Chinas weapons of trade war By Keyu Jin February 22, 2017 – Project Syndicate

China exports more to the United States than components in global supply chains and the US exports to . That makes US production networks. Consider the iPhone. President Donald Trump furious – so furious, While China provides just 4% of value added, in fact, that he may be willing to start a trade it supplies the core components to Apple at low war over it. prices. Apple cannot build an iPhone from scratch in the US, so it would have to search Trump has leveled tough protectionist threats for alternative suppliers, raising its production against China. As he attempts to consolidate costs considerably. This would give Chinese his presidency, he is unlikely to back away smartphone businesses an opportunity to seize from them. And with the Communist Party of market share from major players. China’s 19th National Congress set to take place in in November, Chinese leaders Today, 80% of global trade comprises are unlikely to yield to US pressure. international supply chains. Declining trade costs have allowed firms to splinter their A trade war would undoubtedly hurt both production lines geographically, with goods sides. But there is reason to believe that the US processed and value added in multiple has more to lose. If nothing else, the Chinese countries along the chain. If China threw a seem to know precisely which weapons they handful of sand in the gears of these chains, it have available to them. could disrupt entire production networks, China could stop purchasing US aircraft, doing serious damage to the US (and, indeed, impose an embargo on US soybean products, all the countries participating in such and dump US Treasury securities and other networks). financial assets. Chinese enterprises could An escalating trade war, with each side reduce their demand for US business services, erecting symmetric import barriers, would fuel and the government could persuade companies inflationary pressure in the US, potentially not to buy American. The bulk of numerous driving the Federal Reserve to raise interest Fortune 500 companies’ annual sales come rates higher and faster than it would otherwise. from China nowadays – and they already feel That, together with diminished growth increasingly unwelcome. prospects, would depress equity markets, and Beyond being America’s second most declining employment and household income important trading partner, China is America’s could lead to a sizeable loss of GDP in both the main jobs supplier. A trade war could thus cost US and China. the US millions of jobs. If China switched from A more likely scenario, however, is that both Boeing to Airbus, for example, the US would countries would initiate disputes in specific lose some 179,000 jobs. Reduction in US sectors, particularly traditional manufacturing business services would cost another 85,000 industries like iron and steel production. jobs. Soybean-producing regions – for Meanwhile, Trump will continue to accuse example, in Missouri and Mississippi – could China of manipulating its exchange rate, lose some 10% of local jobs if China halted ignoring the recent downward pressure on the imports. renminbi (which indicates that the currency Moreover, though the US exports less to China was actually overvalued), not to mention the than vice versa, it is China that controls key simple fact that many governments intervene For now, China’s leaders seem convinced that to manage their exchange rates. they have little reason to bend to US pressure. For one thing, Trump seems more concerned Both Japan and Switzerland have engaged in with other priorities, such as repealing the US outright currency intervention in recent years, Affordable Care Act, reforming the tax system, and the US itself may well join their ranks, and investing in infrastructure. when the strong dollar’s impact on US export competitiveness becomes untenable. In any Even if a trade war does happen, China’s case, China can probably forget about leaders assume, it probably would not be achieving “market economy status” under sustained for long, given the income and job World Trade Organization rules until after losses that both sides would suffer. In any case, Trump is out of the White House. they have no intention of sending any signal of weakness to a leader so intent on testing The trade confrontation between the US and other’s limits. China will also affect bilateral investment flows. The US may cite national security For the past five years, China has sought to concerns to block Chinese investments. It may establish a growth model that is less reliant on also stop government purchases from Chinese exports and more reliant on domestic companies like Huawei, and force Chinese consumption. But China often needs a crisis or firms and wealthy individuals to reduce an external shock to drive reform. Perhaps investments that have hitherto bolstered US Trump is that shock. While his policies will be asset prices. bad for China in the short term, they may also provide the impetus China needs to stop A high-quality US-China bilateral investment subsidizing exports and perpetuating treaty would create a level playing field for distortions in the domestic economy. If this American companies, giving them better happens, China may actually emerge from the access to China’s large market. But those talks era of Trump better off than before. will invariably be pushed back, while disputes over intellectual property rights and cyber Keyu Jin, a professor of economics at the School security will be reinvigorated. of Economics, is a Young Global Leader and a member of the Richemont Group Advisory Board.