US-China trade: Donald Trump taking time in crafting an effective strategy

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February 23, 2017 5:55 AM

An uneasy diplomatic calm has marked the US-China exchanges in the first month of Donald Trump in office.

‘Many in the Chinese and American media believe daughter and son-in-law—Ivanka Trump and Jared Kushner—are building bridges between Trump and the Chinese authorities through backroom channels.’ (Reuters)

An uneasy diplomatic calm has marked the US-China exchanges in the first month of Donald Trump in office. Beneath the calm, there is considerable anxiety on the part of both countries regarding how each should anticipate the next move of the other. China has adopted a wait-and-watch posture, putting the ball in the US’s court.

One of Trump’s major electoral themes was to slap punitive tariffs on China. Chinese manufacturing exports to the US currently attract a simple applied average MFN tariff of 9% across all exports. This is higher than tariffs for other top exporters to the US like Canada, Mexico, Japan and EU whose average MFN tariffs range from 2.6%(Canada) to 4.6% (Mexico). EU and Japan, while not being FTA partners of the US, still face marginally lower tariffs than Mexico despite Mexico being in the NAFTA. Chinese agricultural exports to the US, however, face the lowest applied MFN tariffs among the top five exporters. This is interesting given that among the latter, China is the highest agricultural exporter to the US, while coming after Canada, EU and Mexico in export of manufactures. The US domestic market though is more protected for agriculture than manufacturing, making Chinese agricultural exports still subject to average MFN tariff of 15.6%. It’s also important to note that Mexico and Canada have much larger shares of duty-free imports of agriculture and manufacturing by the US due to NAFTA.

Trump’s campaign promise was to raise tariffs up to as much as 45% on Chinese exports to the US if China didn’t agree to negotiate better trade terms for the US. The increase would imply three-fold and five-fold jumps in current tariffs on Chinese agricultural and manufacturing exports. The repeated emphasis on hiking tariffs during elections followed by induction of China ‘baiter’ economic experts Wilbur Ross and Peter Navarro in the Trump team led to expectations of immediate trade actions on China. This, most expected, would be part of an overall aggressive China policy to be followed by Trump. Strategic signals contributing to the expectation were Trump’s unprecedented tête-à-tête soon after his election with the Taiwanese president, his chief strategist Steve Bannon predicting US and China going to war on the South China Sea within five years and a marked departure from tradition in the White House not conveying greetings on the occasion of the Chinese New Year. But notwithstanding the signals and pronouncements, strong trade actions are yet to be taken.

Trump’s most prominent trade actions have been on the TPP and NAFTA. He followed on his election promise by withdrawing the US from the TPP immediately after assuming office. He’s also pushing Mexico and Canada to renegotiate the NAFTA. While the renegotiation might eventually be limited to a few ‘tweaks’, Mexico is more worried about Trump than Canada as it has been at the receiving end of Trump’s ire on immigrants. In Trump world, Mexico’s a major villain as it snatches business and jobs away from the US. Trump has been urging US companies not to move jobs out and particularly not to Mexico. But at the same time, during elections, Trump attacked China almost as much as he did Mexico on similar grounds. So, the fact that he’s yet to act on China while gunning against Mexico is raising some eyebrows.

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Many in the Chinese and American media believe daughter and son-in-law—Ivanka Trump and Jared Kushner—are building bridges between Trump and the Chinese authorities through backroom channels. This is possible. But what is more plausible is that Trump and his team are taking time in crafting a long-term effective China strategy.

Taking unilateral trade actions against China, like raising tariffs manifold, are not going to be easy because of the WTO. Unlike in the past, China is now a ‘market’ economy according to the WTO, which makes it difficult for other members to slap even anti-dumping tariffs on it as easily as they could earlier. More importantly, any abrupt economic action against China trade might have an adverse impact on the US economy given the deep links between the two economies. His long term plans of changing US taxes by giving businesses income tax deduction for producing at home and protecting them from imports by imposing Border Adjustment Tax (BAT) would be significantly damaging for China. The first would lead to relocation of some investment from elsewhere in the world, including China, back to the US. The second would be a setback for all imports by the US, including those from China. Most other countries exporting to the US would try to shake off the BAT by getting into bilateral FTAs with the US. Such a possibility is remote for China for the time being. As a result, China would face a situation in the US market where Japan, EU and other competitor countries with FTAs with the US would get preferential access into the US market as opposed to China.

The uneasy calm in the US-China relations might well be the lull before the storm erupts. Notwithstanding the influence of his family, which China hopes would restrain Trump, the possibilities of economic friction between the US and China are too large to be wished away.

The author is senior research fellow and research lead (trade and economic policy) in the Institute of South Asian Studies in the National University of Singapore. E-mail: Twitter: @Amitendu1

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