China may be growing at its slowest annual pace since 1990, but it's still the powerhouse of global growth. That's something Donald Trump's trade hawks will need to consider if they're truly serious about risking a conflict with China to win economic concessions.
Not only would a clash derail bilateral ties, it might also deep-six a nascent global recovery.
Powered by government stimulus that fired up smokestack industries and a burgeoning middle class that's spending on everything from Starbuck's coffee to Apple iPhones, China's gross domestic product grew 6.7 percent in 2016. That means it likely contributed 30 percent of global growth last year, slightly above its 28 percent contribution in 2015, according to Rajiv Biswas, Asia-Pacific chief economist at IHS Global Insight in Singapore.
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If Trump backs up harsh campaign rhetoric—he accused China of raping America and cheating on trade —with punishing tariffs, the move would have repercussions for supply chains in South Korea, Taiwan, Japan and beyond. Nor would the U.S. economy escape unscathed: state-controlled media have warned the incoming Trump administration that Beijing has a "big stick" to punish U.S. companies that sell goods and services to China.
"With China America's third-largest and most rapidly growing export market, that's hardly a trivial consideration for a growth-starved U.S. economy," said Stephen Roach, a senior fellow at Yale University and former non-executive chairman for Morgan Stanley in Asia. "Also expect China to be far less interested in buying Treasury debt—a potentially serious problem in light of the expanded federal budget deficits likely under Trumponomics."
Chinese President Xi Jinping warned in a speech at the World Economic Forum in Davos this week that heightened trade tensions would produce no winners—only losers.
The stakes are high. Trade between the world's two biggest economies supports around 2.6 million American jobs, according to the U.S.-China Business Council. While the U.S. continues to have a gaping goods-trade deficit with China, its exports of services to the country are growing rapidly. Between 2006 and 2014, they climbed more than 300 percent.
"If Trump were to apply a broad, 15 percent tariff on imports from China, the impact on the Chinese economy would be significant, but it would be much lighter than most people expect, because China is no longer an export-led economy," said Andy Rothman, a San Francisco-based investment strategist at Matthews Asia and previously a U.S. diplomat in Beijing.
Data Friday from Beijing underscored that shift. Consumption contributed about two thirds of full-year growth, while net exports were a drag on the economy. China's service sector has eclipsed manufacturing and now accounts for 51.6 percent of annual economic output.
Trump, of course, could be bluffing about imposing punitive trade measures on China and the President's powers on applying tariffs are limited. He may opt to push back against the dumping of excess supply of iron and steel by China through the World Trade Organization, a process that would take time to resolve and fall well short of sparking a trade war.
Trump has also walked back from some of his harshest criticism, telling the Wall Street Journal that he no longer plans to label China a currency manipulator on his first day in office. His pick for Treasury Secretary, Steve Mnuchin, agreed during a Senate confirmation hearing that China has shifted recently from efforts to weaken the yuan. He did say, however, he is willing to label China a manipulator if warranted.
Business executives seem sanguine, for now. HSBC Holdings CEO Stuart Gulliver told Bloomberg Television at Davos that his "operating assumption" was for the U.S. and China to "tweak" rules on country of origin and dumping goods below fair market value.
Still, Trump has proven anything but predictable. Going after a big trading power like China would reverberate around the global economy. China is the biggest trading nation to twice as many countries as the U.S., according to Parag Khanna, a senior research fellow in the Center on Asia and Globalisation at the Lee Kuan Yew School of Public Policy at the National University of Singapore.
It's also the case that while consumption and services are increasingly fueling growth in China, the wider economy is being held back by a drag from rust belt regions. That's a theme also prevalent in industrial nations such as the U.S. and U.K., which has spurred a surge in populism that helped lead to Trump's election and Britain's plan to leave the E.U.
"Hurting China will hurt global growth and make its way back to the U.S.'s own growth," said Zhu Ning, author of "China's Guaranteed Bubble" and deputy director of the National Institute of Financial Research at Tsinghua University in Beijing. "It is, indeed, a decision that President Trump has to be extremely careful about."
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