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China poised for measured responses to US

Chinese authorities will stand firm as an advocate for globalisation in the wake of the United States’ plans to slap tariffs on $US60 billion worth of Chinese goods entering the US – but expect the Asian giant to  respond on a bilateral basis.

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The pressure from the US will push China to upgrade its economy – although it will not devalue its currency - and the ideal point of focus is to shift its employment structure from manufacturing to domestic services.

"Trump’s China policy may result in a divided world, risking not only global economic recovery but also stability.”

Trump’s tactical approach will spill over to the rest of the world. He deliberately relates trade measures to foreign policy.

Canada and Mexico were granted exemptions from newly imposed steel and aluminium tariffs and it has been reported many countries will attempt to seek similar exemptions if they have security partnerships with the US.

Although the face value of the US tariff will be small, US President Donald Trump may push other countries to take sides, resulting in a divided world. The scale of the trade skirmish would be broadened. This is the biggest risk lying ahead.

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The direct damage of the proposed tariffs to the Chinese economy would be small.

The proposed list of products subject to the tariffs will affect the aerospace, information and communication technology and machinery sectors. The list will be set out in a register notice seeking public comments on the proposed tariff action.

However, the parts supplied by China are small because the rest are made up of components (like semiconductors) imported from the rest of Asia, notably Taiwan and Korea.

ANZ Research believes the value-add contribution by China in the related products to be between just 20 per cent and 30 per cent (or $US15 billion), equivalent to around 0.1 per cent of China’s gross domestic product. In addition, the imposition of tariff will not reduce the demand for these products entirely.

As part of the US’ actions, the country’s trade representative will confront China’s ‘discriminatory’ technology licensing practices through the World Trade Organisation.

Additionally, relevant departments and agencies will work with the US Treasury Department to propose measures to address China’s investment practices involving the acquisition of sensitive technologies.

Framework

In dealing with trade negotiations, China will stick to its position as a champion of globalisation through a multilateral framework. At China’s Party Congress in October 2017, President Xi Jinping said “openness brings progress, while self-seclusion leaves one behind.”

There he pledged to “expand foreign trade, develop new models and new forms of trade and turn China into a trader of quality”.

A month later China cut import tariffs on 187 items, ranging from milk powder to wine. The appointment of a non-Chinese bank as a yuan clearing bank in the US in February this year also caught many by surprise.

We believe China will react to the US bilaterally through reciprocal responses. Reportedly, China’s Ministry of Commerce is considering tax on 128 US products from pork to steel in response to the US action.

In order to show respect to the WTO China may file an investigation into the US exports, in particular subsidies on agricultural products.

China is keen to elevate its global status to that of the US – exporting brand value, technology and culture via Hollywood movies, Silicon Valley technology, Big Macs and the Yankees. Chinese policymakers know China is losing its cost competitiveness and the nation can no longer rely on textile products, toys or mobile phone assembling services.

Raymond Yeung is Chief Economist, Greater China and Daniel Wilson is a Markets Economist at ANZ

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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