US-China relationship will likely remain tense – Nordea Markets

According to Amy Yuan Zhuang, Chief Asia Analyst at Nordea Markets, although the recent trade actions are expected to have limited economic impacts, the relationship between the two largest economies in the world will likely remain tense.

Key Quotes

“It is mainly due to China’s rapid rise that we expect to continue. China’s rise will inevitably require further changes in its growth model. For China to avoid the middle-income gap, it is necessary that it moves fast in the technological ladder. Instead of acting as the simple assembler of all products, China is keen to retain a higher share of value added. This is evident as more components in the exported products are produced in China rather than being imported. These ambitious goals are set for example in the Made in China 2025 programme.”

“At the same time, China is getting increasingly confident on its own growth model. President Xi is probably not aiming at large-scale liberalisation of the economy but rather wants the state-owned companies to be reformed to make them stronger in global competition. The level of party control is also about strengthening rather than diminish. It is therefore difficult to see how foreign companies’ role in China would increase. Surveys already show that both European and American companies are targets of unfair treatment in China while Chinese companies are investing in Western economies and gaining market shares.”

“Tensions between China and many of its trading partners are therefore likely to heat up in the coming years, and goods trade is only a small part of the tensions. We have already now noticed that the US targets not only Chinese imports to China but also investments. Furthermore, better protection of patents and IPRs in general is one of the key policy areas.”

“Thus, even if much of the discussion is centred on Trump and his personality makes the future more uncertain, we think that the intentions of the US to protect the economy are wider. However, such intentions are probably something else than rising tariffs to the cheap imports from China, which are widely known to benefit the US consumers.”