US-China Trade at Global Crossroads
President Donald Trump began his grueling 12-day Asia tour amid US Special Counsel’s first indictments, which cast a shadow over the White House’s future.
Nevertheless, Trump and President Xi Jinping were able to sign deals worth US$253 billion, which makes the visit to China historic in terms of the value of business agreements struck.
If anything, the visit demonstrates that, despite an insular foreign policy, Trump’s economic objectives cannot be executed without expanding trade with China.
By Dan Steinbock
Rapid trade expansion
In 2016, US-China trade amounted to $579 billion, while Trump’s singular focus is on the $368 billion trade deficit. Yet, merchandise trade is only one aspect of the broad bilateral economic relationship. Today, China is US’s second-largest merchandise trading partner, third-largest export market, and biggest source of imports.
The increase of imports from China in the US and the bilateral trade imbalance is largely the result of the shift of production facilities from other, mainly Asian countries to China. Since 1990, the share of US imports from China has soared sevenfold to 26 percent. Today, China is the center for global supply chains, which has greatly lowered US multinationals’ costs and thus prices for US consumers.
During his tour in Japan, South Korea, China, Vietnam and the Philippines, Trump was accompanied by CEOs of some 30 companies. Determined to sign huge deals during the China visit, they did not want Trump to undermine access to what they see as the $400 billion Chinese market, based on US exports of goods and services to China, sales by US foreign affiliates in China, and re-exports of US products through Hong Kong to China.
The same goes for services, foreign direct investment (FDI) and US Treasury securities. China is America’s fourth largest services trading partner (at $70 billion), third-largest services export market, and US has a major services trade surplus with China.
The combined annual US-China investment passed $60 billion in 2016, but there is room for far more as China is the world’s third-largest source of global FDI.
Finally, China remains the second-largest foreign holder of US Treasury securities ($1.2 billion as of August 2017), which help keep US interest rates low.
There are only three probable US-Chinese trade scenarios, after the US directive on steel imports and national security, the recent US-Sino Comprehensive Dialogue, US reliance of Section 301 of the Trade Act of 1974, and the investigation into China over US intellectual property.
In the “Trade Pragmatism” scenario, the White House stance would focus not just on deficits, but other critical bilateral dimensions as well. US multinationals and consumers would continue to benefit from lower costs and prices. Emulating General Electric and Caterpillar, US companies would adopt a more active role in the One Road and One Belt (OBOR) initiatives. Chinese investment would contribute to jobs in America. China-held US Treasuries would keep interest rates moderate. The international role of US dollar would continue to erode, but slowly.
In the “Trade War” scenario, bilateral deficits would dictate the White House’s stance, which would result in progressive deterioration of the bilateral relationship. While corporate giants with major China stakes, such as Apple and Walmart, would be crushed (which would hit hard the US markets), US multinationals would be penalized by higher costs and US consumers by higher prices. American companies would miss historical opportunities in the OBOR initiatives. US would lose Chinese capital and jobs. The bilateral service surplus would shrink.
With the sales of Treasuries, rising interest rates would harm Trump’s $1 trillion infrastructure modernization. The decline of US diplomacy could threaten the dollar’s global-reserve status, especially as the US petrodollar – dollar spending based on revenues from oil exports – will soon be augmented by China's petrorenminbi; the use of Chinese yuan in oil transactions.
Until recently, the White House’s stance has reflected a mixture of these two scenarios. But that has come with uncertainty and volatility, which could prove challenging in crisis conditions.
US reliance on Chinese market
Over time, America’s reliance on the Chinese market will deepen as per capita incomes in China will double by 2020. According to Credit Suisse, China overtook the US in 2015 as the country with the largest middle class at 109 million adults, as opposed to 92 million in the US.
The future translates to more of the same. Private consumption in the US is growing at only 1.6 percent per year; in China, over five times faster.
The global car industry is a case in point. In the past, American cars dominated the international market. But in 2018-9, unit sales in China will soar to 31 million, which is almost twice the size of the US market. As a result, US companies, from old players such as General Motors to new ones such as Tesla, invest heavily in China, where they sell more cars than in the US.
Other industries will follow in the footprints,
The “Trade War” scenario would be a lose-lose proposition not just to the US and China. It would undermine global growth prospects – our future.
Dr Dan Steinbock is the founder of Difference Group and has served as research director at the India, China and America Institute (USA) and visiting fellow at the Shanghai Institutes for International Studies (China) and the EU Center (Singapore). For more, see https://www.differencegroup.net/
The original commentary was released by China Daily on November 10, 2017.