Will US-China trade conflict under Donald Trump impact your business?

January 25, 2017

“We can’t continue to allow China to rape our country” — Mr. Trump at a Ft. Wayne Indiana rally in 2016

This is Part 3 of 4 of an initial series of posts on this subject.

Mr. Trump will need to tread carefully with China, because although the U.S. is its largest export partner, accounting for ~17% of exports, the proportion of China’s net exports to GDP declined from 9% in 2007 to 2% currently, placing China in a stronger position to absorb shocks.

China is the 4th largest export market for U.S. goods and services, after Canada, the EU and Mexico, accounting for $124 billion of exports in 2014.  Mr. Trump’s economic plan is tough on China, stating “China’s unfair subsidy behavior is prohibited by the terms of its entrance to the WTO and I intend to enforce those rules and regulations. And basically, I intend to enforce the agreements from all countries, including China.”

While we do not believe a wholesale renegotiation of the WTO is on the cards, nor blanket tariffs of 45% on Chinese imports as floated during the campaign, there is certainly a possibility that specific goods such as steel will be targeted for some tariffs, and that some tariffs may be temporarily imposed on various other imports to make good on campaign promises. Therefore, there is a real possibility of escalating trade conflicts between the U.S. and China.

In some preemptory sabre rattling, Global Times wrote in an editorial likely sanctioned by the Chinese government:

“Large orders for Boeing planes would switch to Europe, U.S. auto sales in China would face setbacks, Apple phones would essentially be crowded out, and U.S. soybeans and corn would be eradicated from China”

Mr. Trump has also promised to confront China over currency manipulation, claiming that the Yuan is undervalued, helping Chinese imports into the U.S. and hurting U.S. exports to China. A contrarian view expressed by some observers is that while China has historically suppressed the value of the Yuan, that is a past issue and not a current one. China’s restrictions on capital outflows suggests that the exchange rate is stronger than it would be without the numerous limitations the government has imposed.

The collateral damage to a deterioration in U.S.-China trade relations could impact the in-progress China-U.S. Bilateral Investment Treaty (BIT), that some have called the world’s most important bilateral investment agreement. And though it is continuing at a brisk pace, it also faces uncertainties. The BIT would put in place important rules to protect U.S. investors against discrimination and arbitrary treatment, with the U.S. promising the same for Chinese investments. If the BIT were to be derailed as part of the broader disagreement over trade and monetary policy, it would be a significant set-back to U.S. corporate investments in China.

Executive Suite Questions:

  1. As a U.S. exporter to China, will the Chinese market become more restricted to us as part of China’s retaliation strategy? If so, which sectors will be affected most?
  2. As a U.S. company manufacturing in China and importing goods into the U.S., if the U.S. imposes high tariffs on China-made goods, which countries are the best alternatives for relocation? How embedded are our supply chains and how quickly can we reduce exposure to manufacturing in China for importing goods into the U.S.?
  3. What mitigation strategies such as partnerships and joint ventures with Chinese organizations should we consider to reduce our risk of a backlash in China?

Timely market intelligence lowers your risk in a fast-changing international environment

The one thing people can agree on with regards to this U.S. election is that the results were surprising. You can avoid blind spots for your business by asking the right questions and sourcing timely market intelligence in support of your corporate function, whether it is Strategy and Planning, Corporate Development, Marketing or others. If you are a business leader with P&L responsibility, the quality of market insights and decision support in this uncertain environment could be a difference between making or missing your targets.

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