Guan Tao on Preparing for Trump Impact on Chinese Trade
Former SAFE Balance of Payments Director Suggests China Implement Incremental Policies to Enhance Trade Negotiating Position
Nov.17 Shanghai-based financial media Yi Cai published an op-ed by Dr.Guan Tao管涛. Named 特朗普回归对中国贸易冲击辨析 Analyzing the Impact of Trump's Return on China's Trade. Arguing there is no need to exaggerate Trump's potential impact since the Biden administration’s “small yard high fence“ has already heavily impacted normal trade relations, and “derisking“policies have interrupted original supply chains. While China may face weakening trade ties with the US, China should actively create conditions to extend this transition period, minimizing economic shocks from rapid, short-term adjustments. He believes the key is to accelerate the implementation of incremental policies, further deepen comprehensive reform and opening-up, guide economic operations back to a reasonable range, reverse market expectations, and boost market confidence. This will strengthen China's bargaining power and confidence in foreign trade negotiations.
Dr.Guan is the global chief economist at Bank of China International (BOCI) Securities. He joined the Department of the State Administration of Foreign Exchange (SAFE) in 1992 and became the Director of the Balance of Payments in 2009. He joined the China Finance 40 Forum in 2015 as a researcher. In 2020, he joined BOCI as global Chief economist. In 2022, he briefed former PM Li Keqiang about the Chinese economy.
Below is the translation I made:
As the U.S. election concludes and Trump returns, concerns about China's trade exports and economic outlook have resurfaced. This anxiety stems from Trump's campaign rhetoric, where he declared “tariffs” as the “most beautiful word” in his dictionary and threatened to escalate the trade war with China.
However, it remains uncertain whether Trump can fully deliver on his tariff threats against China. Even if Trump initiates new trade friction, challenges may bring opportunities. China should focus on strengthening its fundamentals and restoring its economy to a reasonable growth trajectory. While preparing for the worst-case scenario, China can seek opportunities amid challenges and strive for the best possible outcomes.
Trump's Return May Not Be the Worst Outcome
With the U.S. election results in, Trump's return to the White House is certain. Currently, markets seem to view this as a more unfavorable outcome for U.S.-China economic and trade relations. This perception stems from Trump's non-establishment, unpredictable nature, suggesting his China trade policies might be more extreme and uncontrollable. However, this may be a biased and mistaken view.
Given that maintaining superpower status is America's highest national interest and containing China's rise is a bipartisan consensus, both Republican and Democratic administrations will continue targeting China. Trump 1.0 opened the “Pandora's box” of U.S.-China economic decoupling and tech competition. Biden's four years further institutionalized and systematized this approach, establishing three pillars of China strategy: investment, alliances, and competition. The resulting “small yard, high fence” policy and supply chain decoupling have impacted U.S.-China economic relations no less than during Trump's first term.
Take U.S.-China tech competition as an example: Trump 1.0 wielded three tools - tariffs, blacklists, and national security measures. The Biden era employed government subsidies plus export controls, with the latter becoming “surgical precision.”
During Trump's first term, average tariffs on Chinese imports rose from 2.7% to a peak of 15.4%, later settling around 12.5% after January 2020. In 2018, export controls and economic sanctions were imposed on Chinese firms like Huawei and ZTE, weaponizing semiconductor supply chains. In August 2020, executive orders banned WeChat and TikTok in the U.S., though courts later rejected these bans.
The 2018 Export Control Reform Act expanded the Commerce Department's authority to control U.S. exports of goods, technology, and software under security grounds, leading to more Chinese tech companies being added to the entity list. The 2019 edited “deemed exports” regulation restricted U.S.-based Chinese nationals' access to technology. The Foreign Investment Risk Review Modernization Act (FIRRMA) of August 2018 expanded CFIUS authority to review and restrict foreign investments in critical U.S. technologies, infrastructure, and sensitive sectors, resulting in numerous rejected Chinese investment projects.
In May 2019, Executive Order 13873 strengthened restrictions on “foreign adversaries disrupting U.S. ICT supply chains,” further limiting Chinese tech companies' U.S. investments and market access. May 2020's “Foreign Direct Product” rule targeted non-U.S. semiconductor companies, prohibiting them from using equipment and products derived from sixteen U.S. technologies to supply Entity List companies.
November 2020's Executive Order 13959 banned U.S. investment in Chinese companies identified as military-controlled, leading to NYSE delisting three major Chinese telecom operators. The December 2020 Holding Foreign Companies Accountable Act required U.S.-listed foreign companies' auditors to submit to U.S. regulatory inspections, significantly complicating Chinese companies' U.S. listings.
The Biden administration largely adopted Trump 1.0's tech competition tools, including high tariffs on Chinese products, import restrictions on certain Chinese companies and products, export controls on critical materials, Chinese stock investment restrictions, limits on U.S. investment in China, and comprehensive financial blockades on specific companies.
Biden introduced new measures. The August 2022 CHIPS and Science Act included $52.7 billion in subsidies, with $39 billion for manufacturers. However, subsidy recipients must agree not to expand advanced chip production in China and other areas of concern to the U.S.
On October 7, 2022, the Commerce Department set specific hardware parameters restricting China's access to high-performance AI GPUs, while comprehensively limiting advanced logic and memory chips and supercomputing centers. Chinese chip manufacturers needed licenses for U.S. equipment and technology, and U.S. residents were banned from working at controlled companies. This expanded tech competition from communications and chips to AI. On October 17, 2023, the Commerce Department refined these controls while leveraging European and Asian suppliers' dependence on U.S. components to enforce global semiconductor restrictions on China.
