The Trump administration wants China to cut its trade surplus by $100 billion. China has already released an opening list of retaliatory tariffs in response to Trump’s March 22 announcement that the United States will impose tariffs on up to $60 billion of Chinese exports to the United States — but what further reaction is likely from Beijing?
And what happens over the long run? Here are five points to consider.
1) Will China meet the U.S. demands?
Hypothetically, China would have to dramatically increase imports, reduce exports, or both. But none of those options realistically deliver on the China side — or solve the trade woes on the U.S. side.
U.S. exports to China have outpaced exports to other major economies over the past 10 years. China’s slowing economic growth makes it difficult to maintain this pace of exports, though. In an extreme scenario, exports may fall sharply when an economic crisis hits, but imports tend to fall more than exports during crises. History shows that U.S. attempts to narrow its trade deficits with Japan and South Korea were largely ineffective, even after their economies slowed or fell into recession.
The trade math gets tricky. China thinks that its trade surplus is not as large, particularly if you consider only the value added by China in the chain of production. According to China’s estimates, its trade surplus with the United States in 2016 was $140 billion, 60 percent less than the U.S. government figure.
Because China often performs as a final assembler in global production networks, and because U.S. factories are more productive than Chinese manufacturers, Chinese exports to the United States have much lower value added than U.S. exports to China.
2) Will a trade war hit China harder?
Trade wars are generally “lose-lose” scenarios. Any trade war could mean huge costs for both countries and collateral damage for the rest of the world. Nevertheless, a conventional comparison would suggest that stakes are higher for Beijing.
The growth of the Chinese economy relies much more on trade than U.S. economic growth does. Total trade volume in 2016, according to the World Bank, was equivalent to 37 percent of China’s gross domestic product, compared with 26 percent of U.S. GDP. China also relies more heavily on the United States for its exports than the other way around.
In addition, U.S. companies importing products from China have more leverage in their response to sanctions because they are more able to find substitutes for Chinese products.
If we move beyond these simple economic facts, however, the answer becomes more complicated. Trade creates winners and losers. Both countries benefit tremendously by trading with each other, but the gain is more concentrated in the United States, according some scholars.
Branco Milanovic’s book “Global Inequality,” for instance, suggests that the United States’ richest benefit the most. In China, he argues, the middle class is the largest beneficiary of globalization.
But discontent has shaped the political climate in both countries differently. An unnecessary trade war would hurt the American elite but wouldn’t make the U.S. middle class happier. China’s middle class, while also fretting about rising inequality, is more likely to direct its frustration toward external pressure, which might increase popular support for retaliation.
3) What happens next?
So far, China has shown restraint. Beijing imposed tariffs of between 10 and 20 percent on U.S. agricultural exports, with a total amount of $3 billion. None of the products on the list appear crucial for either country. This measured retaliation signals that China is not yet willing to push the tensions into a full-fledged trade war.
It’s not the first time that China and the United States have experienced trade tensions. The United States has launched five Section 301 investigations (including this one) against China since 1991. During this time, China’s economy has grown from the equivalent of 6 percent of U.S. GDP to the equivalent of 60 percent of U.S. GDP (using market exchange rates), and the U.S. and Chinese economies have become increasingly intertwined.
Yet the two sides settled all previous trade disputes through negotiations, though usually not in China’s favor. What’s different now is that China’s growing power and U.S. wariness of power transition may make it increasingly difficult for the two sides to strike a deal.
4) What U.S. industries might be affected by a pushback from Beijing?
If trade tensions continue to escalate, China might release another list of U.S. products and use political leverage to amplify the effects of retaliation. China’s choice of targeted industries might be based on two criteria: 1) Is there a ready substitute for what China imports from the United States? 2) Do the targeted industries have strong influence in U.S. politics? It would be a plus for China if the industries are concentrated in the swing states where the potential political damage is higher.
Using these criteria, several products — including soybeans, pork, aircraft and automobiles — might make it onto the retaliation list. Soybeans could be first on China’s list. As the largest customer for U.S. soybean products, China could switch imports to other countries relatively easily. This retaliatory move would primarily hurt Trump’s votes in the agricultural states.
5) What might be China’s long-term strategy?
In the short run, China might promise to liberalize more domestic sectors to foreign investors and increase imports of some U.S. products such as oil and gas, but there is no quick solution to the contentious bilateral trade relations.
In the long run, though, a trade war could leave China more determined to expand economic partnerships, through the massive Belt and Road initiative, for instance.
But a trade war also would make it more desirable for China to update the manufacturing capacity of the domestic economy, by scaling new technologies in production.
China’s ongoing transformation to a consumption-driven economy means its overall trade surpluses have declined over the past 10 years. More and more of China’s production and imports are geared toward domestic consumers, not export markets. If this trajectory continues, both countries will find other similarities between their economic structures.
As millions within China’s middle class move beyond being able to afford only the basics of life, the United States might have different, probably more-justified, worries about products that are “made for China” rather than “made in China.”
Yu Zheng is a professor of international politics at Fudan University in Shanghai.