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Trade War Will Not Occur Between China and U.S.

Mar 20 , 2017
  • Xu Hongcai

    Deputy Chief Economist, China Center for Int'l Economic Exchanges

The world was in an uproar when Donald Trump began to reveal his policies (including some rather tough rhetoric on China) after winning the American presidential election in November. However, given what he has said and done since taking office, it seems that Trump’s attitude towards China is changing.

Trump’s first address to the US Congress on March 1 offered the best sample of his present and future policy orientations: rejuvenating American manufacturing; increasing investment in infrastructure; reducing tax, both corporate and personal, by a big margin; adopting a new immigration policy; repealing Obamacare; advancing equality in education; increasing defense expenditure and firmly opposing terrorism; not forcing American values on others (as Trump believes that America will respect all countries’ right to choose their own paths); and insisting on his “America first” principle to “make America great again”.

Generally speaking, the different aspects to Trump’s new deal in the economic, political, diplomatic, educational and livelihood fields are rather people-oriented and realistic.

Trump was largely regarded as a big uncertain factor, riding on special circumstances at that time. His policy orientations contain important positive elements for world development. But with limited personal influence in the US political system, whether much of his policy will be translated into reality remains a question.

For example, Trump wants to increase interest rates. The American economy is recovering, and both inflation and employment are rising. If interest rates are not increased now, inflation pressure will be huge. When the interest rate is increased, however, global capital may flow to the US, fueling dollar appreciation, which may well reduce the competitiveness of American exports.

In the past three years and more, global trade growth has been slower than economic growth. Chinese trade has had negative growth. So have American exports, by a larger margin, mainly due to dollar appreciation. This is something Trump does not wish to see, and many people worry about whether there will be a trade war between China and the US.

My view is that a trade war will not occur between the two countries. The volume of trade between China and the US is huge. Last year it was between $530 billion and $540 billion. But trade between the two countries is seriously unbalanced.

The US is China’s second-largest trading partner. In two-way trade, China has a surplus of about $250 billion. American presidents have long been concerned with trade imbalances with China, many of which are not directly caused by China. For example, the US does not sell hi-tech to China, although China wants very much to buy it. China also wants to invest in the US, which imposes many restrictions on Chinese investment. As a result, capital flow between them is seriously imbalanced. American export on the whole is not very competitive: Its overall trade deficit tops $500 billion; the deficit with Japan accounts for 9% of that figure; that the deficit with China is 47%.

China’s competitiveness in services is rather weak on the whole. Service is a priority area for opening up during China’s 13th Five-Year Plan period. It seems that some local trade frictions have already appeared. In 2016, the US launched 20 trade-remedy investigations against Chinese products, involving sales of over $3.7 billion. In February 2017, the US Department of Commerce went to arbitration on the anti-dumping and countervailing investigation into Chinese stainless-steel sheeting. In January 2017, the US International Trade Commission made a final decision to impose anti-dumping duties on the imports of large washing machines from China.

It must also be noted, however, that China was not defeated completely in its trade frictions with the US. The Chinese tire industry has been the worst-hit sector in China-US trade frictions. The 2016 anti-dumping and countervailing investigation against Chinese-produced truck and bus tires targeted over a hundred Chinese tire exporters. After over a year, the Chinese tire industry celebrated a rare victory. The USITC decided that no substantive harm had been done to the American industry and thus no anti-dumping and countervailing duties would be imposed on tires imported from China. The result boosted our confidence.

A typical example of trade war is in the photovoltaic industry. The US increased customs duties imposed on solar panels imported from China as early as in 2011. A year later, China retaliated on imported American polysilicon, which is an important component of solar panels. Silicon ASA, a Norwegian polysilicon producer, suffered heavy losses. Although it had built a factory in Washington State, retaliatory measures by China caused the loss of purchase orders and jobs, which actually hurt both parties.

So even though it is quite unlikely for a comprehensive trade war to break out between China and the US, smaller-scale battles will be hardly avoidable. If there were to be a trade war, China should consider imposing high custom duties on farm and sideline products, a major category of import from the US. Trump got support from farmers in the American West in his campaign, which may affect his thinking on this question.

All in all, China and the US should build common understanding through communication at various levels and find more points of converging interests so as to avoid risks, strengthen cooperation and achieve win-win results.

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