulings on trade disputes.

“The possibility of a potential trade war between China and the US after Trump takes office has come under heated discussion,” Professor Li Haidong of the Institute of International Relations at China Foreign Affairs University noted. Professor Li Haidong called attention to the fact that Trump nominated American economist Peter Navarro, a vocal critic of China, as a head of the newly created White House National Trade Council.

“Given the current policymaking atmosphere in the US as well as Trump’s picks of advisers, the US has a strong desire to make a major confrontational policy adjustment in its trade with China in the future.”

What’s At Stake?

The most important thing at stake with Trump’s restrictions is the relationship between China as the exporter and producer of cheap goods, and US as the importer with consumers buying these goods. According to the US Census, the US imported $483 billion worth of goods from China last year. The US has in fact been the top importer of Chinese goods for almost every year since China joined the WTO. Having said this, according to the GPF report: “US dependence on Chinese goods is a matter of convenience.” The analysts say the United States has ample spare capacity in manufacturing to eventually make up for the shortfall.

Retaliation

There will likely to be retaliation if Trump’s plans do come to fruition, as it goes against the WTO rulings and almost places a free-for-all on trade internationally. Whether it’s your iPhone, your car, or your television, these items tend to be made up of components that have been manufactured in different countries around the world – these chains are going to be disrupted and shortened.

 

So what would happen if China turned around and decided to place a tariff on American products? This happened back in 2009 when President Barack Obama imposed a 35 percent tariff on Chinese automobile and light truck tires. China retaliated by placing a tariff on US chicken meat. The impact was limited: imports from China fell by 50 percent, only to be replaced by South Korea and other manufacturers. This both demonstrates that the US is not dependant on China, but also that there is a limit on how many jobs will actually come back to the US.

 

We are already seeing changes taking place before Trump comes into power. Ford Motor Co scrapped their planned Mexican car factory, adding 700 jobs in Michigan after facing the threat of a border tax. According to Ford CEO Mark Fields, the move was a “vote of confidence” in Trump, but also a response to a decline in North American demand for small cars. Instead, $700 million has been invested into expanding their Michigan factory and making new electric, hybrid and autonomous vehicles.

However, there is another opinion on the topic, and perhaps a different outcome than the main one discussed. The Chinese government media firm published an op-ed on 30 December with an alternate solution, stating:  “Rather than bash China, perhaps America should learn from and work with China,” read the op-ed by writer Curtis Stone. “Trump wants to spend $1 trillion on infrastructure upgrades in America to rebuild the nation and put people back to work. The problem is how to pay for it and how to do it. China knows how to fund and carry out serious infrastructure building, and deep-pocketed Chinese investors want to invest billions in America.”

Who Will Win?

If this trade war does go ahead, who is likely to come off better? This is a question that will best be answered in time, and as the current situation stands, opinions are very divided.

The Chinese government newspaper, the People’s Daily, reported on Tuesday that unnamed trade officials and economic advisers said the Chinese economy could withstand trade tariffs mainly because exports were no longer a driving factor for growth. If Trump imposes a 45 percent tariff on Chinese goods and reduces China’s exports to the US by half, it is unlikely to affect the nation’s highly diversified global trade income picture, a HSBC report said in November. More than 60 percent of China’s exports are currently directed to markets other than the US, Japan and the Eurozone, the report said. China knows that Trump is in power for at least four years, and possibly eight, which means they are likely to take a long term view on the situation and invest heavily in local infrastructure to offset some of the trade they may loose.

On the other hand, according to the GPF report, both countries would lose in a full-blown trade war, but it is the United States that has the upper hand. The United States is the destination of 18% of all Chinese exports, while China accounts for just 7% of American exports. The United States is much wealthier than China, too, meaning that it has more resources to suffer through any slowdown that may result from a trade war. Trump understands this, which is why he is pushing China to get a better deal for America.

For the moment however, the Chinese are still taking a ‘wait and see’ approach. Trump won’t officially become president until after the inauguration on January 20, and his policy towards China could then become quite different from his campaign rhetoric.

 

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