Threats of global trade war have come at a delicate time. The world economy has finally emerged from recession, with international economic growth expected to reach a seven-year high of 3.9% in 2018. Last year, global trade expanded by 4.2%, its best performance in six years.
But are Trump’s tariffs threats to China at all.
Back in 2005, when exports accounted for 35% of China’s GDP, a tariff war might have concentrated Beijing’s mind.
But today, with most growth being driven by the domestic consumer market, and exports down to 18% of GDP, leverage has been lost, particularly when you consider that over a decade ago, Chinese economists recognised that much of its export economy, employing millions of mainly migrant workers was not enriching the country.
And there’s more that has not been considered.
An economic study of the iPhone costing (then) US$500 in the US, had an export value to China of just US$179.
Worse, most of this US$179 was made up of components imported from Japan, South Korea, Malaysia, and the US.
The value being captured inside China was and assembly fee of just US$7.
When Beijing officials realised that much of China’s export processing economy worked this way they determined to build skills to move up the production value chain; and start to capture some of the IP-protected “brand value” that accounted for so much of the gap between the US$179 the iPhone’s export price and its $500 retail price.
Come back to the current simmering trade war, and some things become obvious: what the US sees as IP to be protected, China sees as a more profitable part of the production value chain.
Having learned these value chain lessons, Beijing has worked hard to bring more of the high-value-adding parts of value chains into China, and to build hi-tech industries in which it can establish a globally competitive position.
China has successfully done this in areas like high-speed trains (CRRC), digital telecoms networks (Huawei), drones (DJI) and hi-tech batteries (BYD). Trump’s team is not wrong to be worried about China’s competitive emergence here, and to target these new-tech sectors in the latest trade war sortie.
But here’s the problem: China exports almost none of these new-tech products to the US, making US tariff threats meaningless.
The danger for Trump is, in targeting such exports, he is targeting export processing chains that work mainly to the advantage of US companies (like Apple) that successfully keep most of the value in an iPhone inside the US.
By contrast, Beijing may find US exporters easier to target without the danger of “collateral damage” on the region’s other exporters. Whether it is soya, beef, almonds or Boeing aircraft, a large majority of the value in such exports is captured by, and stays in, the US. Tariff pain would be acute, and felt fast.