Saturday 02 Mar 2024
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WASHINGTON (Feb 12): Donald Trump’s China trade war frayed economic ties between the two global superpowers. His second-term plans risk cutting them entirely.

The former president is pitching a 60% tariff on all Chinese imports. That would shrink a US$575 billion trade pipeline to practically nothing, Bloomberg Economics analysis shows. And it’s not the only escalation Trump has in mind if he converts a narrow poll lead over incumbent Joe Biden into victory in November.

For China’s economy and its slumping stock market — down more than 40% from its 2021 high — that’s bad news. Worse, Trump’s rhetoric may add pressure on Biden to take harsher measures in the run-up to election day.

The president knows that China is on the ballot, and tough-on-China a proven vote winner. Biden may not be floating anything as drastic as Trump’s tariffs, and his administration has said it doesn’t want decoupling. But he has a raft of new restrictions on everything from data flows to electric vehicles to pick from, and doesn’t have to wait till Americans go to the polls before rolling them out.

Whichever way you cut it, three months after Biden’s San Francisco summit with his Chinese counterpart Xi Jinping lowered the temperature, US elections mean the heat is on again. For investors, Trump’s latest proposals may trigger flashbacks to his first term — when trade policy announcements tweeted at all hours could whipsaw markets around the world.

In Beijing, officials say they have no clear preference on who takes power. While Trump is unpredictable and often aggressive, he also likes to strike deals and could undercut Biden's efforts to work with US allies, according to Chinese officials who asked not to be identified speaking about sensitive topics.

“They’re both a big threat,” said Sang Baichuan, a professor at the University of International Business and Economics in Beijing, and adviser to China’s Ministry of Commerce.

Trump’s America-first approach could create opportunities to “break through the anti-China economic circle,” Sang said, citing Biden’s ability to shut China out of technology supply chains. But either way, Beijing will face an American president whose overall strategy is “to exclude and contain China’s development”.

Trump tariff shock

Responding to a question about his 60% tariff plan last week, Trump said the goal was to “bring business back to the US”. The 25% tariffs in his first term already put a hole in the revenue that China’s exporters earn from American markets. Tariffs at 60% would turn the hole into a crater. Using a model of the global economy, Bloomberg Economics estimates it would slash the share of US imports that come from China — which peaked at about 22% before the trade war started — down to near-zero.

The biggest impact would fall on textiles and electronics, industries where China currently dominates and where thin profit margins make it impossible for factories to absorb the tariff impact. Bloomberg Economics’ model shows Southeast Asia and Mexico would pick up the largest share of the slack, as trade flows shift around geopolitical fault lines. US electronics firms would take a hit, since many of them manufacture in China. And American companies and consumers would end up paying higher prices for imports.

Tariffs might be the most eye-catching economic proposal from the Trump campaign, but they’re not the only one. The ex-president is hinting at new bans on US-China investment in both directions — an area where Biden’s already tightening the rules — promising to keep China out of America’s “essential industries” and ensure US cash isn’t driving China’s rise.

China is “taking our business at levels that nobody’s ever seen before,” Trump told reporters at his Mar-a-Lago estate in Palm Beach, Florida, on Thursday. On the second-term tariff plan, he said: “By doing that, we bring business back, manufacturing back to the United States”.

Then he accused the Biden administration, which has kept his China curbs in place and added more, of letting American gains ebb away. “Now, they’re blowing it,” he said.

Campaign promises, especially when their real-world impact would be this disruptive, don’t always translate into administration policy. Still, if there’s a lesson from Trump’s first term, it’s that his anti-China rhetoric tends to do just that.

For Xi, the prospect of intensifying economic conflict with the US comes at a bad time.

Beijing is already grappling with a property meltdown that’s turned the biggest growth driver into a major drag, and a stock market slide that’s erased US$7 trillion in wealth. Xi’s economic planners have recently stepped up exchanges with US counterparts, with plans to welcome Treasury secretary Janet Yellen to Beijing this year, in a bid to stabilise relations with its biggest export market.

With Trump close to sewing up the Republican nomination, and running ahead of Biden in key swing states, investors are already bracing for impact.

Trump’s 60% tariff threat drove a selloff in China stocks from low-price retailers to solar panel makers. Goldman Sachs economists report that the implications of a Trump win are one of the things they are most frequently asked about by investors in Beijing and Shanghai.

Election turns up the heat

Before any of this comes into play, there’s 2024 to get through. From Bill Clinton — who campaigned on a promise to hold the “butchers of Beijing” to account — to Trump, history suggests a US election year spells trouble ahead.

