Xi- Trump meeting dampens trade war risk
Editor’s Note:
There has been an ongoing debate about the possibility of a Sino- US trade war, and after the recent Xi- Trump summit, academic and market professionals have once again cast their attention to the issue. Zhang Ming, chief economist at Ping An Securities, and Lian Ping, chief economist at Bank of Communications, share their insights on the potential of a trade war between China and the US.
Lian Ping
US President Donald Trump once pledged to label China a currency manipulator and punish it with high tariffs. If it happens as many fear, China would retaliate against trade sanctions, which could escalate into a full- fledged trade war between the two countries. Yet, in my opinion, the possibility of such a trade war looks unlikely.
There is no justification for labeling China a currency manipulator, even under US standards. Although the US puts China on its list of countries using unfair currency practices, China only meets one of the three criteria given its large bilateral trade surplus with the US, according to a report issued by the US Treasury Department in October 2016.
Assuming that the US imposed trade sanctions on China for currency manipulation, China would certainly take a series of measures to strike back. The US mainly exports high- end manufacturing products and agricultural products to China. Over the past five years, US agricultural exports to China accounted for 17 to 20 percent of the country’s total agricultural exports. If China limits these exports, the industry will suffer a serious setback.
Once there is a bilateral trade war, Chinese exports to the US will fall remarkably and a large amount of goods will be blocked outside the US. Certainly Chinese enterprises will suffer, but at the same time US consumers will also be affected as they will be forced to reduce consumption due to higher prices as a result of high tariffs, or they will have to buy more expensive locally- produced or other imported products. That is to say, a trade war is bound to harm the interests of both sides.
As two major powers in the world, China and the US maintain close political, economic, trade and investment ties, with huge amounts of foreign direct investment between the countries. A large number of US companies are doing business in the Chinese market, and a trade war will have a negative impact on their investment.
The US is China’s largest export market, which is crucial for millions of jobs in China. In this sense, China will seek to take a flexible policy approach to deal with Sino- US trade relations to avoid a trade war.
As such, the possibility of a fullfledged trade war between China and the US is virtually nil. But this doesn’t mean that there will be no trade conflicts. In fact, frictions will continue to exist, and may even intensify at certain time periods.
Zhang Ming
Chinese President Xi Jinping and US President Donald Trump wrapped up their first meeting with a 100- day plan for trade talks which aims to resolve their trade disputes, Reuters reported on Friday. It is a tangible achievement, which puts off the outbreak of a potential trade conflict between the two countries by more than three months so as to allow both parties to seek potential room for tighter cooperation.
Another positive implication behind the 100- day plan is that the possibility of the US naming China a currency manipulator and imposing punitive tariffs on Chinese exports will decline significantly.
Yet, we should not be too optimistic about the result. At present, the Trump administration is taking a less aggressive approach toward trade with China thanks to the good performance of the US economy, which saw the unemployment rate fall to a near 10- year low of 4.5 percent and the core inflation rate near 2 percent. If the US economy could continue to grow at a satisfactory rate, the Trump administration will turn their focus to other issues. On the other hand, if economic growth declines sharply, then the government will probably again look for trouble in the Sino- US trade.
Indeed, it is highly unwise to claim that the Chinese currency is undervalued, as we are aware that China’s foreign exchange reserves dropped by $ 1 trillion within three years, pointing to the central bank’s intervention efforts in the forex market in preventing substantial depreciation in the yuan. However, the US government at the moment seems to be shifting its emphasis from accusing China of currency manipulation to currency misalignment, a term even more difficult for the Chinese government to retort. For example, the Trump government could accuse the Chinese government of subsidizing State- owned enterprises and export- oriented industries, which thereby leads to exchange rate distortion and gains unfair competitive advantages.
Although chances of a comprehensive Sino- US trade war are slim, driven by US domestic political pressure, the Trump administration could still launch a trade war with China with two strategies. The US could either choose to impose punitive tariffs on imports from sectors where China enjoys trade surpluses, such as mechanical and electrical products, furniture and clothing, or could levy comparatively mild tariffs on all Chinese imports, an idea similar to the border adjustment tax proposed by the Trump administration.
The Xi- Trump summit has generally achieved satisfying outcomes which indicate potential cooperation on bilateral trade and could reduce the odds of a bilateral trade war in the short run. But we need to refrain from being excessively optimistic. After all, considering the US president’s performance thus far, he is highly unpredictable.