China’s True Bargaining Power by Kusum Sull

As the tensions of the U.S.-Sino trade war continue to impact China’s economic slowdown, positive trade talks are more necessary than ever for both the U.S. and China, albeit for China more so than the United States. China’s weaker performance in equities suggests that it has faced a greater negative impact than the U.S. has. Hence, the idea that the U.S. has the upper hand or is at least paying less of a price from the current trade war is not far-fetched at all. However, amongst the constant coverage of this trade war, there are subtle factors to consider when assessing to what extent China’s bargaining power can protect its own interests.

Firstly, the largest Chinese export to the United States is in fact capital – not manufactured products. As of June 2018, China remains the largest holder of U.S. government debt at $1.2 trillion. Thus, China’s ability to leverage their capital to achieve more favourable terms – in a possible deal – is arguably one of their best tools in this trade war.

Furthermore, U.S. firms’ incentive to enter the Chinese market is highly dependent on the Chinese consumer. However, what commonly seems to be dismissed is the assumption that the Chinese consumers and workers go hand in hand. With a population of almost 1.4 billion people, consisting of different dialects, socioeconomic backgrounds and most importantly highly unequal per capita incomes, demand for U.S. products vary across the country. With Chinese consumption slowing, any further economic damage to China’s consumers and workers can have harmful repercussions for U.S. firms with ties to the Chinese economy.

However, China’s bargaining power may not fully protect its own interests when taking into account the roles of Chinese manufacturing and foreign direct investment. Despite the widely held understanding that China is the most dominant manufacturing economy in the world – indicated by the “Made in China” mark – it is important to avoid overestimating the true value of manufacturing in China. Apple is a prime example. The California-based iPhone producer’s Chinese factories are mostly invested in assembling hardware components of various iPhone products. Since the individual components of the products originate from other countries such as Japan, Taiwan and the U.S., the cost of assembling iPhones is actually 3-6% of the total product cost.

Furthermore, figures from 2017 indicate that U.S. foreign investment was $107.6 billion, whereas Chinese foreign investment in the U.S. was $39.5 billion. This indication that China’s corporate presence in the U.S. is 37% of what the U.S. holds in China is an additional factor that may limit Chinese bargaining power during trade talks.

 

China’s domestic economic issues such as shadow banking and the particular slowdown in the housing market, are additional factors that can partly explain the performance of the CSI 300 since December 2017. Hence, the stock market cannot be solely relied upon in understanding the dynamics of the ongoing trade war between the two economic giants. The subtler points may not suggest China has the upper hand in trade talks. Nonetheless, amongst the chaos of threatening sanctions and talks about potential trade deals, it is crucial to consider factors less apparent that impact China’s ultimate bargaining power.

 

 

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