China faces uphill battle to meet Trump’s $100bn trade demand


Policymakers could resort to cosmetic changes such as shifting iPhone assembly

Gabriel Wildau in Shanghai and Jane Pong in Hong Kong

March 14, 2018

China is not immune to the charms of symbolic gestures when they serve a diplomatic purpose.From 2005 to 2014, when US criticism of China for undervaluing its currency was a big bilateral issue, Beijing frequently pushed the renminbi higher in advance of international summits and state visits, only to revert once international attention had faded.But this time — faced with demands by President Donald Trump to cut the bilateral trade deficit by $100bn — Beijing has few easy options.“If you look at China’s overall trade or current account surplus, we can’t really call that a mercantilist or excess-saving economy,” says Louis Kuijs, head of Asia economics at Oxford Economics in Hong Kong. “China now runs trade deficits with many countries, but it happens to run big surpluses with US, Europe and India — three regions where there is now increasing momentum towards protectionism.”A key obstacle to Beijing’s efforts to satisfy Mr Trump’s demands is the substantial progress that China has already made in reducing external surpluses. China’s current account surplus had fallen to 1.4 per cent of gross domestic product by last year, down from 9.9 per cent in 2007. Similarly, analysts broadly agree that China’s currency is no longer undervalued.

Despite this wider improvement, however, the US-China bilateral gap for goods trade hit a record $375bn last year, according to US census data that also include Hong Kong. China’s customs bureau reckons the deficit was lower at $276bn but still a record. The robust US economy — which is receiving a further jolt from recent tax cuts — helped propel the total US trade deficit in January to its widest since 2008. Though China’s imports have increased dramatically in the past decade, exports remain an important source of employment. Beijing is therefore unlikely to actively discourage exports to the US and will try instead to boost imports, analysts say.Imports of agricultural commodities, Boeing aircraft and energy are the products of choice for high-profile, big-ticket purchases. Yet simple arithmetic suggests that these traditional staples of trade diplomacy will not be sufficient to meet the $100bn goal. Chinese purchases of US agricultural products of all kinds, including food and beverages, totalled just $21bn last year. Energy added another $9bn, mostly in the form of oil and gas.

“It is hard to see how a $100bn swing in the bilateral trade deficit could come from growing US exports alone,” says Brad Setser, senior fellow for international economics at the Council on Foreign Relations and a former deputy assistant treasury secretary in the Obama administration.“In the short-run, the only real way to get a change that large in the headline number is to do things that have big optical but only modest real effects, like change the final assembly location for iPhones, or do a better job counting US exports to Hong Kong that end up in China,” he says.Indeed, mobile phones, computers and computer accessories alone accounted for $148bn in Chinese exports to the US last year, or 29 per cent of the total, according to census figures. For most of these items, China itself produces only a fraction of the total value-added, since it imports expensive components from elsewhere. Still, if China wanted to grant Mr Trump a cosmetic victory, it could pressure manufacturers such as Foxconn to put finishing touches on such products in a third country.

Another way to narrow the gap would be through trade in services, where the US already ran a surplus of $39bn in the year to the end of September, according to US balance of payments data. More than half of US service “exports” take the form of Chinese travel to the US, including both tourism and educational travel spending such as university tuition.But it is hard to see how the Chinese government intervention could significantly affect individual Chinese travel decisions. Moreover, research suggests that a sizeable share of Chinese travel spending may be capital flight in disguise. This implies that the true size of the US services-trade surplus with the US may be overstated. And while Mr Trump is also pressuring China to open up its services sectors such as finance, law, consulting and logistics to US investment, those benefits would accrue mostly to foreign companies with operations inside China and would not show up in figures on cross-border services trade.

From the Chinese perspective, the US deserves most of the blame for the bilateral deficit. In addition to macroeconomic policies that boost consumption, officials point to US restrictions on high-tech exports to China. Most Chinese analysts take a dim view of the prospects for achieving Mr Trump’s goal.“In a fair and reasonable situation, the Chinese side will take the US side’s appeal into account and seek to resolve its core concerns,” says Liang Ming, director of the Institute of International Trade at the Chinese Academy of International Trade and Economic Co-operation, a think-tank under China’s commerce ministry.“But if the US only exports crude oil, natural gas, and agricultural products without actively increasing the scale of high-tech exports . . . there is basically no hope of achieving the $100bn goal.”Trump’s steel tariffs explainedPlay videoThis article has been amended to correct an incorrectly labelled chartAdditional reporting by Yizhen Jia in ShanghaiFollow @gabewildau on Twitter


Copyright

The Financial Times Limited 2018. All rights reserved.