How seriously should brands and retailers take reports that Trump will slap extra duties on Chinese imports – and China’s almost hysterical response to those reports?
I think they create real new risks – but not quite those expected.
What Trump promised, and how China reacted
On October 22, Trump published a list of 29 things he would do on his day in office.
They included directing the Secretary of the Treasury to label China a currency manipulator – and during his campaign he’d threatened to hike duty on Chinese imports up to threefold if China didn’t toe the line.
Almost as soon as he’d been elected, the Chinese government-run Global Times threatened “tit-for-tat approach” to any US trade sanctions: “A batch of Boeing orders will be replaced by Airbus. US auto and iPhone sales in China will suffer a setback, and US soybean and maize imports will be halted.”
As of Thanksgiving Day, Trump had confirmed some of those 29 plans – but remained silent on plans for dealing with China.
Should America worry about Chinese reprisals?
It’s easy to see why the US Administration might believe possible Chinese sanctions against US exports aren’t America’s biggest problem: in the first nine months of 2016, China exported $281 bn of merchandise to the US – and imported just $96 bn in return.
Many incoming Presidents might be tempted to conclude the priority is to get those imports down, since the US is unlikely
Because poor countries don’t import much. At the beginning of this century Britain, for example, spent more importing clothes than the ten largest low-income countries (China, India, Indonesia, Brazil, Pakistan, Nigeria, Bangladesh, Russia, Mexico and the Philippines) put together. 15 years later, despite all the fuss industry observers make about booming Asian markets, Britain is still spending more – though those ten countries have sixty times Britain’s population.
And the US spent more than all the world’s 210 developing countries combined.
But surely the Chinese market’s huge?
Well sort of. Economists rank countries on the basis of what’s called the “purchasing power parity” of their economies. Most prices are much lower in developing countries like China, so after adjusting for those lower prices, the Chinese economy is now reckoned to be about the same size as America’s.
But businesses based in the US (or any other high-income country) sell in conventional dollars – and on that basis, America’s economy is still 60% bigger than China’s.
Now Chinese workers earn about one-seventh what Americans do. So, even though those Chinese workers are far better paid than practically anyone else in Asia apart from the Japanese and Koreans, there’s little point in Chinese retailers scouring the world for cheaper clothes: by the time they’ve paid freight and import duty from, say, India there’s no real saving.
We can still sell something to them, though?
In China’s case, with difficulty, says the American Chamber of Commerce in China. In its 2016 Business Climate Survey, three-quarters of surveyed US companies reported that “they felt foreign businesses are less welcome in China than in years past.”
In October, the US-China Economic and Security Review Commission (a joint committee of the US Senate and House of Representative) produced its 2016 Annual Report: the most pessimistic account of China’s international economic policies it’s written since being established in 2002. It concluded that the Chinese Communist Party “has no intention of opening up what it considers key sectors of its economy to significant U.S. or foreign competition and control”, and that barriers to foreigners trying to do business in China are getting worse.
Speak to any French or Japanese business in China and they’ll all agree: America’s not being singled out. China has a very simple approach to foreign trade: all for it – but only if China’s making the money. When it comes to trade, the Chinese government is as contemptuous of wimpish modern theories about win-win relations as Trump has been throughout his campaign.
So no-one can sell to China?
Well, here’s the thing.
Most other rich countries imported about the same amount of Chinese merchandise per head as the US. But while in the last nine months, America sold China just 34 cents worth of goods for every dollarsworth it imported, Germany sold it $1.32, Japan $1.10 and Korea $1.66. And those three countries don’t have America’s advantages of exceptionally efficient famers selling pork or soya beans: they’re exporting the same things (like electronics, cars and planes) the US Congress claims Chinese obstructionism stops American businesses from selling.
If America were as successful as Germany at selling to China it’d wouldn’t be handing over a net $185 bn a year to China, it’d be receiving a net $95 bn.
What would you do?
Well, if I were President-elect and made a lot of tough promises before the vote, right now I’d be confirming only those promises with the least likelihood of damaging fall-out to confirm – and that’s what Trump’s done.
On November 21, he chose to confirm just one of the five trade-related commitments when he announced he’d pull out of the Trans-Pacific Partnership (TPP)
Pulling out of a TPP that doesn’t yet exist looks almost risk-free. Especially since it’s mostly with countries like Mexico and Australia that America’s already got a free trade treaty with anyway, and that really aren’t going to threaten sanctions against the US tomorrow.
For any sensible businessman, there can only be one solution to what Trump sees as the China trade problem: proceed with immense caution. Trump’s belief that America’s been too kind to China has some truth: it’s not only America that failed to get the benefits expected when China joined the World Trade Organisation in 2001.
Dealing with America’s China trade requires two things:
- Trump must announce something about China and trade on January 20. Otherwise, his supporters will think he’s reneging – and China will decide he’s all bark and no bite.
- He needs a team around him – Secretaries of State, Commerce and Treasury, and a US Trade Representative – to discuss then craft short and longer-term policies that work for Americans without destroying relations with China.
What does China think Trump should do?
The day after Global Times told us what China was threatening, it took a far more conciliatory line about China and Trump. Trump, it said, “is probably the very American leader who will make strides in reshaping major-power relations in a pragmatic manner.”
Which strikes me as saying China’s not going to start retaliating unless Trump mishandles the diplomacy. The Chinese can’t seriously complain if someone else plays hardball: it’s pretty much he only game they know. But Trump’s iron fist needs to be wrapped pretty tightly in a velvet glove.
What would I do?
If I shared Trump’s priorities, I’d certainly announce on January 20 that the US Treasury should start investigating alleged Chinese currency manipulation and what to do about it. But I’d also want a review of how to deal with China’s barriers against Western imports, and I’d set pretty tight deadlines.
But remember, Trump’s also committed to 28 other things, including renegotiating NAFTA, “using every tool under American and international law to end foreign trading abuses immediately “ and doing something about them, and trying to get two Bills through Congress by April 30:
- An End The Offshoring Act, “establishing tariffs to discourage companies from laying off their [US] workers in order to relocate”
- An End Illegal Immigration Act, “building a wall on America’s southern border and ensuring open jobs are offered to American workers first.
That’s a lot to do – which means a lot might go wrong. And I’d avoid committing myself to anything I couldn’t get out of until my team was all approved by the US Senate, was fully bedded in and we’d had time to set priorities.
So what are the risks for our industry?
Simple: we now know the areas Trump has said he’s prioritising.
Imports from Mexico and China, all alleged abuses in overseas sourcing, a likelihood of punitive tariffs on imports that have caused US job losses after Trump’s presidency and he possibility of mandatory “American workers first” hiring policies.
That’s a colossal amount of possible legal changes over the next year. – and I suggest the uncertainty over their scope and timing will last longer than just a few months.
I’d say that level of uncertainty will add up to a much greater set of business risks than the mere possibility of higher tariffs on Chinese clothes.
It’s an uncertainty US importers need to factor for. Other rich-country importers – in Europe, Japan, Canada and Australia – need to start considering the possibility of sudden extra capacity becoming available in China. Manufacturers throughout the world need to think about the likelihood that they may become more competitive in the US – but less competitive in other importing countries.
And they all need to start thinking now.