Both the markets and the Chinese government shouldn't underestimate what policies the Trump administration has in store. Hence, well thought-out and well-prepared responses are critical for China, Sino-US relations, and also for the global economy.
During Trump’s first 60 days in office the Trump administration: (1) has already backed off of threatening to disavow the one Chine policy; (2) has not yet labelled China a currency manipulator; (3) has not implemented the promised 45% tariff on Chinese imports.
However, China should still prepare proactively to respond to potential US policies, and below are our suggestions.
China should take a leading role by respecting rule of law
Only when China respects the rule of the law can China gain ground in the international community. The Trump administration wants to bring global trade from multilateral to bilateral arrangements. For the bilateral Sino-US trade negotiations, China should take the high road, though the Trump administration is taking the low road.
The market and the Chinese government should understand globalization has been oversold, and globalization is only part of the reason for US job losses: the real reason is technology. US exports to China are capital intensive, and US imports are labour intensive, hence US has net job losses. And job loss shouldn't be the focus for trade for the Trump administration and other countries. The focus should be on whether the welfare of the majority of people has benefited. US consumers clearly benefit from Sino-US trade relations with low cost consumption goods.
There is no perfect international institution, but WTO is still trying to create a level playing field. The rule of law that has been set up by the WTO should still be respected, and China should take a leading role here. It is clear the new rule of law regarding trade shouldn't be and can’t be rewritten by the Trump administration.
China should set a wise negotiating strategy
The best practice for China would be whenever they are engaged in negotiations with the Trump administration, they should allow a long time to think before responding, as US policy could change whilst China is still thinking.
China should prepare for the worst-case scenario on trade negotiations
The general consensus is that the US will not levy a 45% tariff on China anytime soon. However, the current Trump administration claims they will be hard negotiators. The markets and the Chinese government have guessed the Trump administration might start by levying an anti-dumping duty tax on Chinese industries.
The Trump administration will likely be tough when negotiating sectors with overcapacity such as the Chinese steel industry. The best thing for China to do is to send the cases to the WTO. China would be taking a leading role by respecting the global rule of law, but also the WTO usually takes three to five years to deal with the cases. This is the best way to deal with the current Trump administration which wants quick results.
China should levy export tax rather than the US levy a border adjustment tax
It is likely that the US congress would not pass a heavy tariff on Chinese imports, however China should still be prepared. In our mind, the best approach is for China to levy an export tax and collect the tax when exporting goods, rather let the revenues go to the US as an import tax.
China should offer a gift to the Trump administration
In our view, the best gift China can give the Trump administration would be if China agrees not to be a currency manipulator. China can also agree to provide more jobs to the US, including both financing and building construction projects, if the US is willing for China to participate.
China should prepare for an eight-year Trump administration
The more Trump retreats from his current policies, the less destructive his term in office will be, giving him a great chance to be re-elected. If this is the case, the damage from his policies is more likely to be long-term, and less likely to affect his re-election.
Mo JI is chief economist, Asia ex-Japan, at Amundi Hong Kong Limited.
