How China tariffs could backfire on U.S. — Harvard Gazette

First of all, yes, it would make things difficult. Clearly, export of manufactured goods into the United States is a very significant part of China’s economy. But it’s worth remembering that other key markets, including the European Union and Japan, are also part of China’s strategy of selling to highly developed, advanced economies. Nonetheless, the U.S. is a very important market, and in fact, even during the last few years of U.S.-China political controversy, trade figures between two sides have actually often gone up rather than down. So, it is significant, there’s no doubt about that.

In terms of opening up new markets, there’s certainly very, very strong efforts, and have been for some years, to try and do that.

Think about the signature policy that China has used in terms of international exports and foreign direct investment, what’s been known as the Belt and Road Initiative [a global infrastructure development plan to connect Asia with Africa and Europe to strengthen China’s geopolitical and economic influence]. In the last year or two, the term GDI, Global Development Initiative, has been much more widely used by the Chinese for the next phase of their plans.

The aim is essentially to create new and higher value markets in emerging economies — Southeast Asia, Latin America, and to some extent, Sub-Saharan Africa, although the latter is still of more interest in terms of raw materials than it is in terms of new markets for sales. Or think about EVs (electric vehicles), both Chinese exports of EVs and the export of intellectual property, including Chinese technology, to areas like Southeast Asia is becoming a bigger factor than it would have been four or five years ago even.

Nonetheless, these are still small markets compared to the number of Chinese goods that are sold into very advanced markets like the United States — half a trillion dollars according to U.N. figures.

Trump has been promising for some time to impose additional tariffs if re-elected. Has China been preparing for that possibility?

Yes, they’ve been preparing for quite some time for this possibility. Since it became clear that President Trump would likely be the Republican candidate, and then could quite possibly win, there has been plenty of strategizing in Beijing about what that outcome would mean in a whole variety of areas, including security, as well as trade.

On trade, the question of how China tries to move to protect their markets and also deal with the shaky state of the domestic economy has been a really key question. But there is no clear answer yet.

If you look at the economic policies the Chinese government has undertaken in the last few months, it involves repeated use of fiscal stimulus to try to stimulate domestic consumer spending. But since China is very, very determined to maintain a global trade surplus, it’s going to be much harder for them to use domestic consumption as a means of boosting the economy. So, exports still really matter.

Getting around that involves a policy decision they don’t want to make: to release large amounts of the savings that ordinary Chinese have in their accounts, reduce their trade surplus, and redirect spending into the domestic consumer market. That is something that has been advocated by Chinese policymakers for more than 20 years. They always step back from it because, in the end, exporting more has seemed more politically attractive and a solution more suited to where they are at the moment in terms of global supply chains.

Which countries stand to benefit most from a decline in Chinese imports to the U.S.? Is anyone poised to step in to meet U.S. demand?

You put your finger on the key issue. Filling that gap in short order will be very, very difficult. There is a reason that China has become so dominant over 30 years. If there was some reason — terrorists or a conflict or something else — that made China no longer viable, then India is probably one place that would attract investment on that front. But it would take time to bring its supply chains and its technical capacity up to standards.

Vietnam, but of course Vietnam borders China, and it’s possible that issues with supply-chain problems might well affect Vietnam more directly. There are also places where you can get niche manufacturing of various sorts done. But in terms of that kind of higher-value-added manufacturing, that demands technical skills, lots of components, supply chains, those are very complex things.

A slightly different issue, but not unrelated, is the dominance that Taiwan has on the very-high-end semiconductor market. That’s still a very vulnerable part of a global supply chain and that will remain relevant in terms of trying to shift capacity from China. Because it’s never just about China, it’s also about the things that get sent to and sent from China as part of the wider manufacturing process.

Harvard economist Larry Summers recently said if the U.S. takes a broad brushstroke approach to tariffs on imports, that may provide Beijing with a ready excuse for China’s own internal economic problems, further straining U.S.-China relations. Do you share that view?

I think that’s quite plausible, but I’d say there’s another “yes, and.” It also provides an opportunity for something else that China could do that the U.S. would find unattractive.