The Trump administration tirelessly asserts that the United States can “win” any trade war with China. The assumption is that because Chinese exports to the United States are nearly four times the amount of US exports to China, a tit-for-tat escalation of tariffs will cause the Chinese to “run out” of products to target with tariffs long before the United States does.
But this calculation, like so many others in the trade debate, is built on a fallacy. Here are four reasons why.
A major share of US imports from China is produced by multinational companies, including those based in the United States. According to the list released last week by the US Trade Representative, the largest single category of targeted Chinese goods is computers and electronic products. But 87 percent of these targeted products are produced by multinationals. Tariffs, which will reduce US imports of these goods, won’t hurt China as much as they will hurt multinationals. Also hurt are the non-Chinese East Asian firms that are part of the supply chains that provide the parts and components that account for a large share of the value-added in these products. In computers and electronic products, for example, the Chinese value-added is less than half, according to my PIIE colleague Mary Lovely. China will feel some pain but not as much as these firms in the supply chain that contribute such a large share of the value added in Chinese exports. The US administration has failed to recognize that tariffs on Chinese goods will primarily hurt multinational companies and our friends in Asia. China’s retaliatory tariffs, on the other hand, will hurt US suppliers directly. The tariffs on soybeans will fall on US farmers.
Suppose China does “run out” of goods to target with tariffs. It has other options to impose pain on the United States. For example, US goods and services produced and sold in China in 2015 (the most recent year these data are available) totaled $223 billion, far exceeding US exports to China of $150 billion in the same year. The Chinese government can easily launch a propaganda campaign that would quickly lead Chinese consumers to shun these US goods. Apple’s $40 billion market in China for iPhones, the largest in the world, could quickly collapse. Similarly, General Motors sells more cars in China than in the United States, sales that could easily be disrupted by the Chinese government.
By contrast, Chinese investment in manufacturing in the United States is modest. The magnitude of Chinese goods made and sold in the United States is minuscule, only $10 billion in 2015. In short, China has many more opportunities to interfere with US firms operating in China than exists vice versa. China can also further delay regulatory approvals that are central to the economic future of US companies. In short, it can make life miserable for companies now doing business in China under hard-won concessions by US negotiators over the years. Qualcomm, a major US semiconductor manufacturer, has a bid pending to merge with the Dutch semiconductor firm NPX. This transaction has been approved by regulatory authorities in eight required countries. The ninth and last would be China, which does not seem to be in a rush to grant approval. China is not likely to speed up in the current climate.
China can impose leverage in areas outside the economic sphere. In the most extreme case China could undermine the ability of the Trump administration to conclude a nuclear deal with North Korea. Already, China is gradually easing its trade sanctions against North Korea, much to the consternation of some policymakers, in the absence of concrete steps by the north to live up to its commitment to “denuclearize” the Korean peninsula. Further easing of sanctions by China could provide Kim Jong-un with breathing room to try to strike a better deal with the United States, probably leading to an impasse or even a collapse of the talks, ending President Trump’s goal of achieving a historic agreement on the Korean Peninsula.


 

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