Trump’s tar­iffs hit China where it hurts


How se­ri­ous are Pres­i­dent Don­ald Trump’s lat­est trade threats against China? The scale of the new mea­sures — 10% tar­iffs on an ad­di­tional $200 bil­lion of Chi­nese prod­ucts — will cer­tainly get Bei­jing’s at­ten­tion. But the head­line fig­ure mat­ters less than the in­dus­tries be­ing tar­geted and their rel­a­tive im­por­tance to China’s econ­omy. By that met­ric, this lat­est at­tack is a se­ri­ous es­ca­la­tion.

Most con­se­quen­tially, the tar­iff list tar­gets ba­sic man­u­fac­tured goods such as fur­ni­ture, elec­tron­ics, ma­chin­ery, tex­tiles and fibers. To­gether, these broad cat­e­gories make up roughly 67% of to­tal Chi­nese ex­ports, which in turn ac­count for 18 per­cent of gross do­mes­tic prod­uct. That means the po­ten­tial for sig­nif­i­cant eco­nomic harm is high, all the more so given that man­u­fac­tur­ing is the largest in­di­vid­ual em­ploy­ment sec­tor in China.

The new tar­iffs will also put pres­sure on China’s trade sur­plus with the U.S. In prin­ci­ple, this im­bal­ance doesn’t much bother econ­o­mists. The prob­lem is that China de­pends on sav­ings, in­vest­ment, and cap­i­tal ac­cu­mu­la­tion to drive its econ­omy. His­tor­i­cally, it would print money to buy sur­plus U.S. dol­lars, build up re­serves, flood the do­mes­tic mar­ket with money, and thus en­cour­age in­vest­ment. Be­gin­ning around 2012, how­ever, this strat­egy started break­ing down as gray-mar­ket cap­i­tal out­flows rose and sur­plus dol­lars dwin­dled.

Af­ter years of in­creas­ingly strin­gent cap­i­tal con­trols, China has only re­cently re­turned to a small sur­plus in to­tal cap­i­tal flow. Tar­iffs on ma­jor ex­port in­dus­tries will threaten its pri­mary source of hard cur­rency and place sub­stan­tial strain on the cap­i­tal-con­trol sys­tem. That, in turn, will jeop­ar­dize China’s dreams of sig­na­ture in­ter­na­tional in­vest­ment and po­ten­tially desta­bi­lize its fi­nances as it be­comes harder to bal­ance cap­i­tal flows. Un­less it can gen­er­ate more U.S. dol­lars, this could place se­ri­ous pres­sure on the yuan.

Mak­ing mat­ters worse, the new tar­iffs will likely ac­cel­er­ate the mi­gra­tion of low-wage man­u­fac­tur­ing from China to fron­tier mar­kets such as Viet­nam and Bangladesh. Even with­out tar­iffs, many ex­port-fo­cused firms in in­dus­tries such as gar­ments and tex­tiles were eye­ing the ex­its af­ter years of dou­ble-digit wage growth in China. Tar­iffs will only ex­ac­er­bate this shift, for which China was ill-pre­pared to be­gin with.

All this, more­over, comes at a bad time. With eco­nomic strain ris­ing, Chi­nese of­fi­cials were al­ready re­sort­ing to risky mea­sures to boost growth. The China Bank­ing and In­sur­ance Reg­u­la­tory Com­mis­sion re­cently ad­vised banks to re­duce in­ter­est rates on loans to small and medium-sized en­ter­prises, while sta­te­owned banks have in­creased lend­ing for real-es­tate in­vest­ment to en­sure the econ­omy con­tin­ues to grow, even as stocks and key com­modi­ties have been plum­met­ing.

Against this back­drop, the prospect of a pro­longed trade war is caus­ing grow­ing alarm within China. Aca­demics and key of­fi­cials have been qui­etly won­der­ing if the rul­ing party has made a sig­nif­i­cant mis­cal­cu­la­tion. The Com­merce Min­istry has vowed to re­tal­i­ate against Trump’s lat­est mea­sures, but it has lit­tle room to ma­neu­ver given China’s rel­a­tive lack of im­ports from the U.S. The govern­ment has even agreed to re­im­burse some im­porters for the cost of its re­tal­ia­tory soy­bean tar­iff, which is hardly the sign of a strong hand.

Ex­actly how China will re­spond, then, is any­one’s guess. But make no mis­take: Trump is at­tack­ing the foun­da­tions of the mod­ern Chi­nese econ­omy. And the trade war he ini­ti­ated is es­ca­lat­ing faster than ei­ther side seems to ap­pre­ci­ate.

Guest Colum­nist


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