Authors: Li Zengxin and Saga McFarland

Posted: November 11, 2016

Donald J. Trump will soon become the 45th president of the United States. While the world slowly comes to terms with Trump’s astonishing victory, China is asking what the next president’s «America first» campaign slogan will mean for foreign trade policies and U.S.-China relations.

Trump, whose appeal to working-class Americans left behind by globalization and free trade propelled him to victory, will almost certainly create a more-closed America. But even with support from a Republican-controlled Congress, doubts remain about whether the new president can fulfill campaign promises to label China a currency manipulator and impose a punitive 45% tariff on Chinese imports.

Whether he acts on these two fronts remains to be seen. Nevertheless, weariness with globalization and international trade is spreading in Western nations. In this context, the pressure to generate growth inside national borders will only grow for China and other emerging countries.

Manipulator Label

While campaigning, Trump said labeling China a currency manipulator would be one of his first acts as president. But current requirements for slapping China with that politically charged label will make fulfilling this pledge difficult.

To be officially considered a currency manipulator, a country must have «a significant bilateral trade surplus with the U.S., have a material current account surplus, and be engaged in persistent one-sided intervention in the foreign exchange market,» according to the U.S. Trade Facilitation and Trade Enforcement Act of 2015.

China met two of these three requirements last April, according to the U.S. Treasury Department’s Semiannual Report on International Economic and Exchange Rate Policies. At that time, the data showed a significant trade surplus with the United States and a current account surplus that was greater than 3% of gross domestic product (GDP).

In the department’s October’s report, though, China met only one requirement: The current account surplus had decreased to 2.4% of GDP against the backdrop of a significant trade surplus.

No country has been formally declared a currency manipulator since 1994, when China was given that label by the administration of then-President Bill Clinton.

Today, China is on a U.S. Treasury Department monitoring list of economies that meet two out of three criteria. Also on the list are Japan, South Korea, Taiwan, Germany and Switzerland, which was added in October.

The latest report notes: «China’s intervention in foreign exchange markets has sought to prevent a rapid RMB (yuan) depreciation that would have negative consequences for the Chinese and global economies.»

That China is actively seeking to prevent the depreciation of its currency is a fact that stands in stark contrast to Trump’s assertion that American workers have suffered at the hands of a Chinese manufacturing sector bolstered by an artificially cheap yuan.

Trade Power

Trump may find it difficult to officially condemn China’s currency policies. But Chinese imports may face new barriers.

Early this year, the U.S. Department of Commerce imposed tariffs as high as 266% on Chinese-made steel products, even though China denied its steelmakers dumped at below-market prices. Chinese companies then allegedly found ways to evade these tariffs. The Commerce Department is now investigating a complaint filed by U.S. steelmakers in September that claimed their Chinese competitors avoided tariffs by funneling steel products through Vietnam. The department is also investigating Chinese aluminum imports.

Trump’s campaign rhetoric suggested these sorts of investigations will continue and even increase under his administration. More unilateral trade restrictions are also a possibility.

Trump has promised to go after Chinese imports, even though he famously used steel imported from China for some real estate projects. Once in office, he will have a great deal of power, as the president does not need congressional approval to impose import restrictions or tariffs.

American consumers would pay a heavy price if a 45% tariff were to be imposed on Chinese imports. It’s unlikely, then, that Trump will follow through with this threat, although import penalties tied to lower tariff rates are very likely.

Globalization Backlash

Trump’s rise to power is emblematic of an anti-globalization trend sweeping the Western world. Early this year, British voters rejected a long-enshrined vision of globalization as something that’s beneficial for all when they voted to leave the European Union.

This anti-globalization sentiment, which favors stronger restrictions on immigration and higher trade barriers, will likely put more inflationary pressure on developed economies and conversely lead to deflation in emerging economies, according to Shen Minggao, chief economist at the Caixin think tank China Insight Group.

In this context, Shen said, China’s exports will likely decline. And there’s an increased possibility that the nation’s producer price index will turn negative. China would thus have to rely even more on bolstering leverage and domestic consumption to achieve GDP growth.

Shen also predicted a short-term weakening, followed by a rebound, for the U.S. dollar due to short-term uncertainty and rising inflationary pressure. Deflationary pressure on the yuan may be offset by political pressure from a Trump-led America aimed at curbing a weakening yuan. This means yuan-dollar exchange rate fluctuations will likely increase during Trump’s presidency, according to Shen.

The likelihood of increasingly protectionist trade policies under Trump bodes poorly for emerging-market countries such as China, according to a Citigroup Global Analysts report authored by Markus Rosgen, the firm’s chief Asia equity strategist.

Now that Trump is poised to replace President Barack Obama, the future is uncertain. Institutional investors are likely to reduce risky spending amid this uncertainty. And due to an increasingly protectionist United States, emerging markets face higher risk premiums.
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