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COMMENTARY

Pitfalls in sizing up US-China risks

DONALD Trump's renewed trade threats this week undermine any relief from the recent resumption of US-China trade talks. But this is merely a timely reminder that it is too complacent to regard US-China risks as having a short "half-life", which proportionally declines with progress on bilateral trade talks.

To be sure, the trouble is not so much that benign (or overly hopeful) perspectives on US-China trade risks under-account for the risks of a breakdown of trading relations - especially in the context of Beijing's White Paper on US-China trade relations, which materially narrows the path to a mutually beneficial and politically palatable US-China deal.

Instead, the bigger picture is that the pitfalls in attempting to size up, much less contain, US-China trade risks are that trade is not just about China, and China is not just about trade.

Put differently, mistaking US-China risks for a single-dimensional trade spat led by hawkish US trade policy response to years of bilateral US-China trade imbalance is a miscalculation of far deeper and more disperse, multi-dimensional risks.

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The real danger is misdiagnosing the true nature of threats to global trade and international diplomacy - as a result of which, policy/political responses inadvertently end up ineffective, if not inappropriate.

This, in turn, plays out as self-inflicted economic/political pain, which could otherwise have been avoided or at least mitigated.

Admittedly, seeking a resolution to avert unnecessary economic tragedy is a high bar. But reflection is not too much to ask, and starts with decomposing the delicate risks.

TRADE IS NOT JUST ABOUT CHINA

For a start, there must be recognition that the distinct element of "America First" trade policies certainly does not stop at China. This has been a sobering realisation even for traditionally close strategic partners such as Canada, Mexico, Europe, Japan, Korea, India - all of whom have been subject to much tougher trade renegotiations, sometimes under threat of tariffs.

Moreover, the US Treasury's expanded "Monitoring List" for currency manipulation is an unapologetic pervasion of "America First" reach from 12 of the largest trading partners to the 21countries now.

What is clear is that "America First" trade policies are meant to target a much wider array of trading partners - not just China - with US' zero-sum game approach to exports and jobs, exploiting economic clout in bilateral negotiations. Accordingly, there is no room for complacency about adverse trade effects being limited to indirect supply-chain ripples via China. Instead, direct but hard-to-predict US trade action (be it tariff- or quota-based) remains a real and present danger.

It then stands to reason that unbridled optimism about being positioned as a substitute for Chinese manufacturing, hence benefiting from a rush of capital investments relocating out of China, must also be tempered by mercurial US trade antagonism. This is precisely why justifiable optimism about Vietnam, Thailand and Malaysia - arguably best-placed to capture some of the "fallout business activity" from China on grounds of "exports similarity" - must be dynamically assessed for evolving threats.

Case in point - with Malaysia and Vietnam flagged on the US Treasury's "Monitoring List", and Thailand at risk of being marked in future, it would be remiss to not recognise greater and acute scrutiny, and corresponding trade action by Washington as a consequence. The upshot is the likelihood of the US potentially expanding trade action on a wider range of countries or across particular products regardless of origin of manufacturing, or probably some combination of the two.

CHINA IS NOT JUST ABOUT TRADE

Above all, it is increasingly evident that simmering US-China tensions are multi-dimensional, with far greater geopolitical motivation, which is likely to be more pervasive. Admittedly, merchandise trade may be more quantifiable and tangible. But the tussle for lasting global superiority on matters of national security, economic strategy and military might overwhelms bottomline aspects of the trade agenda.

What that means is that any prospective deal on US-China trade may turn out to be invariably shallow and short-lived as an unresolved geopolitical agenda poses a constant threat of hijacking diplomatic dealings. And the inextricable link between technology - critical for economic and strategic dominance - and industry means that trade may be the unfortunate conduit for the growing US-China rivalry for dominance.

The inescapable conclusion then is that trading partners (of both the US and China) in Asia can neither attain immunity from collateral damage and partisan pressures nor can they hope for quick relief from a lasting resolution. And waiting for clarity may prove frustrating. So businesses may have to adapt to making decisions in the context of, rather than waiting for the absence of, prolonged uncertainty and accentuated tensions.

Admittedly, contemplating the true nature of current economic and geopolitical risks involving the US and China unearths more worries than reassurances. But as Master Yoda in his infinite wisdom put it, "Named must your fear be before banish it you can". So, it is critical that the worst fears and risks are identified ("named") as a precondition to conquering, or at least, circumventing them.

  • The writer is Executive Director and Head, Economics & Strategy, Asia & Oceania Treasury, at Mizuho Bank Ltd.