Digital Art: Sepfry Ng

America’s new president is no fan of China. Donald Trump complained during his campaign that the world’s second-biggest economy was stealing American jobs, engaging in state-sponsored cyber espionage and manipulating its currency.

“Look at what China is doing to our country. They are using our country as a piggy bank to rebuild China,” he said during the first presidential debate with Hillary Clinton. He has even tweeted that the “concept of global warming was created by and for the Chinese in order to make US manufacturing non-competitive.”

Combined with his penchant for ill-considered late-night tweeting and his promise to “start winning” in China, there are some concerns that Trump is setting the two countries on an economic collision course, and possibly worse.

It is true that Trump said a lot of outrageous things for no other reason than to get elected—even his spokespeople have admitted that we should take the president seriously, not literally. But the anti-China rhetoric is far more mainstream than some of his other pronouncements—and far more important to his voters than locking up Clinton or forcing Mexico to pay for a border wall.

“Trump knows his key constituencies are the rust-belt states that were crucial for his election victory, so appearing strong to the Chinese is extremely important,” according to Mark Wills, managing director and head of Asia-Pacific for the investment solutions group at State Street Global Advisors.

Indeed, Trump set out his tough-on-China stance immediately upon assuming office when he undermined decades of diplomatic convention and appeared to question America’s commitment to the “One China” policy. He had to walk that back in the end, but the message was clear: everything is up for negotiation, nothing is certain.

He has threatened to impose huge tariffs on Chinese goods and appointed two prominent anti-China figures to important trade positions: Peter Navarro, who wrote a book titled Death by China, is now director of the newly created National Trade Council; and another China critic, Robert Lighthizer, is the US trade representative.

There is certainly a lot at stake. Trade between the two countries is huge. America imported US$463 billion of goods and services from China during 2016, and exported US$116 billion in the other direction. In Trump’s world, this trade deficit of US$350 billion is “not winning,” but it is difficult to argue that a Chinese labourer assembling iPhones in a Foxconn factory in Shenzhen for US$2 an hour is getting a better deal out of this arrangement than an American consumer buying a US$700 smartphone in New York.

“If he does try and penalise exporters by implementing, for example, a 45 per cent increase in tariffs, the person that will ultimately hurt is the end consumer in the US,” says Catherine Yeung, investment director
at Fidelity International in Hong Kong. “It’s very hard to replicate Foxconn’s capacity for Apple devices.”

This is a key point—iPhones aren’t assembled in China because of cheap labour or the weak Chinese currency, at least not primarily. There are plenty of countries where workers earn less. Chad?

China’s real advantage is its abundance of workers (Foxconn employs one million people, mostly in one Chinese city) and its proximity to Korea, Japan and Taiwan, where most of the components that go into modern smartphones are actually manufactured. It also has other advantages over Chad, such as reliable electricity and decent transport infrastructure, and Hong Kong, which offers a world-class container port and modern financial services.

Putting an iPhone factory in Michigan solves very few problems for anyone. These are not jobs that anyone really wants and the cost of labour in the US would make robots a much more competitive proposition than they are in China—if not today, then very soon. It would make more sense to let the Chinese compete with robots instead of importing that problem to America.

And despite Trump’s whining about currency manipulation, the obvious reality is that China has recently been trying to slow the depreciation in the value of the yuan through increasingly desperate measures.

His own Treasury Department can confirm this. It uses three criteria to classify “unfair currency practices”: a significant bilateral trade surplus with the US, a material current account surplus and persistent one-sided intervention in the foreign exchange market. According to its latest assessment in October, China met only one of these criteria (whereas American allies Japan, Korea and Germany met two).

Indeed, China has tried to move away from benchmarking its currency against the dollar in favour of a basket of currencies that reflects the real composition of its trade with the rest of the world.

“Given the simple fact that the yen, pound and other trade-weighted currencies have fallen, it makes complete sense that the renminbi has also been weaker against the US dollar, in the same way that if they all went up against the dollar, the renminbi would probably appreciate,” says Josh Crabb, head of Asian equities at Old Mutual Global Investors.

Markets have largely ignored Trump. Chinese stocks have been rising steadily since early 2016 and US stocks have been moving up since President Barack Obama took office. Neither of those trends has changed.

“Markets are rational,” says Crabb. “They’re saying the economy is getting better.”

But is Trump's relationship with China really any different from his predecessors? Find out in part two.