Why China will win a trade war

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Почему Китай победит в торговой войне

Despite all his bragging about negotiating talent, trump — an inept Amateur. He chose a solitary struggle against an opponent that is smarter, more patient and stronger than him. Chinese leaders will surely offer him some cosmetic concessions, which he gladly accepted. In any case, China can not afford to delay time.

In economic terms from the trade war will hurt the US and China. Punitive duties will push up import prices will hit exports, lead to job losses and hamper economic growth. Therefore, both parties should refrain from the beginning of the confrontation. But the administration trump threatens to impose a 25 percent duty on American imports from China amounting to $ 46 billion, and China took steps to respond, and so the trade war loomed menacingly on the horizon. Trump further raised the stakes, threatening to impose additional duties on imports in the amount of 100 billion dollars (while the list of these goods is not specified), and Beijing in response immediately promised proportionate sanctions. Obviously, trump is counting on the fact that the loss of China will have more, and so it will go back down. But the us President is wrong.

Summary statistics seriously exaggerates the degree of economic vulnerability of China, and lessen the vulnerability of America. If you focus on trade in goods, as does most observers, we see that the American imports from China last year totaled 506 billion, almost four times higher than exports in the opposite direction (131 billion dollars). But the United States sold to China service for $ 38 billion more than they bought it, and it is the largest positive balance in bilateral trade to America. In addition, merchandise exports from U.S. to China is mainly agricultural products and finished products with mostly American content that sell to American firms. And China’s exports to the United States is the main products of Chinese build, which a lot of foreign parts and components. And on top of that, they often have American brands. Another 37 percent of U.S. imports from China are parts and components that American manufacturers use.

Take as an example the iPhone company Apple. When iPhones come with Chinese enterprises in the United States of America, all the imported cost of the goods is attributed to China. But in this iPhone there is a display of the company “Samsung” from South Korea, has integrated circuit memory of the company “Toshiba” from Japan and many other foreign components. According to one estimate, the Assembly in China accounted for only 3-6% of the cost of production of the iPhone 10-th model, which amount to $ 370. And as in retailing this smartphone worth $ 999, the core part of the value added is the American: this is the margin Apple and American sellers.

Admittedly, this example is not the typical, but rather exceptional, and trump has not yet zeroed in on the import of iPhones. So let’s think about another example — the import amounting to $ 46 billion, is threatened by trump. 26 billion of this amount is attributable to the electronics. The idea of trump’s duties are designed to slow down the campaign of the Chinese government “Made in China 2025”, which aims to develop domestic high-tech products. But these duties are in fact mainly affect the low-tech products that China exports to America now. According to the Organization for economic cooperation and development (OECD), almost half of the toppings are exported by China to the United States of computer, electronic and optical equipment is foreign. (Latest data from 2011, so over the years, the proportion could vary slightly.) Even if the proposed duty cut Chinese exports of such products in the quarter, direct losses for China will amount to $ 6.5 billion, i.e., approximately 0.05 percent of the national GDP. For an economy that is growing at 6.8 percent per year, it’s a mosquito bite, nothing more.

China will withstand even a single American duties on all export products, including iPhones and other products. The OECD estimates that about one third of the content of U.S. imports from China actually is of foreign origin. Therefore, conventionally, the net value of Chinese exports to the United States is about 329 billion dollars, that is, about 2.7 per cent of the total 12 trillion in dollar terms China’s economy. So even if a single duty trump will reduce Chinese exports to the U.S. by 25 percent, a direct loss to GDP will be 0.7 percent. Yes, it will be painful. But the Chinese economy will still grow at a rate of 6.1 percent per year.

This is unlikely to come — just due to the fact that the United States is much worse protected from a trade war than it seems to Trump. Imagine how indignant consumers, if trump will impose duties on iPhones! It should be noted that since many U.S. firms moved production to China, they are completely protected from dirty Chinese above. For example, Beijing can stop for some time, the production, stating the regulatory false claims.

Under the threat turned out to be not only the goods of American brands that are popular with consumers in the United States. A trade war also creates a danger for those companies that operate in the United States, and to maintain competitiveness in the world market need the Chinese components and parts. A list of trump’s $ 46 billion aimed against propellers for aircraft, machinery and other intermediate products. If you increase their cost, that will pose a threat to jobs in manufacturing in the United States. Although duties do not apply to consumer goods such as clothing and footwear, prices for some consumer products will increase, say, on TVs and dishwashers.

