The implications of Sino-US trade tensions

The implications of Sino-US trade tensions

Hostility is building up between the US and China over trade policy, particularly with regards to Chinese steel exports. What are the political forces driving these tensions, and what are the consequences for firms and investors?

The last few months have experienced mounting trade frictions between the US and China.  April in particular saw China initiate a number of new trade measures – with mixed consequences for bilateral trade relations. China’s changing trade policy presents potential risks and opportunities for investors and businesses with a stake in Sino-US trade.

Tensions ebb and flow

Bilateral tensions over trade between the US and China began escalating in March when the US, following in the footsteps of the European Union (EU), accused China of dumping subsidized, underpriced Chinese steel on the American market.  To counter this dumping, the US set a tariff of 265.79% on Chinese cold-rolled steel.

By mid-April, however, trade relations seemed to be looking up. On April 14th, the US and China resolved a long-standing dispute over Chinese export subsidies. The US had filed a formal complaint (dispute DS489) at the World Trade Organization over China’s subsidization of key small firms in several industries including textiles, agriculture, and aquaculture.  The agreement also cut into Chinese government support for firms producing specialized steel exports. China appears to have acquiesced to American demands, backing down in the face of US pressure.  US leaders heralded the agreement as a major win and a positive step forward for trade relations.

One week later, however, Beijing announced a host of new export-promotion measures. On April 20th, China released new policies pushing banks to give more credit to exporters and offering tax incentives to firms exporting machinery and appliances. The next day, Beijing introduced new measures to encourage banks to back steel exporters. These steps are likely to reverse the positive momentum generated by the April 14th MOU and spark renewed tensions over trade.

Recent trade data is also likely to further strain Sino-American trade relations.  The UN Conference on Trade and Employment announced that China’s share of worldwide exports increased from 12.3% in 2014 to 13.8% in 2015.  Despite China’s economic difficulties, rising manufacturing costs, and a strengthening currency, Chinese exports seem to be increasingly competitive abroad.  This will lead to renewed US and European calls for China to address its steel dumping.

The political roots of the challenge                     

The ongoing trade dispute is driven by several key forces.  First and foremost, China is struggling with excess capacity in its steel and manufacturing industries, and is trying to jettison a burgeoning glut of steel onto the global market.  Additionally, given slowing economic growth and plans to introduce large, potentially socially-destabilizing cuts to its steel, coal, and manufacturing sectors, China will be loath to voluntarily reduce the competitiveness of its exports.  Beijing has always been wary of social unrest, and given the growing number of labor protests throughout the mainland, it may be feeling increasingly vulnerable.

At the same time, strategic and political concerns are driving the US to challenge China more aggressively over its trade practices.  The Obama administration hopes to promote the newly-formed Trans-Pacific Partnership – the centerpiece of American economic leadership in Asia – at home and abroad by highlighting that the US will vigorously prosecute states that violate the terms of trade agreements.  The administration also hopes to protect the Democratic Party against accusations from the progressive left and populist right that it has been weak on trade policy – particularly given the difficulties facing steel manufacturers in the US.

Looking ahead: Risks and opportunities

New Chinese export policies will create immediate challenges for Western steel producers by increasing the competitiveness of Chinese exports and contributing to continued global overcapacity. Meanwhile foreign companies in textiles and seafood industries are likely to enjoy new opportunities generated by China’s reversal of its incentive program.

Beyond these obvious immediate threats lie broader strategic concerns for investors and businesses affected by Sino-US commercial ties.  Most significantly, escalating trade frictions pose a longer-term strategic risk to importers, exporters, and investors in both countries.

Beijing’s recalcitrance will only feed into rising protectionist sentiments in the US during the 2016 presidential race.  On the right, Trump touts protectionist measures that deviate wildly from conservative, pro-business positions on free-trade. On the left, the Clinton has been pulled away from her neo-liberal sympathies and toward populist positions on trade over the course of her primary competition with Sanders.  Either candidate could take a hardline stance on trade with China early on in their administration.  Aggressive tariffs on Chinese goods could spark a broader trade war that would result in significant losses for both economies, creating significant concerns for investors.

Additionally, China’s continued dependence on export-promotion does not bode well for the long-term health of its economy.  China needs to bolster domestic demand and its service sector, not its heavy industry exports. China’s support for exports may simply be a stopgap measure to support social stability as it pursues broader structural reforms, but investors should monitor Beijing’s progress carefully.  Stronger reforms are still needed to guarantee robust growth for China’s economy.

Categories: Asia Pacific, Economics

About Author

Erik French

Erik French is a PhD Candidate at the Maxwell School of Citizenship and Public Affairs, a supervisor at Wikistrat Inc., and a former Sasakawa Peace Foundation fellow with Pacific Forum CSIS. His research focuses on security, politics, and economics in East Asia.