A Trump-Biden rematch will pit the president who started the trade war against the one who’s broadened its scope. Both men have a case that they’ve been tougher on China.

Tariffs were Trump’s weapon of choice early on, but as China policy hardened, he expanded the arsenal. Executive orders attempted to ban superapp WeChat and viral video platform TikTok from operating in the US. A raft of export controls and sanctions took aim at Chinese firms, with telecom equipment giant Huawei Technologies Co being the highest-profile target. Human rights violations in Xinjiang were classified as genocide.

By the time Biden came into office, the bipartisan consensus was that China posed a fundamental threat. While Biden has restored diplomatic guardrails and a more civil tone, the substance of the relationship remains unblinking strategic rivalry.

On top of the tariffs, Biden has targeted China’s ability to compete at the cutting edge of technology. He imposed export curbs on semiconductors and chipmaking equipment — accompanied by measures to boost those industries at home —  and is setting up a screening programme for US investment in areas like artificial intelligence and quantum computing.

A key difference is that Trump’s approach was more transactional — he sought a China trade deal timed to help his reelection campaign — and it often looked more like a solo effort. He sparred over trade with American allies, as well as adversaries, and has plans for punitive measures targeting Europe in a second term.

By contrast, Biden has built a broader coalition for his policies, invoking a shared interest in preventing China from undermining the US-led world order. He’s been able to convince officials in The Hague and Tokyo to help squeeze China on semiconductor technology, limiting the China sales of key firms like Dutch chip machinery giant ASML Holdings NV.

China’s alignment with Russia before and during the invasion of Ukraine helped strengthen the US argument. European allies, which till then saw China more as a market opportunity than a geopolitical threat, started to pay more attention to US warnings — including on the risk of an invasion of Taiwan.

Some aspects of the impact are measurable. Bloomberg Economics estimates that China’s exports to the US are US$160 billion below where they would be, if the Trump tariffs had never been imposed. Others, like the effect on confidence, are harder to capture.

The overall effect, though, is clear and negative, contributing to the slide in China’s growth and darkening the view in corporate board rooms and Wall Street trading floors.

Before America goes to the polls, China’s economy might come under more pressure.

Eight executive orders explicitly targeting China, and most of Trump’s export controls and sanctions, came in his last year in office — when he also closed the Chinese consulate in Houston. Trump’s election-year antagonism came after the onset of the pandemic, which he blamed on China: Shortly before Covid hit the US, he’d signed a trade deal with Beijing and talked up the relationship.

Biden’s November meeting with Xi in San Francisco started with a warm handshake and ended with hopes for a partial thaw. Still, the Biden team has some pre-election moves lined up.

The administration is working on a final version of rules for US investors in China, with hawks pushing for tougher action. And it’s preparing to open a new front: data security. One measure, curbing transactions that involve sensitive personal data across a wide range of industries, could be announced as early as this week. Also in the works are restrictions on Chinese electric vehicles and other so-called “smart cars” because of the data risks they pose.

There’s talk of higher tariffs on EVs and clean-energy products, and on older-generation semiconductors. All of this could come before November’s vote, and poses a direct threat to the high-tech industries Xi is counting on to lift China’s economy out of the doldrums.

Asked about Biden’s approach to China ahead of elections, the White House referred to comments made by National Security Adviser Jake Sullivan late last month.

In that speech, Sullivan outlined economic steps the administration has taken with national security in mind, including investment and trade curbs on China. He said there are “competitive structural dynamics” in the US-China relationship, but added that the competition “does not have to lead to conflict, confrontation, or a new Cold War.”

The view from Beijing 

China isn't waiting to see what that means in practice. Xi is pouring money into manufacturing in a bid for technological breakthroughs that can make the nation self-sufficient. Huawei saw its revenue surge close to US$100 billion last year, as it released a smartphone with a sophisticated chip, which was celebrated across the nation as a victory over US restrictions.

As for the Chinese public, Zhu Junwei — director of American research at Grandview Institution, a Beijing think tank, and a former researcher in the People’s Liberation Army — carried out an informal online survey to find out how they view the upcoming US vote.

About 60% preferred Trump, and the main reason may not have had much to do with how his China policies stacked up against Biden’s. Rather, Zhu suspects, people thought he might ease the pressure on China a different way — by bringing chaos to the US.

Methodology

Bloomberg Economics models the impact of a 60% tariff using the WTO Global Trade Model (GTM), a dynamic and recursive model based on the GTAP Model (version 7) (Aguiar et al, 2019; Corong et al., 2017). Following the experience of the first Trump administration, we assume that 60% US tariffs on imports from China would be matched by retaliatory 60% Chinese tariffs on imports from the US.

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