By Cheng Cheng Source: Global Times Published: 2017-1-4
"Twitter president" Donald Trump drew in voters with his China bashing campaign, claiming that "China is the largest currency manipulator on the planet." Trump`s impending presidency seems to mean that a Sino-US trade war is approaching. China`s Deputy Minister of Finance Zhu Guangyao recently stated that the implementation of full cooperation is the only strategic choice for the two countries. As such, Trump`s administration should abandon its zero-sum game.
From a traditional bilateral trade perspective, whichever country handles the final assembly of a product is counted as that item`s exporter. Based on this, China accounts for nearly half of the US` trade deficit, which undoubtedly distorts the reality of China`s trade surplus as a new "world industry." However, if we use a production value chain perspective, the structure of Sino-US trade is much different. According to Deutsche Bank`s statistics, based on the additional value of import and export trade, China`s exports to the US account for only 16.4 percent of their trade deficit. The rest of the so-called 50 percent trade deficit involves exports from Taiwan, Korea and Japan. This makes the US` record only 3-5 percentage points higher than Japan`s and Germany`s deficits with China. This shows that Trump`s criticism on trade issues with China is not realistic.
Under the idea of bringing jobs back to the US, Trump has suggested attracting businesses through discriminatory penalties concerning trade and exchange rates. Basic economic principles tell us that if the US needs to enhance the competitiveness of its commodity exports and increase employment, it should adopt a policy of interest rate cuts to keep the dollar in a weak position. Rather, the Fed raised interest rates at the end of 2016 and is striving to maintain a strong dollar as expected. The reason behind this lies in the process of economic globalization. US multinationals transferred their manufacturing production to East Asia and other countries over a decade ago in the development of global supply chains. As the US manufacturing industry represents a decreasing proportion of its GDP, the country needs a strong dollar to attract global capital inflows to support its GDP growth.
As part of his economic decision-making team, Trump nominated ExxonMobil chairman and CEO Rex Tillerson as the new secretary of state and former Goldman Sachs executive Steven Mnuchin as the new finance minister, who will hold two decisive positions in the formulation of US policy toward China. As their resumes in petroleum and hedge funds imply, both selections have similarities in the understanding of global macroeconomics and finance, and high sensitivity to market risks. Trump`s nomination of the two actually reflects a prudent approach to trade and currency issues. Tillerson and Mnuchin must be well aware of the real situation concerning the Sino-US trade deficit. If they do eventually take up the jobs, they should have a full understanding of the potentially catastrophic outcome of a US-China trade war.
As the world`s largest trading country, China`s economy symbolizes the expansion of the global value chain, as economic globalization has run deeper in the past two decades. A trade war against China would be equivalent to a trade war against the global production value chain. The consequences will not only be limited to China, but will spread to other countries, first in East Asia and then to the rest of the world, which is already embedded in the chain. China alone contributes over one-third to global economic growth. Taking the spillover effect and China`s inevitable countermeasures into account, a trade war with China would drag the global economy once again into crisis, and seriously impact the US economy. To sum-up, we believe that an all-out trade war against China is highly improbable, since punishing China will not help "make American great again" and the logic behind Trump`s accusation is a false interpretation.
The author is an associate research fellow with the Chongyang Institute for Financial Studies at Renmin University of China.