Our China Economists (Yang Zhao, Wendy Chen and Chang Chun Hua) outline how a Trump presidency may impact China.

As President, Donald Trump could pose profound risks in three broad categories: protectionism, threats to national security and US macro policy uncertainty. China seems to be at the centre of the two former issues. Based on Mr. Trump’s rhetoric during his campaign for presidency, and the policies outlined on his website, there is a high probability that he will declare China a currency manipulator, and pursue more aggressive trade policies.

A Trump presidency may lead to a smaller trade surplus for China, and more capital outflows due to increased trade frictions and geopolitical risks in the region. However, we believe the impact should be limited, as China and the US have more common interests than conflicts in the region. China is not only a major exporter but also a large importer from the US (some 8% of US exports were destined for China in 2015). Moreover, China’s outward direct investment (ODI) to the US has surged while the pace of US foreign direct investment (FDI) to China has moderated.

So, although a trade war is possible, it would unlikely lead to a collapse of fundamental cooperation between the two nations. Furthermore, China is relying more on domestic demand and less on external demand, as suggested by a declining trade dependence ratio (Figure 20), which makes it less vulnerable to foreign shocks.

The US might impose punitive tariffs on certain items imported from China, particularly in traditional industries such as textiles, chemical products and steel. In 2015, about 16 per cent of textiles, 21 per cent of rubber and 13 per cent of base metal exported from China went to the US. Trade frictions could extend to higher value-added products as well, such as mechanical and electrical products, which comprise over 40 per cent of China’s total exports to the US.

Overall, the economic impact of a Trump presidency on China would be a narrower trade surplus and more capital outflows, but the potential for a full trade war with the US is low.

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