Rough trade

Donald Trump got his facts wrong this week when he tweeted that the growth rate in the American economy was higher than its unemployment rate for the first time in a century.

Kevin Hassett, chairman of Trump’s Council of Economic Advisors, conceded that the claim wasn’t correct, but absolved his boss of blame. “What is true is that it’s the highest in 10 years,” he explained. “At some point somebody probably conveyed it to him adding a zero to that, and they shouldn’t have done that.”

A more pressing question is whether the American president is making a mistake in his trade policy towards China. As a recap: his administration has levied tariffs upon $50 billion of Chinese imports and he is deciding whether to do the same for $200 billion more. Last weekend Trump warned that he might take the same approach for the entirety of goods the Chinese sell the Americans. “I hate to do this, but behind that [the decision on tariffs on $200 billion of goods] there is another $267 billion ready to go on short notice if I want,” he told reporters on Air Force One.

A pause in the tensions did briefly occur this week when China’s foreign ministry confirmed that Trump’s team had invited the Chinese to restart trade talks. However, these hopes were dashed within hours after Trump tweeted that he questioned the point of such talks and felt no pressure to make a deal because “our markets are surging, theirs are collapsing”.

So how might China fight back? Earlier this summer we wondered whether Apple might be one of the American icons to be caught in the crossfire if the row worsens (see WiC420) and there were signs that the tension was beginning to tell when the San Cupertino firm published a letter to the United States Trade Representative 10 days ago. The warning was that more tariffs would mean higher prices for Apple’s products, and the Californian giant pleaded with its government to step back from further confrontation with China. “Make your products in the United States instead of China. Start building new plants now. Exciting!” was the indignant response from the president.

Trump’s trade team is now trying to turn its guns on the Chinese in a more concentrated way. The Americans have agreed terms with the EU to hold off on imposing new tariffs on one another and the White House has reached a preliminary deal with Mexico to overhaul the North American Free Trade Agreement. It is said to be talking to the Canadians about including them in the new accord too.

Larry Kudlow, an economic advisor to the president, spelled out the strategy in a television interview. “The Chinese, you know, may find themselves more isolated if they don’t come into the global process,” he warned.

The Chinese would argue they are engaged globally – including in a case against the US at the World Trade Organisation. Next week Beijing will seek that body’s permission to impose $7 billion a year in penalties on the US for not complying with a ruling on dumping duties.

Yet amid all the tit-for-tat rhetoric there was news that China’s trade surplus with the US had widened to record levels in August, surpassing $31 billion.

Trump cites the surplus as proof that China has an unfair advantage. However, it seems counterintuitive that exports could be hitting new highs in the first full month that tariffs on $50 billion of goods came into effect, or that China’s surplus should have risen nearly 15% this year, despite the tensest backdrop to trade relations in recent memory (the US is its largest export market).

Much of the increase is coming from Chinese companies getting their goods to market before another round of tariffs is confirmed. Americans are buying them before prices go up too. Another driver is the strength of the US economy, which has been going gangbusters, partly as a result of Trump’s tax cuts.

Overall the signals on trade were more troubling for the Chinese, with exports as a whole increasing at their slowest rate since March. The leadership in Beijing is bracing itself for tougher conditions for exporters once the sales surge subsides and it has just flagged increases in export rebates for 397 goods, ranging from lubricants to children’s books, which come into effect this weekend.

The basic calculation from the hawks in Washington is that the bigger the confrontation, the more the Chinese will bleed, simply because they enjoy the bigger share of bilateral trade.

Another of Trump’s takes is that the Americans are in a better position to outlast their opponent, because the US economy is booming, while China’s is showing signs of stress.

Elsewhere the predictions are different, including an editorial in the China Daily that claims that the row is going to be a “blessing in disguise” because import-reliant businesses are looking for alternative suppliers in the domestic market.

Others have said that US tariffs could backfire, primarily in bolstering the drive to make the Chinese economy more self-reliant and by encouraging local consumers to shop for local goods.

This is how the Bloomberg columnist Michael Schuman summed it up: “Simply put, the Communist Party prefers Chinese to buy Xiaomi phones and Geely cars, not iPhones and Buicks.”

The Chinese could offset the worst of the impact of Trump’s tariffs by accelerating their exports to other markets too. A timely piece of research from Julia Wang, economist for Greater China at HSBC, acknowledges that a trade war between the superpowers will hurt their exports to one another.

However, she argues that China’s economy could turn out to be more resilient than many people think. In part that’s due to its robust foundations, including the best-educated labour force in the country’s history, and the productive power of all those new roads, railways and power plants – the biggest infrastructure splurge that the world has ever seen. But another factor is that China’s exporters are already counting less on sales of labour-intensive goods to markets like America’s, after reducing their reliance in the 10 years since the global financial crisis.

Instead some of the focus has shifted to exports to customers in developing markets. Emerging economies were already the destination for 59% of China’s exports last year – more than the sales to the US (19%), the Eurozone (16%) and Japan (6%) combined.

Turbo-charging this transformation is that China’s companies have a better understanding of consumers in emerging economies, having spent a decade or more targeting a similar demographic at home. The best example is the stunning success of Chinese smartphones: five years ago they were relatively unknown outside their home market, but brands like Xiaomi, Oppo and Huawei now account for about a quarter of worldwide sales, capturing half of India’s fast-growing market.

“Over the next few years, we will likely see more examples,” Wang writes. “In fact, we expect this trend to become a dominant nexus, linking China and other emerging markets.”

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