Biden's administration continued and upgraded investment restrictions. In October 2024, new rules controlled U.S. investments in mainland China's advanced semiconductors, quantum technology, and AI, categorized as “prohibited” or “notification required.” Prohibited categories included high-performance AI, advanced semiconductor manufacturing, EDA, and equipment, with others requiring notification to prevent investments potentially 'threatening U.S. national security.' Biden maintained Trump's blacklists, while related legislation prohibited defense and other departments from purchasing certain Chinese companies' products.
According to U.S. statistics, China's share of U.S. imports was 18.4% in 2020 (end of Trump's last term), down 3 percentage points from 2017. By 2023 (the year before Biden's term ends), this share fell to 13.7%, a 4.7 percentage point drop from 2020. In the first three quarters of 2024, it further declined to 13.2%, down 0.4 percentage points year-over-year.
Clearly, if Harris wins the election, she would likely continue Biden's basic China policy framework. While Democratic economic policies toward China might be less overt, who's to say subtle approaches would be easier to counter than direct confrontation? The impact might be gentler but not necessarily less significant.
Trump's Tariff Policy Faces Uncertainties
During this election, Trump threatened to escalate trade sanctions against China in four ways: First, revoking China's Permanent Normal Trade Relations (PNTR/MFN status); second, imposing 60% or higher tariffs on all Chinese exports to the U.S.; third, halting imports of essential goods from China within four years; and fourth, cracking down on Chinese goods reaching the U.S. through third countries.
While Trump favored tariffs, Biden preferred non-tariff measures, using 'de-risking' to intervene in global supply chains.
Trump 1.0 largely delivered on trade policy campaign promises, and Trump 2.0 might freely wield tariffs again for several reasons: First, exploiting China's current economic pressures and higher export dependency. Second, using tariffs to offset tax revenue losses from tax cuts and ease U.S. fiscal deficit pressure. Third, using tariffs as negotiating leverage for Chinese concessions in other areas. Fourth, potentially using tariffs to pressure China to complete and compensate for the partially implemented Phase One trade deal from early 2020, which stalled due to the pandemic.
In 2023, Robert Lighthizer, Trump's 2017-2020 Trade Representative, strongly criticized the trade liberalization consensus in his book “No Trade Is Free.” His potential return as Trade Representative would increase the likelihood of renewed tariff conflicts. This probability rises further with hawks like Rubio potentially joining Trump 2.0's inner circle.
The Japan case may offer insights into future U.S.-China trade relations. U.S. data shows that in 1986 (the year after the September 1985 Plaza Accord), Japan accounted for 22.2% of U.S. imports (0.8 percentage points higher than China's 2017 peak). This share fell below 10% from 2003, dropping to just 4.7% in 2023 and further to 4.5% in the first three quarters of 2024. Japan's share of the U.S. trade deficit peaked at 56.4% in 1991 and fell below 10% from 2014, reaching 6.7% in 2023 and 5.7% in the first three quarters of 2024.
By similar metrics, current U.S.-China trade friction exceeds the historical U.S.-Japan tensions. From 2018 to 2023, China's share of U.S. goods imports and trade deficit fell by 7.7 and 20.7 percentage points, respectively. In contrast, from 1987 to 1992, Japan's import share decreased by 4.1 percentage points while its trade deficit share increased by 13.3 percentage points.
However, Trump's implementation of China trade policies is not certain, and even if enacted, might come later with uncertain pace and intensity.
Republican control of both chambers following this election might focus Trump more on domestic issues. Trump 1.0's weak domestic policy record remains a regret.
With China's significantly reduced share in U.S. imports and trade deficit, further trade pressure offers limited political gains. Trump 2.0 might instead target economies whose U.S. trade shares have recently increased.
High inflation's role in Democratic election losses, combined with Trump 1.0's economic strengths, makes inflation control a priority for Trump 2.0. Either 60% tariffs on China or 10% global tariffs would increase inflation persistence, potentially giving Trump 2.0 pause.
While China's U.S. import share decreased, its global export share increased, showing foreign investment effectively circumvents trade barriers. This explains Trump 2.0's threats against Chinese exports through third countries. However, global containment of indirect Chinese exports faces practical challenges: difficult and costly identification, plus potential opposition or retaliation from host countries of Chinese overseas investments.
Just as Biden adopted many Trump 1.0 policies, Trump 2.0 might learn from Biden's approaches. Unlike Trump 1.0's non-mainstream team, Trump 2.0's strong return likely attracts more think tanks and mainstream support, potentially leading to more systematic, rational policies.
In conclusion, China must prepare for U.S.-China trade relations to worsen before they improve while avoiding panic or premature concessions. Instead, China should remain calm and respond strategically. Even if U.S.-China trade relations eventually evolve to resemble current U.S.-Japan relations, China should actively create conditions to extend this transition period, minimizing economic shocks from rapid short-term adjustments.
The key to actively addressing external challenges lies in accelerating the implementation of incremental policies, furthering comprehensive reform and opening-up, guiding economic operations back to reasonable ranges, and reversing market expectations to boost confidence. This will strengthen China's position and leverage in international trade negotiations. Meanwhile, China should conduct scenario analyses and war-gaming exercises, monitor and assess Trump's China trade policies in real-time, take proactive measures, position itself strategically, seek opportunities amid challenges, and work toward optimal outcomes while preparing for worst-case scenarios.
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