Trump’s tariffs miss the mark as China changes

The long-term result of US President Donald Trump’s tariffs against Chinese exports may not be what he intended.

While US President Donald Trump is turning up the heat on Beijing with escalating tariffs against Chinese exports to the US, the long-term result may be the opposite of what he intended.

The changing structure of the Chinese economy — from manufacturing to consumption, from cheap production to more sophisticated value-adding — means that the Chinese economy is now rooted in expanding trade ties with the rest of the world.

“Made in China” and its image of the factories of Guangdong province over the border from Hong Kong is being replaced by an new policy of “Made by China”, where China increasingly outsources the production of its own brands to lower-cost counties in Asia, while its own increasingly sophisticated consumers have become a key market for locally made products.

Increased pressure from the US will only accelerate Chinese economic ties with the rest of the world, further validating President Xi Jinping’s Belt and Road trade and infrastructure initiatives, from China west to Europe and south and west to the rest of Asia.

The Trump tariffs may cause short-term pain for exports of Chinese hi-tech products and machinery to the US, but they will only fuel China’s determination to push its own production up the value chain.

The US trade war will hurt US consumers — who will pay more for the products they buy in local stores such as Walmart and Costco — and US manufacturers using Chinese-made capital equipment.

A report just produced by economists at the ANZ Bank, Raymond Yeung and Betty Wang, admits that a trade war between the US and China will hurt China.

But it shows the changing nature of the Chinese economy means that its growing domestic sector is an increasingly important source of demand for Chinese-made products, including electronics.

And, as global supply chains become more complex, any impact on demand for Chinese goods will flow through to demand for inputs sourced from the region, including Australia.

Offsetting that will be a determination by China to look elsewhere for its markets of increasingly sophisticated goods.

The report shows that US imports from China are worth $US505 billion ($656bn) a year, while US exports to China are worth $US130bn a year — leaving a trade deficit of $US375bn in China’s “favour”.

But behind that is the changing nature of the Chinese economy.

“China was a net importer of raw materials and exporter of consumer goods,” it notes.

“But the last decade has seen a rapid rise in net exports of capital goods, such as machinery.

“The local manufacturing sector is growing increasingly sophisticated to challenge developed countries.”

If the US tariffs bite, it could encourage Chinese manufacturers to look to Europe for new markets for their capital goods. In this context, Xi’s proactive Belt and Road initiative looks increasingly prudent — a diversification by China from its reliance on trade with the US.

The ANZ economists point out that while China is moving up the value-added chain in terms of production, China’s exports of hi-tech products as a percentage of its total exports have actually eased, from around 32 per cent in 2011 to around 28 per cent today.

“China has benefited from vibrant global supply chains in the last decade,” it says, “mainly by providing assembly services to foreign tech companies.

“Contrary to common perceptions, the share of hi-tech components in China’s exports has stagnated.”

This could be because more tech products are being produced and exported from cheaper countries in Asia. At the same time an increasing amount of the market for tech products is now in China itself.

The report homes in on the smartphone industry, which it notes is witnessing a shift from “Made in China” to “Made by China”.

“Chinese brands like Oppo and Huawei have joined the competition in recent years, supported by a national 4G (soon to be 5G) network. The size of the domestic network allows for rapid expansion.

“China has been the world’s factory for a long time. But by developing its own brands, the country can optimise the economic benefits from finished products such as research and development and marketing.”

The report argues that China’s goal is to become like Japan and Germany, producing increasingly high-quality products and allowing its citizens to consume high-quality foreign goods.

It points out that the Chinese government has actually been cutting tariffs on imported consumer products from baby formula to wine, to help its consumers access products not produced in China.

“Trade tensions with the US will not undermine China’s determination to be a champion of globalisation,” the ANZ report argues. “China will continue to champion globalisation just as the US and Japan did decades ago,” it adds.

As President Trump ramps up the protectionist rhetoric from Washington, Chinese president Xi Jinping is expected to use his speech to the opening of the Boao forum next week to confirm China’s view of the virtues of a more open global trading system — along the lines of his message delivered to the Davos forum in January of 2017.