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

Analysts at Deutsche Bank 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

“We need to think of the previously unthinkable as risk scenarios. The headline trade data suggest China accounts for 50% of the US trade deficit in 2015. That is misleading. Around 37% 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% of US trade deficits in 2015 came from China, slightly higher than 13% from Japan and 11% from Germany. A trade war against China would be a war against all participants of the global supply chain, including some US companies.”

“Assume that the US takes serious actions to (i) reduce the trade deficit, (ii) boost domestic growth; and/or (iii) “bring jobs back to the US”, we find it difficult to target China in a trade war: higher tariff on furniture, textile and apparel would likely drive the deficit to other developing countries; China doesn’t export that many cars; and electric and electronic products are often made by multinational companies using imported parts. If US imports from China are down 10% and the vacuum is filled by other exporters to the US, countries that should benefit most are: Mexico (overall exports up 3%), Vietnam (1.7%); Canada (1.3%); Pakistan (1.1%), and the Philippines (0.9%). 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.”

“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 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.”