Xi Jinping can make life tough for US companies in China, following Trump threat of bigger duties on Chinese trade

China's President Xi Jinping attends a meeting at the Great Hall of the People in Beijing, China, on June 14, 2018.
China's President Xi Jinping attends a meeting at the Great Hall of the People in Beijing, China, on June 14, 2018. PHOTO: EPA-EFE

HONG KONG (BLOOMBERG) - China does not import enough from the United States to match President Donald Trump's tariffs dollar for dollar, but President Xi Jinping can still squeeze American companies in other ways in retaliation.

American businesses from Apple and Walmart to Boeing and General Motors all operate in China and are keen to expand. That hands Mr Xi room to impose penalties such as customs delays, tax audits and increased regulatory scrutiny if Mr Trump delivers on his threat of bigger duties on Chinese trade.

US shares slumped on Tuesday (June 19) as part of a broad sell-off in global markets in response to Mr Trump's threat.

The total amount of US goods exports to China only amounted to US$130 billion (S$176 billion) last year, meaning Mr Trump's potential tariffs on US$250 billion or more of Chinese imports cannot be matched, at least directly.

But if one measures both exports and sales of US companies inside China, the US has a surplus of US$20 billion with China, according to Deutsche Bank.

Pressuring companies through bureaucratic means "is a practice that the Chinese have used for a long time and our companies are on guard", Mr William Zarit, chairman of the American Chamber of Commerce in the People's Republic of China, said on Bloomberg Television. "This is definitely a concern."

South Korean and Japanese companies have all felt this effect, with their businesses in China hurt as part of a dispute between states.

In 2017, following the Seoul government's decision to deploy an anti-missile system that China opposed, China forced South Korean retailer Lotte Shopping to suspend operations at many of its hypermarkets in the country for alleged violations of fire-safety rules.

The company eventually decided to pull out of China, but still cannot sell all its units and continues to rack up losses. In total due to the dispute, Lotte Group lost an estimated 2 trillion won (S$2 billion) ) in the year from March 2017, according to Yonhap News Agency.

The backlash also led to boycotts, with consumers shunning cars from Hyundai Motor and cosmetics from Amorepacific Group. Chinese tourists cancelled Korean vacations, forcing airlines to scrap flights and hotels to slash rates. The Bank of Korea estimated that 0.4 percentage point was cut from 2017's gross domestic product.

Japanese carmakers suffered major declines in their China sales in 2012 after the fight over disputed islands in the East China Sea worsened.

"The Chinese government can organise a boycott very quickly," said Mr Nicholas Lardy, a senior fellow at the Peterson Institute for International Economics in Washington. "We've seen it repeatedly with the cases of Japan and Korea: They whipped up the propaganda machine and suddenly no one was buying Toyotas anymore."

Even before Mr Trump's latest threat, some US companies in China were feeling the pressure.

"We're already beginning to see some increased regulatory scrutiny against US companies operating in the market, whether it's increased customs enforcement, local emissions inspections at our companies' factories, stricter enforcement of the advertising law," said Mr Jake Parker, vice-president of China operations for the US-China Business Council in Beijing.

One advantage of this tactic for Mr Xi is that this time the numbers are on his side, as US investment in China is far larger than the reverse. American companies had US$627 billion in assets and US$482 billion in sales in China in 2015, compared to just US$167 billion in US assets and US$26 billion in US sales for Chinese companies, according to a report published on Tuesday by China International Capital analysts Liu Liu and Liang Hong.

One sector that is at risk is cars, especially considering the historical precedents from Japanese and South Korean companies.

Like other foreign carmakers, GM and Ford Motor have invested heavily in local production in the world's largest car market. China contributed about a quarter of GM's profit last year and about 12 per cent of Ford's, according to Bloomberg Intelligence.

China is also the biggest market for electric vehicles and heightened hostility from Beijing could further complicate efforts by Mr Elon Musk to conclude negotiations between Tesla and Chinese regulators over a proposed factory in Shanghai.

The 15,000 vehicles Tesla sold in China last year brought in more than US$2 billion, about 17 per cent of total revenue.

Starbucks wants to more than triple its revenue over the next five years from China, which is on track to become the company's largest market within a decade. Starbucks currently has 3,300 outlets, compared with about 12,000 in the US.

The US has a huge surplus in aerospace trade with China, largely because of Boeing, the biggest US exporter. That gap could narrow if Beijing expands its levies on Boeing's 737 jetliner, the largest source of profit for the planemaker. China so far has said it would target only smaller versions of the jet and the country's options are limited since competing planes from Europe's Airbus are largely sold out for the next several years.

Apple, which hires companies in China to assemble the iPhone, might have been penalised by the US but so far has avoided tariffs.

The New York Times reported that Mr Trump told Apple that the US would not place tariffs on iPhones, although Mr Peter Navarro, the president's top trade adviser, said he was unaware of any such exemption.

One thing that may cause Mr Xi to hold back from a full-scale attack on American companies is concern about the impact it would have on the domestic economy.

"China has been trying to avoid an ugly outcome of the US-China trade conflict," said Mr Lu Ting, chief China economist at Nomura Holdings in Hong Kong, adding that the country left some "wiggle room" for future negotiations.

"This year is tough for China as the country will face greater downward pressure on growth in coming months due to the deleveraging campaign and slowdown in some major export destinations."