Want a U.S. Recession? Try Trump’s China Divestment Plan

(Bloomberg Opinion) -- Is President Donald Trump serious about forcing American companies out of China? His advisers talk like it.

The president would have the authority for such a move, Treasury Secretary Steven Mnuchin and White House economic director Larry Kudlow said in television interviews while their boss was at the G-7 – though there’s “nothing right now in the cards,” Kudlow added.

Trump had suggested the policy in a series of Tweets capping a week marked by tussles with the Fed and China: “Our great American companies are hereby ordered to immediately start looking for an alternative to China, including bringing your companies HOME and making your products in the USA.”

There’s a difference, though, between what’s possible and what’s advisable – especially given the way the world economy seems to be teetering on the edge of a downturn. Ten-year Treasury yields fell to their lowest level since 2016 and Hong Kong’s Hang Seng Index dropped the most in nearly four months Monday as fears of a deeper trade conflict ramped up.

The U.S. president has extraordinarily wide-ranging powers granted by the 1977 International Emergency Economic Powers Act. There are around 29 national emergencies ongoing under the terms of the law, which was originally intended to ensure such decision-making didn’t get perpetually stuck in Congress. The powers were last invoked in May when Trump threatened tariffs on Mexico if it didn’t stop flows of migrants.

The question now is whether Trump would follow through or, as in the Mexican case, fold. The likelier result is the latter because, as with the U.S. banking sector in 2008, the investments of American businesses in China are too big to fail.

The U.S. had a stock of $107.6 billion in foreign direct investment in China in 2017, according to the Office of the U.S. Trade Representative – a figure that’s likely to be larger now in spite of trade tensions, since FDI stocks rarely fall outright. On top of that, it’s worth considering the $81.2 billion in FDI in Hong Kong and the $2.5 billion in Macau, given the risk that a crackdown by the Chinese government in Hong Kong threatens that territory’s special status – a prospect that’s already been raised by lawmakers and officials in Washington.

What would sanctions on China look like? The act has mostly been used to freeze assets of targeted countries and prohibit U.S. businesses from transactions involving those countries; the tariffs proposed in May against Mexico were a relatively novel use of the powers. Either way, the stated intention would be to force American businesses to divest their assets in China, a sum that’s potentially as high as $191.3 billion.

That’s an alarmingly large sum. The reduction in the value of U.S. commercial banking sector assets between their peak in December 2008 and their trough in March 2010 was only $801 billion, and that shift was enough to provoke a financial crisis from which the world is still recovering. Much smaller reductions can easily spark downturns: The decline in the value of U.S. commercial and industrial loans from their highest point before the 2001 recession to their low in 2004 was $231 billion, or around $310 billion in 2019 dollars.

U.S. businesses forced to sell out of China almost certainly wouldn’t end up writing their assets down to zero – but in such a chaotic fire-sale, they’d be unlikely to get a good price. 

Beyond that, there would be a loss of revenue for businesses such as General Motors Co., Caterpillar Inc. and Boeing Co., which count China as one of their largest markets. That would compound the problem of servicing loans taken to acquire now-sold assets in the country.

Of course, such a scenario is so dramatic as to be improbable. More likely, given the bipartisan anti-China sentiment in Washington, is a scenario where economic relations between China and the U.S. gradually dwindle over the years ahead.

Even Trump probably wouldn’t follow through on a sudden stop and divestment, because the effects on the world’s already-shaky economy are simply too serious to contemplate. The idea of a forced withdrawal from China may be scary for U.S. businesses. In truth, it’s a paper tiger.

To contact the editor responsible for this story: Patrick McDowell at pmcdowell10@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

David Fickling is a Bloomberg Opinion columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

©2019 Bloomberg L.P.