CHANGE OF TONE ON CHINA

Factors that may explain US’s taming of threats

NEW YORK

UNITED States President Donald Trump’s threats to punish China over trade have been displaced by a pledge to negotiate after hearing the perspective of his counterpart Xi Jinping. Below are factors that may explain the change in tone:

The Setting z A meeting with Xi at Mar-aLago created “tremendous goodwill and friendship”, Trump tweeted on Saturday. Commerce Secretary Wilbur Ross said the countries agreed to a “100-day plan” to discuss trade.

z The nations agreed to “properly” deal with trade friction, said China’s Foreign Ministry.

z Trump said the US had been treated “unfairly” and had made “terrible trade deals” with China.

Less Dependent

The world’s biggest exporter is becoming less dependent on external demand as policymakers promote consumption-driven growth.

z At the broadest measure, 40 million people work in export-related sectors in China today, seven per cent of non-farming employment, according to an estimate by UBS Group AG economists.

z That’s dwarfed by the services sector, which accounted for 43.5 per cent of total employment last year, up from 36.1 per cent in 2012, according to the National Bureau of Statistics. The new economy accounted for about 70 per cent of new jobs, it said.

Inter-Connected

Also the world’s second largest importer, China is deeply connected with a number of nations. That means any US-led trade war would also hurt some of its closest allies.

z China is the biggest export market for many economies. Taiwan, Malaysia, South Korea, Vietnam and Singapore are among nations exposed to any turbulence in China caused by potential trade frictions, according to UBS.

z The effects of aggressive US tariffs against China will ripple far beyond to countries, including Germany and others in Europe, via China’s domestic and foreign supply chains, according to an Oxford Economics note in February.

Blow Back

A trade war would threaten complex mutual supply chain links with US electronics manufacturers.

z China’s biggest export category to the US and other countries is electronic products, including cell phones and computers, according to UBS.

z The US is the most important supplier to China, according to Oxford Economics: “This illustrates the two-way nature of supply chains and suggests trade protection has the potential to come back to bite US producers.”

Apple, Boeing

A trade war would hurt a growing number of US multinationals eyeing China as a major engine for revenue growth.

z Major US multinationals could be lobbyists for China, the Beijing-based Centre for China and Globalisation wrote in a report in January.

z The US companies had been lobbying Congress to grant China most favoured nation treatment every year before China joined the WTO in 2001, the CCG wrote. Now China can still work together with those multinationals to push for a stable bilateral ties, it said.

Do Your Worst

Even on a worst-case scenario, the effect on China’s economy would be manageable.

z The most likely approach toward China from Trump will be case-by-case, sector-by-sector tariffs and the enhanced enforcement of US trade laws, according to UBS. Even in a scenario in which the US imposes a 15 per cent tariff on Chinese exports that would only dent China’s gross domestic product growth by 0.5 per cent, UBS estimates.

z With China already pursuing a more moderate yearly growth target of “about 6.5 per cent or higher if possible,” the fallout from any tariffs if they were to come look manageable.

These may help explain the confidence of Chinese officials in the days leading up to the US visit: “We don’t want a trade war,” said Jiang Shan, former general director of Americas and Oceanic Affairs at the Ministry of Commerce last month.

“But we shouldn’t be afraid of any trade war.” Bloomberg