Today, Donald Trump meets Xi Jinping, the Chinese president, and his administration for the first time at his Mar-a-Lago property in Tampa Bay, Florida. Scheduled to run over two days, the premiers and their respective teams of advisors are to discuss a range of pressing economic and political topics pertinent to their countries.
The US-China trade relationship has been one of the most talked about subjects since Trump’s accession to the White House. It is not hard to understand why considering that his harsh stance against China (expressed throughout his presidential campaign) could potentially disrupt the world’s most important economic relationship, which was valued at approximately $580bn in 2016.
Inevitably, any disruptions in the relationship would cause the financial markets and business world to react, further impacting the majority of the global population. There are three main talking points about the relationship in its current form that must be considered before discussing its future and the possible implications of a trade war.
America’s Trade Deficit with China
Underlying US-China trade is a deficit run by the Western side that has increased by $100bn+ over the last decade. Currently, China accounts for 66% of the USA’s overall trade deficit. An opposing viewpoint is that these figures ought to be sizably lower considering that they do not account for export subventions and currency meddling allegedly undertaken by the Chinese government.
Since most Chinese companies exporting their products or services to the USA factor in the costs of utilising components from different parts of the world into that of the final piece being exported, their surplus against the US should be considerably lower. Supporting this assertion is the fact that the World Trade Organization opened 99 anti-dumping and countervailing investigations against China in 2015.
Another criticism of China’s trade policy and a reason put forth as a reason for the deficit, repeatedly voiced by Trump during his presidential campaign, was currency meddling. The principal implication of doing so is that China can decrease the price of its exports and therefore bolster its current account. The accuracy of this allegation is, however, questionable, particularly after acknowledging that renminbi has appreciated by almost 10% against the dollar since 2007.
Strong Corporate Interdependence
In addition to pledging that he will tag China as currency manipulators, Trump and his administration have claimed that their Asian counterparts have been competing unfairly since entering the WTO in 2001, causing a loss of millions of American jobs in the process.
Despite the problems that the Chinese have allegedly caused for the American workforce, US-based corporations remain dependent on China for growth and success. Big brands such as Apple, Boeing, Nike and P&G, all stand to suffer if a trade war with China develops, given their revenue exposures to the region. Companies with manufacturing bases in China will undoubtedly incur higher costs of sales, due to the reconfiguration of their supply networks, thereby impacting profitability.
Having said this, it is important to note that China is as reliant on the US for trade as the US is on China – if not more. Chinese exports to America equate to roughly 4% of Chinese GDP, making the USA China’s largest trade partner. Even if one considers a worst-case scenario, one in which Trump levies a 45% tariff on Chinese imports (as he previously has claimed), it is almost impossible that China will find a suitable trading substitute for America.
Foreign Direct Investment (FDI)
For years, the FDI landscape between the two countries has been characterised by an imbalance, with the majority of the investments going into China from US-based companies. Over the years, American corporations that have managed to operate successfully in China have reaped massive rewards.
However, 2016 saw a surge in Chinese FDI into the US, valued at $45.6bn, despite Trump’s harsh stance against Beijing. This surge in Chinese FDI comes at a time when American investments into China have been declining, indicating a change in the FDI nexus. The bulk of Chinese FDI in 2016 is accounted for by acquisitions – spread across multiple segments including Hollywood production units, semiconductor firms, automobile manufacturing and beyond.
In November 2016, Reuters reported that Chinese companies operating in America created over 100,000 jobs. The same report also stated that American FDIs into China generated 1.6 million jobs. Despite this co-dependency, there have been increasing restrictions put in place by both governments on investors from each other’s countries, supposedly due to concerns over national security. Whether this upshot in Chinese FDI grows or even sustains itself in 2017 is not clear. A lot depends on how cooperative the Trump and Xi administrations are with each other.
What Does the Future Hold?
It is too early in Trump’s presidential reign to think that today’s meeting in Florida will resolve all the major trade issues between the two superpowers. However, the outcome of the session could give the financial markets and corporate world a hint as to where the relationship is headed towards.
Although Trump stated that he was going to place a 45% tariff on Chinese imports, his approach seems to have mellowed out on the advice of his cabinet, as well as lobbying efforts by American businesses invested in China. His softer approach may also be a result of experiencing failure early in his career as a statesman – ie in his efforts to repeal Obamacare.
Given their dependence on each other, it is probably safe to say that it would help quite substantially if the two governments were to see eye-to-eye. A trade war would not only hamper their own economies, but have negative implications for their currencies. American interest rates would also fluctuate if the Chinese government decided to dump their share of US government bonds, of which they hold over a trillion dollars’ worth.
It is unlikely that the upcoming session will lead to concrete agreements being met on the most important trade-related issues. Still, it is equally unlikely that the meeting would set off an all-out trade war given the potentially disastrous consequences. Considering this uncertain future, the outcome of this two-day session will likely carve US-China relations for the medium-term.