World Economy

China will likely withstand the shock of a trade war better than the US will

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While China will suffer from a trade war with the United States, some experts say the Asian giant has more resilience than the U.S.

The "Chinese government has plenty of financial resources to step in," said Arthur Kroeber, founding partner of Hong Kong-based financial services and research firm Gavekal Dragonomics.

"I think the Chinese government has looked at this and is prepared to act," Kroeber said, speaking by phone from Beijing.

In the last few decades, the communist government in Beijing has built China into the world's second-largest economy with a state-backed form of capitalism and has expanded the nation's global reach. A large portion of that growth came from heavy-handed policies that favored domestic industries, displaced more than a million people for infrastructure projects and generated questionably high levels of debt.

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But key to China's rise has been access to the global market, particularly the U.S. consumer. And in the very near term, that makes the Asian giant vulnerable to increased tensions with the U.S.

China was the largest source of goods imported to the 2015, according to an estimate from the Office of the U.S. Trade Representative. The U.S. goods trade deficit with China was $366 billion in 2015, meaning the U.S. bought far more from China than the other way around.

"If there is a full-fledged trade war, China is going to get hurt disproportionately to the U.S.," said Jacob Shapiro, director of analysis at Geopolitical Futures, an online publication that analyzes and forecasts the course of global events.

"It's not really about what China wants. China needs access to the U.S. consumer market," Shapiro said. He doesn't expect tensions to escalate into a trade war.

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U.S. President Donald Trump has promised a policy of "America First" and bringing back jobs, ostensibly lost to China. He has also threatened tariffs on goods imported from the Asian giant and chosen a group of outspoken China critics for top positions on trade policy.

However, Beijing has an array of tools to strike back with, and the message from the state is it will use them. China's state-backed Global Times said in an English editorial after the U.S. presidential election that:

"A batch of Boeing orders will be replaced by Airbus. U.S. auto and iPhone sales in China will suffer a setback, and U.S. soybean and maize imports will be halted. China can also limit the number of Chinese students studying in the U.S."

"There's an array of things China could do that are not trade related that would enable them to persuade in a personal way," Kroeber said, adding that Beijing could also make China a tougher business environment for U.S. companies operating there.

In the last few weeks, China's president, Xi Jinping, and other top Chinese leaders have also stepped up efforts to promote China as a globalization-friendly alternative to Trump's protectionist stance. The power play is especially important this year. Xi is set to consolidate his authority at a Communist Party congress this fall.

The political support for free trade rhetoric is more divided in the U.S.

"Trump also needs to show he's making things better for the American worker," Shapiro said. "He's also limited" in power due to the U.S. democratic system of checks and balances.

The challenge is if trade tensions escalate, Shapiro said, "the U.S. is going to be hurt anyways" from disruption to the supply chain. Many products sold in the U.S. are partly or wholly manufactured in China.

To be sure, it's still unclear whether U.S-China tensions will heat up into a trade war that decimates one party over the other. China's economy is by no means as advanced as that of the United States, but can increasingly hold its own while U.S. presidents come and go. Meanwhile, deep business relations between the two countries will be complicated to unravel.

"I don't see trade as a zero-sum game where, if one country benefits the other loses," said Ira Kalish, chief global economist at Deloitte. "Certainly both countries depend on one another substantially."

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