It is time to think about what at one point was unthinkable, Deutsche Bank says in a November 28 report. With the Brexit vote and the US election “clearly” showing how conventional wisdom can backfire, the bank’s Chief Economist Zhiwei Zhang and Economist Li Zeng look at the potential winners and losers of a China trade war.

Trump Tariff On Chinese Exports Would Kill China

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China trade war

China only represents 16% of the US trade deficit, says Deutsche Bank

The headline number that China accounts for nearly 50% of the US trade deficit is slightly misleading. In fact, when accounts are made for imported parts into China, what is actually manufactured in the Asian nation only accounts for 16% of the US trade deficit, the report points out.

It a trade war were to begin, the US would likely focus on five primary sectors: Computer and electronics; Automobiles, trailers and parts; Apparel, leather and allied products; Electronic equipment and parts; and Furniture.

Targeting solely China may prove problematic, stated the report, titled “The risk of de-globalization: a US-China trade war?” Higher tariffs low-skill manufacturing such as furniture, textile and apparel products are likely to just push manufacturing to other developing nations. China doesn’t export that many cars and electronic products are often assembled by multinational companies using imported parts.

Targeting only China for a trade war is likely to create a re-shuffling of overseas manufacturing, not necessarily a move that “brings back jobs.” If this were to occur, however, the nations that could benefit include Mexico, with overall exports up 3%, Vietnam (up 1.7%); Canada (1.3%); Pakistan (1.1%), and the Philippines (0.9%).


China would likely strategically target US industry in a trade war

If the US were to engage in a targeted trade war, China would likely retaliate by focusing their wrath on high value manufacturing also restricting agricultural product imports.

The focus on what markets they might pick to target would be based on the significance of the market/sector impact in the US; making certain not to target critical imports; and targeting imports where it would be easy to find substitute. Examples of such products include: Aircraft; Seeds and fruits; Pulp; Prepared animal food; Wood products; Leather; Cotton.

Determining which industry segments would be least impacted (or even positively impacted) by a trade war involves several calculations.

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Looking at the ratio of domestic demand to domestic production, for instance, interesting distinctions are drawn when just considering the US chemical and electronic equipment markets. The two sectors had similar size 2015 trade deficits, $69 billion and $61 billion respectively. Looking at the ratio of domestic production to domestic demand tells a different story. It was 92 percent for chemicals but only 66 percent for electrical equipment, the report noted.

“This suggests that, despite similar size of trade deficits, the electrical equipment and parts sector was hurt more deeply than “chemicals”—the US has ‘given up’ more domestic production of electrical equipment and parts than chemicals.”

Deutsche Bank takes the analysis further:

Among industries with low domestic production to demand ratios in 2015, there seem to be three groups: (i) Those whose situations had worsened over time, including “computer and electronics”, “electrical equipments and parts” and “furniture”. For instance, in 1997, the US’s domestic production of “computer and electronics” could meet 92 percent of its domestic demand. It dropped to 72 percent in 2006, and was only 61 in 2015. (ii) Those where most “damages” by imports seemed to have taken place prior to 2006. This includes “textile, apparel and products” and “automobiles, trailers and parts”. (iii) The last group is “oil and gas extraction” and “miscellaneous manufacturing”. Although their domestic production to demand ratios were low in 2015, they had been stable or even improved compared with early periods.


What could happen is a lesson in the “Art of the Deal” rather than a China trade war

In the end what might occur under the Trump administration isn’t so much a brutish trade war, but rather a lesson in the “Art of the Deal,” to steal a title from a Donald Trump book.

“The rhetoric of a trade war might well be a threat that intends to bring China to the negotiation table,” the report observed. There are other ways to reduce trade deficits. China could agree to import more goods from the US, for instance. China could further remove restrictions and expanding services trade with the US, where the US has been running surplus.

If negotiations and a deal were to rule the day, the biggest winners could be the aircraft industry, high-tech firms and service sectors in the US, the report predicted.