Sunday, April 15, 2018

Why forcing countries to choose sides in a trade war could benefit China, not the US

scmp.com | April 15, 2018

In a China-US trade war, many countries around the world would come under pressure to take sides. We pray it does not come to this. But let’s say it does. Whose side will they take? Even five years ago, that question would have been a no-brainer – the US, by a mile.
But today? The answer would be trickier, and not at all comforting to US consumers, companies or the trade war battle team assembled around the White House.
To help gauge an answer, I looked at the world’s top 20 economies. Then for good measure I looked at the 21 Asia-Pacific Economic Cooperation (Apec) economies. I browsed each of these economies’ 2017 export and import numbers to discover how important the US and China were to these economies, either as sources of imports or as leading destinations for their exports. I looked at just goods trade, omitting the services trade which is messier to compute.
The results were perhaps not unexpected, but were sobering nonetheless. As for the world’s 20 largest economies, China is the leading source of imports for 11. It is the second most important source of imports for a further four. For only two countries – France and Switzerland – is China not one of their top five sources of imports.


By contrast, the US is the major source of imports for just two – Canada and Mexico, and is in the top five for just 13 more. That means that for five of the world’s top 20 economies, the US was not among their top five sources of imports.
Now look at China as an export destination, and it is the most important export market for seven of the top 20, and one of the top five export markets for seven more. Of the other six economies for which China is not in their top five destinations, five are European economies (France, the UK, Italy, Spain and the Netherlands) and the sixth is Turkey. Since Europe’s economies mainly trade among themselves, this is not surprising.
And the US? It is the main export destination for six of the world’s top 20 economies, and in the top five destinations for a further 12. Only for Russia and Spain does the US fall outside their top five export destinations.
In sum, for 11 of the world’s top 20 economies, China is more important as a source of imports than the US, with just Canada and Mexico being more heavily reliant on the US. And even as an export destination – where the Trump administration would argue that flagrant exploitation of the openness of the US market has allowed foreign companies to trample US competitors underfoot – China has risen close to a point where it is just as important as the US market.
The picture for the Apec member economies, which obviously captures more accurately trade relations around the Pacific, shows even more starkly the rising importance of China to the region. The Apec list includes eight of the world’s biggest economies, and then 12 smaller regional economies (Hong Kong, Malaysia, Papua New Guinea, Peru, the Philippines, Singapore, South Korea, Thailand, Taiwan, Vietnam, Brunei and Chile). Of the Apec list, China is the most important source of imports for 15, and the second source for another four. Only Thailand has less reliance on China as a source of imports, and even here it is Thailand’s third most important source.
As an export destination, China is the number one market for 12 of the region’s economies, and is in the top five for six more – just Thailand and oil exporter Brunei are outside.
Compare the US: Canada and Mexico remain the only two markets for which the US is the main source of imports, with a further 15 having the US in its top five. As an export destination, the US is number one for just four (Peru and China join Canada and Mexico), and is in the top five for a further 13 economies (Russia, Thailand and Brunei fall outside).
So I ask the question a second time: if economies are forced to choose, which way will they flip? A country like the Philippines seems already to have made its choice. As investment from China’s “Belt and Road Initiative” begins to flow in, and plans take shape for joint exploitation of marine resources in jointly claimed areas of the South China Sea, President Rodrigo Duterte has seen what side his bread is buttered on.
For economies like Japan, the conflict is less easy to manage. China is its most important source of imports and its most important export market, but the US is number two both for imports and exports. So too for South Korea, whose main import sources are China, Japan and the US, in that order, with China, the US and Vietnam its three leading export markets. And Chile, which counts China, the US and Japan as its three leading export markets, in that order. There are similar stresses for New Zealand and Australia.
In short, this is not a choice anyone wants to be forced to make. But as China’s consumer market continues to grow strongly, and as Trump’s behaviour undermines confidence in the US’s commitment to rules-based behaviour, in particular through the World Trade Organisation, the temptation to keep friendly lines open to China must get steadily stronger.
For Canada and Mexico, the painful experience of US pressure to renegotiate Nafta to make it more favourable to the US has created impossible strains. Despite their huge interconnectivity with the US economy, they must surely be looking to dilute their reliance on an increasingly unpredictable and pugilistic partner. Trump’s initiatives to hurt its closest trading partners (include Germany and Japan) must surely be counterproductive, and must surely be putting in jeopardy the goodwill that has been built over seven decades of Pax Americana.
This is a trade war that is yet to start. It might end up being no more than bluff and bluster aimed at strengthening a negotiating position that is weakening over time. A rational China will stay cool, continue to liberalise – even if more slowly than most of us would like – in line with multilateral rules and commitments, confident that time is on its side. A rational US … where on Earth has that disappeared to?

David Dodwell researches and writes about global, regional and Hong Kong challenges from a Hong Kong point of view

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