What will Trump’s election mean to U.S. — China Trade and Investment?
Around 1:45 am, November 10, 2016, my cell phone received the news alert of AP Race Projection — “Donald Trump has won Pennsylvania”. Before CNN or Fox News made any official announcement, another alert came. This time it was Tencent. The alert was from the People’s Daily, the Chinese Central Government’s Mouthpiece, impatiently announcing the final victory of Donald Trump. A large number of Chinese cheered for the outcome.
Shouldn’t Chinese be concerned about Trump, who labeled China a currency manipulator in his GETTYSBURG speech; who threatened to impose a 45% tariff on Chinese imports; who condemned China for stealing manufacturing jobs from the U.S.?
Not really. Chinese finally learned or think they have learned, that all these statements are nothing but bluffing and tricks of American politicians to collect votes. Remember the 2012 US Olympics uniform anecdote? During the campaign season, Democratic Senator Henry Reid threatened to burn all the Made-in-China Olympics uniforms designed by Ralph Lauren and sewed in China; Republican nominee Mitt Romney angrily criticized China for currency manipulation.
Even if Trump really means what he said, the question is to what extent?
First, “currency manipulation”. The Chinese Yuan has been depreciating, partly because its economy has been slowing and partly because it is experiencing capital flight to other countries. Labeling China a currency manipulator is more of a political gesture, which may not bear any result if China cannot or is not willing to cooperate.
Secondly, bringing manufacturing jobs back to the U.S. Can an American company like Apple manufacture its products in the U.S.?
Let me borrow two charts from Tim Worstall, a U.K. scholar and writer.
China almost makes little money through its manufacturing of iPhone or iPad. What is worse, in 2010, 18 workers for Foxconn, Apple’s contractor in China, attempted suicide and 14 of them died due to excessive strain, including long working hours, isolation and punishments. Each worker at Foxconn receives a salary about $400 per month. Will any American be willing to work 15 to 20 hours a day, 6 days a week in a factory like Foxconn for so little pay?
During the economic restructuring underway in China, it is losing its appetite for low value added and low paying manufacturing work that also contributes to damaging its environment. Additionally, the rise in labor costs is also undermining China’s ability to continue to support and to compete for such manufacturing activity. So, what manufacturing jobs are we talking about bringing back to the U.S.? I would prefer we focus on how to create more jobs in the U.S. that would appeal to U.S. workers.
How about the proposed 45% tariff on Chinese imports? It is Americans who have benefited from cheap products made in China over the past two decades. Imposing a 45% tariff on Chinese imports is equivalent to imposing 45% price increase on each item sold to American consumers. Are American consumers ready for it? In 2015, US-China bilateral trade totaled $550 billion, an amount that is expected to increase to $1 trillion by 2024. If the U.S. imposed a 45% tariff across the board on Chinese imports, China would retaliate and fight back. Both countries would get hurt, potentially leading to an economic slowdown or worse. Both sides should think twice.
Now let’s see what the U.S. received from China besides cheap imports. The following chart shows that in 2015, the U.S. received approximately $80 billion in Foreign Direct Investment (FDI) from China. According to KPMG, “China is emerging as a net capital exporter. China’s outbound direct investment (ODI) exceeded inbound foreign direct investment (FDI) for the first time in 2015. According to a joint government statement, total ODI flow in 2015 increased 18 percent to USD 145.7 billion, compared to a total of USD 135.6 billion in FDI.” As a US-China cross-border advisory firm helping growth stage companies, we have never seen a time when so many American companies are looking to China for both capital and opportunities to sell their products and services. American companies have passed the stage of seeing China simply as a source of cheap labor for manufacturing. They are increasingly attracted to its capital, its consumers’ surging disposable income and their rapidly growing appetite to consume.
If Trump is serious about stimulating the U.S. economy through investment in infrastructure, China’s capital may come in handy given US federal government’s $587 billion budget deficit in 2016.
All in all, the Chinese treat Trump’s campaign talk as noise, bluffing and rhetoric. They expect business to continue as usual, if not better. So should we.