In contrast, the potential responses of China will be more focused. First on the list will be the export of American goods civil aviation. The share price of Boeing tumbled, when China announced their steps. But Chinese airlines are developing so fast that Boeing may go for reduction of prices for the sake of sales in this market. In this case, China does not suffer from the imposed duties. But if the situation escalates, the Chinese have a reliable alternative supplier: the European company “Airbus” (Airbus).

In the second position in the list is the soybean exports, which amounts to 12.8 billion. China buys more than half of the American export of soybeans, and this gives him power in the market. Once started talking about a trade war, American farmers immediately felt the effects, as soybean prices fell. But here in China there is an alternative supplier in the face of Brazil.

In short, the trade deficit with China, really of only $ 200 billion, are unlikely to give America some serious advantages.

China has much more opportunities to address the economic damage, than the administration of the trump. Unlike the American Federal reserve, the Chinese Central Bank is not independent, and therefore him, if necessary, can order to cut accounting rate to increase domestic demand. State banks are also unable to give instructions to lend more. And although China after the arrival of the trump in the White house has allowed to significantly raise the yuan against the dollar, now he can put it down, making Chinese exports will become more competitive.

The Chinese state is also much better condition budget, and it can compensate for the loss of any industries and businesses that will suffer from a trade war. But the American state has large budget deficit is about four percent of GDP, and in the coming years, this deficit will certainly increase. To increase spending will require congressional approval, and he may not get it.

Finally, the Chinese government will be much easier to overcome the political costs of trade war. Whenever trump lashes out at China, the us stock market falls. This creates special difficulties for the President, which the industrial Dow Jones refers to a personal approval rating, especially in view of the fact that the largest company in the index is “Boeing”. Because the President has tied himself to this index, the administration of the trump in every case of reduction of quotations is forced to reassure the markets, saying that seeking to settle the trade dispute through negotiations. It weakens its leverage.

In November, the country ahead of midterm elections, and Republicans are politically vulnerable. China takes advantage of this and introduces punitive measures against soybeans, which are grown mainly in the Midwestern States, where the population supports trump. China also plans to retaliate against U.S. exports of whiskey, the main producer of which is Kentucky, where Senate majority leader Mitch McConnell (Mitch McConnell).

On top of that, trump appears to be missing a strategy. An international Alliance could be much more effective to put pressure on China, forcing it to open its markets and respect intellectual property of foreign firms than the US can do alone. In the past year, the United States, European Union and Japan agreed on joint actions in this direction. But trump got the allies against America, by entering the export duties on Japanese steel and aluminum for spurious reasons of national security, and threatening similar measures to the allies of the EU. And because of his duties against China will also affect foreign suppliers, primarily in Asia, it will further weaken the chances for the establishment of a United front.

Trump compounded the situation by taking unilateral action against China, which apparently is against the rules of the world trade organization. I must say that the potential allies to be repugnant trump the slogan “America first”. Because of this, China is in an advantageous position politically. Its official line is: “China wants a trade war, but not afraid of it”.

Despite all his bragging about negotiating talent, trump — an inept Amateur. He chose a solitary struggle against an opponent that is smarter, more patient and stronger than him. While this is mostly political theater. But since trump overestimates their abilities and underestimates China’s determination, there is a very real danger that this conflict will intensify.

And because Chinese leaders are smarter and more cunning trump, they will surely offer him some cosmetic concessions, which he gladly accepted. Obvious win-win option would be the increase in purchases of U.S. liquefied natural gas. According to reports on Twitter, trump misled the so-called concessions, which Chinese President XI Jinping announced April 10 at the forum in Boao. They are the promise of economic reforms, which were announced earlier, but which were reformulated and sounded like music to the ears of the trump. If Trump is lucky, he will be able to retreat, saying this about the victory.

In any case, China can not afford to delay time. Voters can vote for Democrats in Congress, and it will cut Trump the wings for next year. And in 2020 they can vote against him. XI Jinping don’t have to worry about re-election.

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