Trade Warning to China Over North Korea Carries Risks to U.S. Economy

By Kate Davidson Features Dow Jones Newswires

President Donald Trump's stern warning that the U.S. may halt trade with countries doing business with North Korea was seen as a direct shot at China, the regime's biggest trading partner. But China is America's largest single trading partner as well, highlighting how difficult it would be for the Trump administration to follow through on its threat.

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North Korea sent 83% of its exports, valued at about $2.34 billion, to China in 2015, consisting of such items as coal briquettes, according to data compiled by MIT's Observatory of Economic Complexity. Going the other way, China was the source of about 85% of North Korea's imports, such as refined petroleum, synthetic fabric, delivery trucks, soybean oil and broadcasting equipment, the data show.

China's goods and services trade with the U.S., meanwhile, totaled nearly $650 billion in 2016, figures from the U.S. Trade Representative's office show. China produced more than one-fifth of the total goods the U.S. imports, from cellphones and computers to furniture and footwear. After Canada and Mexico, China is the U.S.'s third-largest goods export market, which totaled nearly $170 billion in 2016. Top American exports to China include planes and helicopters.

Because the trade volume is so heavy, analysts say severely restricting trade with China would be nearly impossible to implement without wreaking havoc on the U.S. economy, leading some analysts to dismiss the threat as not credible.

"We think there is little prospect of Trump carrying out his threat to 'stop all trade with any country doing business with North Korea,' given that the U.S. imported $479 billion of goods and services from China last year," Capital Economics analyst Andrew Kenningham said in a note Monday.

At the same time, Mr. Trump has made trade a focus of his administration, saying that the U.S. trade deficits with China and other countries are the result of unfair trade deals that also hurt American factories and workers.

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What exactly could be affected by a move to restrict Chinese trade? In 2015, 63% of the computers the U.S. imported came from China, along with 29% of imported telephones, 49% of furniture imports, 73% of broadcasting equipment, 53% of leather footwear, 79% of mattresses and 39% of knit sweaters, just to name a few categories of goods, according to MIT's OEC project. In terms of exports, China received 26% of all planes and helicopters the U.S. exported that year, as well as 55% of soybean exports and 18% of auto exports.

If those imports were suddenly cut off or severely restricted, businesses would have to scramble to find alternate suppliers, and could face higher costs as well. American exporters and multinational corporations -- such as farmers, aerospace companies, car makers and Hollywood movie studios -- could be shut out of one of the world's biggest markets.

At an emergency meeting of the U.N. Security Council Monday, U.S. ambassador to the United Nations Nikki Haley doubled down on the administration's warning that economic consequences were on the table as it weighs how to respond to Pyongyang's escalated nuclear threats.

"We will look at every country that does business with North Korea as a country that is giving aid to their recklessness and dangerous nuclear intentions," she said.

China has ramped up its trade with North Korea, which increased 6% last year and now accounts for about 93% of North Korea's overall trade, according to an annual report from the Korean Trade-Investment Promotion Agency. North Korea's other top trading partners include Russia, Thailand, Philippines, Pakistan and India, which is the U.S.'s ninth biggest trade partner.

More likely, and more feasible, than cutting off trade with such countries are new unilateral sanctions on firms and individuals in other countries the U.S. determines are helping North Korea's weapons program, Eurasia Group analysts Scott Seaman and Evan Medeiros said in a note Monday.

"More Chinese firms will be in the crosshairs, especially if Washington perceives Beijing as not responding forcefully enough to North Korea," they wrote, but said the U.S. will still be reluctant to sanction large Chinese banks given the risks of a strong negative reaction from Beijing. China, in response, could move to reduce its crude oil exports to North Korea for a limited time and support U.S.-led efforts for tighter sanctions on Pyongyang.

Such moves would follow a series of efforts from the Trump administration to increase trade pressure on China, including directing aides to explore the prospect of sanctioning Beijing for the "unfair" acquisition of American intellectual property.

Write to Kate Davidson at kate.davidson@wsj.com

(END) Dow Jones Newswires

September 04, 2017 17:13 ET (21:13 GMT)