Chinese exports to America rely on products produced by US allies in Asia – which means they could suffer collateral damage from tariffs
A full-blown trade war between the United States and China is likely to damage the economies of American allies such as South Korea, Japan and Taiwan because they supply the bulk of components and raw materials used in the exports targeted by Donald Trump.
Imported goods account for around half of the total value of Chinese exports to the US, which means that tariffs are likely to have a significant knock-on effect on the countries that produce the components needed to make the goods bought by American consumers.
The US President has pledged to slash the US$375 billion goods deficit between America and China, which accounted for almost half the country’s trade gap last year.
Trump has fiercely attacked China’s trade and industry policies and threatened to slap punitive tariffs on shipments from China starting from July 6, which has prompted furious threats to retaliate from Beijing.
Whereas US goods exported to China are mostly agricultural produce or finished products consisting of mostly American components, China’s exports to the US are typically Chinese-assembled goods that contain many foreign parts and components.
This means that when Washington hits Beijing on trade, it also risks hitting China’s foreign suppliers, which could undermine US leadership in the region.
If the US deficit with China is calculated in added value terms, or the part originally contributed by China, economists argue that the figure would be at least one third smaller.
That means China’s trading partners, many of them American allies, will share the blow from punitive trade measures.
A case in point is iPhone production: mainland China imports memory chips from South Korea and Taiwan, the displays from Japan and South Korea, and the design from the US; and it assembles these “elements” into iPhones.
“From a value-added perspective, when an iPhone is shipped from China to the US, it is actually South Korea, Taiwan, Japan, China, and the US itself who are sending exports to the US,” Zhang Zhiwei, chief economist of Deutsche Bank in Hong Kong, said.
“In fact, nearly 37 per cent of China’s exports to the US in 2015 consisted of value-added imported from other countries”, he said.
While China has the reputation of being the world’s factory, its economy relies on a large amount of processing trade.
