US-China trade war: The risk of de-globalization – Deutsche Bank

Research Team at Deutsche Bank suggests that they do not take an outbreak of a US-China trade war as their baseline case but the Brexit vote and the US election clearly show how the conventional wisdom in economics may backfire these days.

Key Quotes

“China only accounts for 16% of the US trade deficit

The headline trade data suggest China accounts for 50 percent of the US trade deficit in 2015. That is misleading. Around 37 percent of China’s exports to the US consisted of imported parts from other countries. After making proper adjustment for global supply chains, we find that, on a value-added basis, only 16 percent of US trade deficits in 2015 came from China, slightly higher than 13 percent from Japan and 11 percent from Germany. We note a trade war against China would be a war against all participants of the global supply chain, including some US companies.”

“Scenario: Winners and losers in a US-China trade war:

What industries would the US target in a trade war? Assume that the US takes serious actions to (i) reduce trade deficit, (ii) boost domestic growth; and/or (iii) “bring jobs back to the US”. We find industries that stand out are:

 Electronics, including computer and phones;

 Electric equipments;

 Textile and apparel;

 Furniture; and

 Automobile.

This shows the difficulty to target China in a trade war: higher tariff on furniture, textile and apparel will likely drive the deficit to other developing countries; China doesn’t export that many cars; electric and electronic products are often made by multinational companies using imported parts.”

“Winners and losers by country: We track the data on global supply chain and US imports, which allows us to estimate the potential impact on other countries. If the US imports from China are down by 10% and the vacuum is filled by other exporters to the US, we find countries that benefit most would be: Mexico (overall exports up 3%), Vietnam (1.7%); Canada (1.3%); Pakistan (1.1%), and the Philippines (0.9 percent).”

“China’s potential retaliation: Should the US wage a targeted trade war— focusing on certain industries, China’s retaliation would probably be selective as well. The most likely target sectors we identify include: aircraft, seeds and fruits, pulp, and some other agricultural products.”

“An alternative and more sensible scenario:

The rhetoric of a trade war might well be a threat that intends to bring China to the negotiation table. The two countries could find other ways to reduce the bilateral trade imbalance, including for instance, China importing more goods from the US, or China removing restrictions and expanding services trade with the US, where the US has been running surplus. Under such a scenario, the biggest winners could be the aircraft industry, high tech firms and service sectors in the US.”