Emerging MarketsFeb 13 2017

China strengthens global trade ties as US tariff threat looms

twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon
Search supported by
China strengthens global trade ties as US tariff threat looms
BloombergChinese president Xi Jinping is committed to boosting economic ties with Latin American countries and across Asia

US president Donald Trump has previously stated a willingness to impose a 45 per cent tariff on imported Chinese goods and label China a currency manipulator for suppressing the value of the renminbi to boost its exports.

The ability of the US to impose such a tariff and the benefits of doing so are questionable. Research suggests China only satisfies one of three criteria set by the US Department of the Treasury to determine if a country is a currency manipulator: that it maintains a trade surplus of more than $20bn (£15.8bn). And although China may have satisfied this current account surplus criteria in the past, as of October 2016 it did not. 

US trade protectionism and tariffs could put further pressure on the already weakening renminbi, which has sunk to an eight-and-a-half-year low due to a strengthening dollar and capital outflows. Chinese authorities have drawn on their war chest of foreign currency reserves to support the renminbi as it approaches the Rmb7 per US dollar threshold. 

After peaking at nearly $4trn in mid-2014, China’s reserves are now below $3trn, which has led to tighter government controls on capital outflows and increased scrutiny of overseas investment projects. Chinese officials will have to decide whether it is more important to continue to support the renminbi at the expense of the country’s reserves, or whether they should prioritise the reserve level and allow market forces to determine the level of the currency.

Another large currency devaluation by China’s central bank could strengthen Mr Trump’s depiction of the country as a currency manipulator. It is also likely to cause other Asian countries to depreciate their currencies, resulting in a domino effect across the region. 

Although China is likely to feel the effects of weaker trade under a Trump presidency, it may benefit from the US withdrawal from the 12-nation Trans-Pacific Partnership (TPP) as the country was previously excluded from the scuttled deal. With its share of global GDP surging from 4 per cent in 2000 to 15 per cent in 2015, China is positioning itself to assume a greater role in promoting regional and global trade agreements and the free flow of investment.

China has already surpassed the US as South America’s largest trading partner and has pledged to increase trade to $500bn and foreign direct investment to $250bn by 2025. President Xi Jinping has opened the possibility for Latin American to join China’s One Belt, One Road programme, a modern version of the Silk Road linking Asia to Europe. 

Although it now relies less on demand for commodities than during the boom years, China remains committed to strengthening economic ties with Latin America and across Asia. 

While the US tends to import China-made mass market consumer products, China typically imports US goods of higher value, such as aircraft, oilseed and cars. The country also has clout in the form of its significant and growing US business investments, and ownership of $1.2trn worth of US Treasury securities, though it may balk at future purchases of Treasuries should it find itself in a trade war with the US.

Any reduction in Chinese exports to the US could trigger more fiscal policy support from the government to stabilise its domestic growth. Any potential trade shock could also accelerate China’s reform and economic rebalancing process, causing the country to speed up its transition away from low-end manufacturing exports. 

US tariffs on Chinese goods could create negative ripples to other Asian economies due to supply chain linkages between China and these countries. Parts of developed and developing Asia could suffer, given that Japan and South Korea are major suppliers of electronics components used in finished Chinese goods. 

James Donald is a managing director, portfolio manager and analyst at Lazard Asset Management