Will Trump change his mind on China again?

“I’m very capable of changing to anything I want to change to.” —Donald Trump

During the presidential campaign, the fifth point in Donald Trump’s “7 Point Plan to Rebuild the American Economy by Fighting for Free Trade” was to “Instruct the Treasury Secretary to label China a currency manipulator.”

This year, on April 2, Trump told the Financial Times, “When you talk about currency manipulation … [the Chinese] are world champions.”

Ten days later, Trump said to the Wall Street Journal, “They’re not currency manipulators.” That, along with several other policy U-turns, signals important victories by White House pragmatists in their ongoing battle with the Trump administration’s nationalist faction, resulting in a significantly lower risk of trade tensions with China.

In the near term, this trend—paired with strengthening corporate profits in China—should lead to improved investor sentiment towards the country which accounts for about one-third of global economic growth.

There is, of course, no guarantee that Trump will not revert to the China-bashing rhetoric of his campaign. Disagreements with President Xi Jinping over dealing with North Korea could fuel retaliation on economic issues. (On Sunday, the President tweeted, “Why would I call China a currency manipulator when they are working with us on the North Korean problem? We will see what happens!”)

Another potential problem could be lack of progress towards reducing the bilateral trade deficit by July 16, the end of the 100-day period agreed to by the two presidents during their summit market.

But, even if Trump were to make another U-turn and pursue currency manipulation and punitive tariffs on Chinese imports, those steps would have only a modest impact on the Chinese economy. The concrete consequences of China being labeled a currency manipulator are, well, nothing.

And if Trump were to apply a broad 15 per cent tariff on imports from China—the highest rate permitted under US law on an emergency basis—the impact on the Chinese economy would be significant, but it would be much lighter than most people expect, because China is no longer an export-led economy.

Last year, domestic consumption accounted for two-thirds of China’s economic growth. Moreover, only about 18 per cent of China’s exports go to the US, while Europe, Japan and ASEAN countries combined take more than a one-third share, limiting the impact of any new barriers to the American market

Andy Rothman Investment Strategist Matthews Asia