Trade War: The Chinese Perspective

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I’ve been living in Yi Chang for the past two months, and I thought it would be helpful to provide a first hand account of the Chinese perspective on the looming trade war. As you might imagine, media coverage here on mainland China is somewhat different than what’s apparently being portrayed in the U.S.

The Chinese media is portraying China as the victim, rather than the perpetrator of unfair trade practices, and a recent Op-ed that ran in China Daily entitled, China Justified in Hitting Back to Protect Interests, stated thatBeijing is ready to stand toe-to-toe with Washington and trade blows.”

While the trade war had been heating up in recent weeks, suddenly China appeared to blink. On Tuesday April 10th, President Xi proposed opening up China’s trade markets by lowering tariffs on automobiles.

“This year, we will significantly lower the import tariffs for automobiles and reduce import tariffs for some other products,” stated Xi, ““Human history shows that openness leads to progress, while seclusion leaves one behind.”

Xi also addressed the thorny issue of China’s intellectual property (IP) rights, stating that China will “do better” to clamp down on unauthorised use of IP.

While this pronouncement was lauded in the U.S., many Chinese nationals were a little more circumspect. Xi has made these kinds of promises before without following through, and China imports relatively few automobiles from the U.S. because U.S. auto manufacturers that sell cars in China, build the cars in China.

Xi’s comments notwithstanding, the very next day, the U.S. granted permission for military manufacturers to sell technology to Taiwan that would allow the country to build submarines. Taiwan and China are embroiled in a long sovereignty dispute, so this allowance irritated China. The Chinese Defense Ministry immediately demanded a retraction.

Though an all out trade war is far from certain, the political relationship between the two biggest economies in the world, remain tense.

How much would a trade war impact the Chinese economy?

China would undoubtedly feel the strain of a trade war with the U.S., however, in 2013 President Xi unveiled a $6 trillion infrastructure initiative to connect Asia with Europe, India, and Africa. This undertaking, called “One Belt, One Road” (OBOR) infrastructure initiative, is intended to pivot China away from reliance on U.S. commerce, and make China the commercial highway for that part of the world.

The OBOR platform would open up 7 corridors.

  • New Eurasian Land Bridge – Western China to Western Russia
  • China–Mongolia–Russia Corridor -Northern China to Eastern Russia
  • China–Central Asia – Western China to Turkey
  • China–Indochina Peninsula – Southern China to Singapore
  • China-Bangladesh–India Corridor – Southern China to Myanmar
  • China–Pakistan Corridor – South-Western China to Pakistan
  • Maritime Silk Road – Chinese Coast to Mediterranean

It is the largest mega-project in history, covering more than 68 countries that contain 65% of the world’s population and drive 40% of the global GDP. In other words, while a trade war with China could injure China’s economy, it might not create a sufficient impact to offset the gains brought about by OBOR. And it’s possible that President Xi’s statements about opening up China’s economy and making an effort to protect intellectual property rights, could just be lip service intending to appease the U.S. president. Only time will tell.

As an aside, if there is in fact a trade war a third-party beneficiary might be Vietnam. Vietnam is already taking factory work away from China due to lower wage costs. This trend is likely to continue at an increased clip if U.S. companies are forced to import products from countries that aren’t penalized by teriffs.

The Vietnam ETF (NYSE: VNM) provides exposure to Vietnamese equities. Foreign investors made net 2017 purchases of about $995 million, which is up 46% year over year.

 

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