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US–China Trade War

Based on the article by Ning Nanshan, writer for the Zheng He Island WeChat Wemedia Account and covers news on economics and business.

Key Quotes

  • “In 2017, Chinese citizens spent about ¥50 trillion [$7.32 billion]. Consumption is still the primary driving force of the country’s economic development.”
  • “From a US perspective, this battle with China is a difficult one to fight. China’s market is too big and too interlocked with the American economy. If the United States strikes lightly, China feels nothing. If the United States strikes hard, it suffers heavy damages itself.”
  • “Relocating parts of a supply chain is a long, tedious procedure. China’s manufacturing expertise and advantages were built over decades. You’re not relocating a cellphone factory with an annual manufacturing capacity of 10 million units; you’re relocating a factory that has the capacity to manufacture hundreds of millions of electronic devices.”

Executive Summary

Under Trump administration (January 2017), the United States has been threatening China with trade tariffs. Concerned about a possible US–China trade war scenario, economists and analysts from government and private institutions has developed financial models to predict the potential impact of various tariffs on the economy of both countries. These institutions arrived at almost similar conclusions that is the impact of the trade war on both countries’ economies is unlikely to exceed a 1% drop in China GDP. 

If the United States impose a tax rate of 15%, 30% or 45% on Chinese imported goods, China’s exports to the United States would fall by 21%, 46% and 72% respectively, according to Chinese securities brokerage firm Industrial Securities; by 21%, 46.5% and 72% according to Morgan Stanley. That means China’s overall export would fall by about 4%, 8% or 13%, respectively.

In July 2018, the US imposed 25% tariffs on Chinese goods, totaling $50 billion in trade value. As a result, experts predict, China’s GDP will drop by around 0.2%, taking direct and indirect impact into account. If China retaliates with the same tariffs on equal value goods, the US economy would dip by 0.1%. The United States is also putting tariffs on imports from Europe and other regions. A global trade war with all parties would add a 10% tariff on global trade, and the global economy would fall by 1.4% which is unlikely to happen.

Since a trade war with China will inevitably hurt the United States economy as well, it will likely keep a rein on these tariffs. After China announced that it would retaliate, the United States announced tariffs on another $200 billion worth of goods but lowered the rate to 10% instead of 25%. This shows that the United States is exercising some restraint to contain the impact on its own economy.

Both tariffs are lower than the 30% and 45% that the analysts used in their calculations.

In order to protect American companies that rely on Chinese goods, the United States allows companies to apply for exemption from the tariffs. Such exemptions apply to products, not individual companies. If one company’s application is successful, all Chinese companies can export that product to the United States without paying the fee. Many companies will apply for product exclusions, so the extent of the trade war won’t be as large as it looks on paper.

Fighting a trade war with China is no easy task for the United States, since the two countries’ economies are intertwined. In fact, China’s top export companies (with the exception of Huawei) are Taiwanese, American and Korean companies, such as Foxconn, ASUS and Micron Technology. The United States must take into account how tariffs on these companies will affect business at home. Therefore, the United States didn’t impose tariffs on Apple’s China-made products. Foxconn in Zhengzhou, China, is currently the world’s largest production base for iPhones, producing nearly half of all iPhones that Apple sells across the world. Chinese factories also produce most of Apple’s other electronic devices. Apple would have to cover the import taxes itself and face a decline in profits or pass on higher costs to consumers by rising its product prices which in turn risking the loss of market share to Apple’s competitors. Of course, Apple could move its supply chain to countries such as Vietnam or India, but it would be a herculean task. The costs of negotiating with the foreign country, choosing locations, building the factory, and training or transferring employees would be immense, not to mention that most host government would require these multi-national companies to employ a minimum percentage (%) of locals for the companies operation in order to be allowed for business operation. Other countries may not have the government support or production capacity and may lack economic and political stability to be a viable option. Any dip  in efficiency could have detrimental consequences in terms of profit and market share. For example, it took Samsung more than seven years to move its supply chain to Vietnam from China, which in turn see its global smartphone market share suffered in the process. The United States is warring with an understanding that if it really were to punch China in the gut, America itself would bleed a great deal. Under these circumstances, the trade war is unlikely to spin out of control for it is a double-edge sword.

Looking into what alarmed the Chinese people most is the US ban of Chinese telecom equipment manufacturer ZTE  and not the import tariffs. Though the United States has agreed to lift the ban under certain conditions, it cost ZTE more dearly than the United States. This also shows that the United States could hold other Chinese companies hostage in the same way.

If this case, China can retaliate in several ways. For example, China buys three-quarters of the world’s chips and semiconductors supply, and the United States is a big supplier of semiconductors with Qualcomm and Micron ranking 4th and 6th largest in the world. Beijing can target Qualcomm and Micron the same way the United States targeted ZTE. Chinese sanctions would hurt Qualcomm and probably bankrupt Micron overnight. The Chinese government could instead source these technologies producers in Japan, South Korea, Taiwan and Europe instead.

Another example is China could also deliver a blow to the American automobile industry via new-energy vehicles. Tesla sales in China doubled from $1.06 billion to $2.03 billion from 2016 to 2017, making China the largest and fastest-growing market for Tesla outside the United States. American cars are on the list of products the Chinese subjected to retaliation tariffs. Since Tesla doesn’t have a factory in China yet, its prices increased sharply which undoubtedly hurting sales.

China’s bargaining chips also include its monopolies on 17 types of rare-earth elements that it exports to the world. Finally, China could devalue its currency to buffer the effects of the tariffs. Within two months from May 2018, the Chinese yuan depreciated about 5% compared with the US dollar. However, this tactic is harmful to Chinese companies with stakes abroad.

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