Non-tariff retaliation from China is another potential problem for the U.S. Because it imports less from the United States than it exports there, China can’t match U.S. tariffs dollar for dollar. It can, however, try to make life miserable for U.S. firms in China in other ways. The American Chamber of Commerce survey showed that in September more than half of U.S. firms in China reported an increase in retaliatory measures such as greater regulatory scrutiny, slower customs clearance times and consumer boycotts. It’s a tactic Beijing will have to use judiciously, lest it spook foreign investors at a time when China is already losing its allure.
The U.S. economy is also likely to suffer from a decrease in Chinese investment. Chinese firms have spent more than $9 billion since 2000 on 869 greenfield investments in the U.S., according to the Rhodium Group. And according to the Bureau of Economic Analysis, more than 38,000 Americans are employed by U.S. affiliates of Chinese firms, and Chinese investment supports more than 100,000 jobs and nearly $11 billion in gross domestic product. The tariffs themselves won’t deter Chinese investment – in fact they incentivize it, to an extent, for Chinese firms looking to avoid tariffs and perhaps gain political clout in Washington. But tightened U.S. restrictions on foreign investment certainly will, as could Beijing’s restrictions on capital outflows, not to mention nationalist tensions. In 2017, Chinese investment in U.S. firms went into a free fall, dropping 65.8 percent over the course of the year – and 95 percent compared with 2016 – to $3 billion, according Mergermarket. The U.S., of course, is still awash in capital, and the slowing economy may keep interest rates down. Investment may get slightly more expensive, though, since Chinese investors often outbid their competition to gain access to U.S. technology.
Taking Stock
Perhaps most important, there’s the potential loss in U.S. exports to China. China is the third-largest market for U.S. exports, and its purchases of U.S. goods have grown by more than 85 percent over the past decade. (By comparison, U.S. exports to all other countries grew by just over 20 percent in that time.) China took in some $130 billion worth of goods and more than $50 billion in services from the United States in 2017, its purchases accounting for about 8.6 percent of total U.S. exports and just under 1 percent of U.S. GDP. By September 2018, it had slapped retaliatory tariffs on $110 billion in U.S. goods. The move drove U.S. exports to China down 9 percent, the equivalent of about $3 billion, in the third quarter of 2018, compared with the previous quarter; in October, goods exports were down $4 billion from the year before.
The pain of these measures so far has been confined to a handful of sectors in the U.S. economy, such as agriculture, energy and auto manufacturing. In addition, Beijing’s decision to suspend several of the tariffs following a trade truce with U.S. President Donald Trump in December eased it somewhat. Chinese orders for U.S. agricultural, energy and auto exports have reportedly resumed since China temporarily lowered tariffs on these goods while talks are underway. The U.S. economy isn’t out of the woods yet, though. Should Washington follow through on its threats to escalate the trade war if the negotiations fail, Beijing is liable to reinstate the retaliatory fees. What’s more, Chinese consumers could boycott American goods in response to the spike in bilateral tensions, as Beijing has hinted. Rerouting supply chains and commodity flows could offset the effect of these moves, but only in the long term. In the meantime, China is buying more and more from U.S. competitors. According to Beijing, China’s imports from the EU increased by 11.7 percent in 2018, while its imports from the U.S. grew by just 0.7 percent. The threat of declining Chinese consumer demand – whether because of the trade war or because of China’s myriad economic problems – poses perhaps the biggest threat to U.S. goods.
For the U.S., the costs of the trade war must be weighed against the economic benefits, many of which are still up in the air. Tariff collections topped $5 billion in October, according to official figures, but U.S. consumers are bearing much of the burden of the new taxes. A handful of new investments or factory reopenings in the U.S. have been announced, mostly in the steel and aluminum sectors, but so have several closings or relocations aimed at avoiding the tariffs or counter-tariffs. Of the 57 percent of U.S. firms in China considering a relocation, according to the American Chamber of Commerce survey, less than 1 percent said they were mulling a move back to the United States. Most are eyeing low-cost manufacturing hubs in regions such as Southeast Asia, South Asia and Latin America. (Given the cost of relocation and the uncertainty surrounding the trade war’s duration and severity, most firms are biding their time to see how things shake out before they make a decision.) And despite the tariffs’ goal of evening the United States’ trade balance with China, the monthly U.S. trade deficit jumped to $43 billion in October 2018, up from just under $26 billion in March of that year. On the year, according to Chinese figures, the bilateral trade deficit soared 17 percent to the highest levels since 2006.
Just One More Thing
China’s economy, meanwhile, is under mounting pressure from nearly every direction. Consumption is down. Manufacturing is shaky. Industrial profits are declining. Household debt is piling up. Bank balance sheets are precarious. And jittery market sentiment is threatening to make everything worse. Beijing is behaving as if it’s staving off a crisis, rolling out a slew of targeted measures to support small businesses, loosen up lending and spur growth.
The trade war is just one more thing for China to worry about. Its main vulnerability in the feud with Washington, of course, is the loss in exports to the U.S., which bought more than $500 billion in goods from China in 2017, the equivalent of 18.6 percent of China’s total goods exports and 3.5 percent of its GDP. Yet Chinese exports, even to the U.S., have remained robust since the trade war began. In October 2018, the first full month in which U.S. tariffs were in place on $250 billion worth of Chinese goods, China exported 7.7 percent more goods compared with the previous year. Newly released figures from December suggest that the trade war is starting to hit home: Chinese exports to the U.S. dropped 3.5 percent year on year and 12.8 percent month on month. At the same time, total Chinese exports fell 4.4 percent year on year and 1.4 percent month on month – the biggest drop since December 2016 – to $221.25 billion. A Renmin University study found that exporters cut demand for new hires in the third quarter of 2018 by 53 percent, compared with a year earlier.
U.S. tariffs explain only a small part of this decline, though. China’s exports to other major consumers such as Europe and Australia also slowed in December. Furthermore, retail sales in the U.S. and EU have been declining, a trend that disproportionately affects finished Chinese consumer electronics not subject to U.S. tariffs, including smartphones and televisions. (Other major exporters of consumer electronics like Taiwan, South Korea and Malaysia, have also reported a slowdown, meaning a drop in global demand, and not an increase in U.S. tariffs, is likely the culprit.) Exports of Chinese goods covered by the tariffs, on the other hand, have been buoyed by several factors, including Beijing’s support for affected industries, and the front-loading of U.S. orders to get ahead of the next round of tariffs. The strength of the dollar, which has jumped 9 percent against the yuan since spring 2018, has been enough on its own to nearly counteract the 10 percent tariffs.
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