News analysis

Trade war will hurt both US and China

Chinese exports would be hit hard by raised tariffs, but Americans' pockets will suffer too

If Apple's iPhone has been used often as an example of what might happen in a trade war between China and the United States, it is for good reason.

The iconic US company shows how President Donald Trump's proposed measures of raising tariffs against Chinese products and declaring China a currency manipulator might end up hurting both economic giants and others. All this, without quite achieving Mr Trump's objectives of bringing back manufacturing jobs to the US or balancing its trade with China.

On the campaign trail, Mr Trump vowed to slap tariffs as high as 45 per cent on Chinese goods and accused China of manipulating its currency, the yuan.

In his inauguration speech on Jan 20, he said: "Every decision on trade, on taxes, on immigration, on foreign affairs will be made to benefit American workers and American families. We must protect our borders from the ravages of other countries making our products, stealing our companies and destroying our jobs."

This has sparked debate of a looming trade war between the US and China.

Many products, including Apple's iPhone, that are exported from China to the US are assembled in China with components made in other economies, which would also be hurt if the US slaps tariffs on Chinese products.
Many products, including Apple's iPhone, that are exported from China to the US are assembled in China with components made in other economies, which would also be hurt if the US slaps tariffs on Chinese products. PHOTO: REUTERS

And while even Chinese economists admit that China's economy will suffer if Mr Trump went ahead to slap tariffs on Chinese products and take other punitive trade measures against China, other economies are set to be hurt too.

  • LOPSIDED TRADE AND INVESTMENT

  • • In 2015, total two-way trade was US$598 billion (S$854 billion), with Chinese exports to the US amounting to US$482 billion and US exports to China totalling US$116 billion.

    • The US is China's largest export market, absorbing 18 per cent of China's total exports.

    • China is the US' third-largest export market, taking in 7.7 per cent of the US' total exports.

    • The US' trade deficit with China in 2015 was US$366 billion.

    • US firms have invested more than US$225 billion in China since 1990, while Chinese firms have invested US$65 billion in the US.

    SOURCES: OFFICE OF THE US TRADE REPRESENTATIVE, RHODIUM GROUP, STATISTA

    Goh Sui Noi

This is because many products exported from China to the US are assembled in China with components made in other countries as part of an international supply chain.

Take Apple's iPhone 6s, for instance. Strip it apart and one sees components made by companies from several economies: Its storage, camera and display come from Japanese companies Toshiba, Sony and Asahi; its RAM is from Korean company Samsung; the A9 processor is from Samsung and Taiwan's TSMC; its LTE modem and radio frequency receiver are by San Diego-based company Qualcomm; its Wifi module, battery and chassis are made by Chinese firms; and its rare earth minerals come from China and the US, according to Business Insider.

As for China, its economy, already facing a slowdown and overcapacity, will be hurt further.

In particular, the textile industry, already losing competitiveness to countries in the region because of increasing labour and other costs, will be hit hard, said economist Yuan Gangming of Tsinghua University.

"Many textile companies have closed down or retrenched their workers," he noted, adding that there would be more bankruptcies and layoffs if a trade war were to occur.

Other industries that would be hit are steel, which already faces overcapacity, and machinery, he added.

The US imports machinery, clothing and consumer electronics from China, with a lot of it made by US companies which profit from them.

However, despite likely retrenchments, Dr Yuan does not think there would be the kind of social unrest that occurred in the 1990s when China reformed its state-owned enterprises (SOEs), leading to massive layoffs.

This is because the economic situation is much better now, he said.

China's economy then was "relatively rigid" with most jobs in manufacturing and SOE factories.

Now, its employability is much stronger while new jobs are being created mainly in the service sector, which has a lot of room for growth, said Dr Yuan. Services and consumption were the main drivers of growth last year, outstripping manufacturing in growth.

Moreover, China's economy is less dependent on exports than before as it rebalances towards consumption, where there is also room for growth.

Dr Yuan pointed out that data shows consumption (10.4 per cent) grew faster than investment (8.1 per cent) while exports shrank 7.7 per cent last year.

The government would also use fiscal policies to stabilise the economy, said Dr Yuan, because stability is important to it. And it has deep enough pockets to do this with its foreign reserves. Despite falling in the last several months, reserves stood at US$3.05 trillion (S$4.35 trillion) last November.

On the other hand, the US economy could be hurt by a trade war too.

First, more expensive imports as a result of the tariffs would hurt Americans' pockets, particularly those in the low-income groups.

Second, the Chinese are likely to hit back at any US action with their own punitive measures if only to dissuade Mr Trump from taking further, broader steps.

And the Chinese can act as the two economies are interdependent: China owns more than US$1.5 trillion in US Treasury securities and other US assets, and is also the US' third-largest export market, and one that is expanding rapidly.

"It is foolish to think that America holds all the cards in this bilateral economic relationship," wrote Yale University economist Stephen Roach recently.

Indeed, the Communist Party-linked Global Times warned recently: "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."

Apple has a big stake in China - not only is China where most of the company's iPhones are made, but it also accounted for US$46 billion of Apple's sales or 22 per cent of its total revenue in its latest fiscal year.

Last year, Apple lost ground to local smartphone maker Huawei, with its share of devices sold in May dropping from 12 per cent the previous year to 10.8 per cent, against Huawei's 17.3 per cent. It has also faced greater regulatory constraints in recent months.

The American Chamber of Commerce in China warned earlier this month that Beijing "is preparing to take steps in retaliation" against US restrictions on trade.

The Trump administration's moves against China could hurt American firms with investments in China and the burgeoning American exports there.

Yet, for all that trouble, Mr Trump may not see many manufacturing jobs returning to the US.

In industries like textiles, where factories were lost decades ago to China, the jobs will simply move to countries where labour is less expensive, such as Bangladesh and Vietnam.

In instances where reshoring occurs, there is likely to be high automation so that few additional Americans are hired, according to analysts.

Foxconn, Apple's contract manufacturer in China, has said it could invest in a display screen plant in the US in a joint venture with Apple, to the tune of more than US$7 billion if there are substantial incentives from the government. This could create 30,000 to 50,000 new jobs.

As for China, a trade war may push it to accelerate its economic reforms to go up the value chain.

"There is no other choice than to move up the value chain," said Dr Yuan, as China cannot compete with other countries in the region at the lower end of manufacturing and the US is ahead of it in technology.

The likes of Huawei will try to close their technology gap with US high-tech firms like Apple.

While the impact of any trade war on China will be significant, it also presents the Asian economic powerhouse with opportunities to emerge stronger.

A version of this article appeared in the print edition of The Straits Times on January 28, 2017, with the headline 'Trade war will hurt both US and China'. Print Edition | Subscribe