COMMENT:

New Zealand is a spectator of the "trade war" threatened between the United States and China.

New Zealand's economy is secure in the short term, but if the dispute escalates, the general diminution of global commerce and confidence will impact New Zealand.

New Zealand need not stand at either nation's side, but rather by the principles of free and fair trade, and by the institutions that support the rule of law upon which the global economy depends. Only these can be New Zealand's enduring allies.

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In April 2018, Trump signalled his intention to place tariffs on over 1000 Chinese products. China immediately threatened retaliatory tariffs.

On 20 May, the US and China issued a communiqué stating an agreement had been reached and that punitive tariffs would not be imposed.

But Trump backtracked and announced that, in the interest of national security, he would impose a 25 per cent tariff on US$50 billion ($72.5b) of Chinese imports containing "industrially significant" technology.

What is often framed as a trade war between strategic competitors could be more accurately described as disputes between uncomfortable economic partners.

The US buys electronic and high-tech products from China that it cannot manufacture competitively elsewhere.

It also buys appliances and other basic household items that has allowed American families to maintain reasonably low living costs for decades.

In 2017 the US exported US$20b worth of agricultural products to China. Although China may have alternative sources for some of these, shifting to other suppliers could result in inflation of food prices.

Trump's figures are misleading. The US Government's official data has the trade deficit with China in 2017 at US$375b when accounting only for goods, and US$336b when services are included (lower than Trump's alleged US$500b).

Taking these figures as a direct representation of the trade imbalance would be misreading the nature of global supply chains, of which China is often the last stage.

Take Apple's iPhone, which is assembled in China from components sourced around the world.

The iPhone X costs around US$400 to manufacture and sells for around US$800 wholesale and US$1200 retail. Of the US$400 manufacturing cost, only 3-6 per cent goes to China-based contract manufacturers.

Apple's iPhone 7/7S series alone accounted for nearly US$16b (over 4 per cent) of the official US$375b goods deficit.

In calculating its deficit with China, Washington uses the gross value of other imported products as it does with the iPhone, resulting in a severely distorted total number.

Trump and his advisors miss the point that no other country is responsible for the fact that in the last 40 years the US has lived, and continues to live, beyond its means.

The US suffers from a multilateral trade imbalance stemming from consuming more than it produces, rather than just a bilateral problem with China.

A trade war with China is, by association, also a trade war with longstanding US allies like Japan, South Korea, Taiwan, and much of Southeast Asia.

Along with its allies, the US risks damaging its own companies such as Boeing, Ford, Starbucks, KFC and Apple, all of which sell to or manufacture significantly in China. And it is ironic that, while Trump's narrative of the Chinese "ripping off America" and "stealing American jobs" has won him support in the struggling manufacturing and agricultural states.

These states have the most to lose in a trade war. This is a war which would see the US engaging in an act of economic self-harm.

The US and China are likely to arrive at a long, uneasy truce rather than a binding agreement or a full-scale trade war, but any conflict will exact an unnecessary cost on the global economy.

China remains New Zealand's number one trading partner, and a significant portion of exports to China are purchased by middle- and upper-middle-class households that are less likely to be impacted by any food inflation stemming from Chinese tariffs on US agricultural products.

Chinese tariffs on American beef and dairy may even be of limited benefit to New Zealand.

Cost-conscious Chinese consumers put off by more expensive US products may consider better-priced Kiwi options.

New Zealand can and should continue to benefit from Chinese demand. It will be difficult to manage a stronger insistence from both Washington and Beijing that New Zealand take sides.

Already, there are voices in New Zealand warning of undue Chinese interference, seemingly encouraging New Zealanders to be afraid of China, and once again casting Chinese New Zealanders as a target of suspicion.

Prime Minister Jacinda Ardern has taken a different tack, stating that it is wrong to associate the issue of foreign interference with any one country, and that New Zealand is an independent nation that depends upon its laws and institutions to uphold its values.

New Zealand should continue to question which forms of influence are welcomed and which are not — from China, the US, and any country with which it has relations.

Any double standard, whether in regard to commercial matters such as investment or to New Zealand's diverse citizens and residents, harms all New Zealanders, because it betrays the country's core values.

The way ahead is to continue to engage in respectful and open partnerships with both the US and China, while retaining the independence for which New Zealand is known and respected around the world.

- David Mahon is Executive chairman and Charlie Gao a partner in Beijing-headquartered investment manager and advisory firm Mahon China.