A strong case for calm talks to resolve trade row

To further assess the potential for China to find alternative buyers for its products, we considered a wider range of goods and calculated an import similarity index for various countries. This compares the degree to which US imports from China match the imports of other countries (imports from the world minus imports from China).

An index of 100 means that a country imports exactly the same goods the US imports from China from the rest of the world, while 0 means the country does not import any items on the list of US imports from China. Thus, a higher index indicates a better match as an alternative export destination for Chinese goods.

In conducting our assessment, we looked at various categories, including consumer products and capital goods. We then selected a basket containing 242 product items which make up about 60 percent of US imports from China. The resulting import similarity index ranged from 88 for India to 12 for Switzerland. At the same time, we also considered the capacity of a given country to import.

Multiplying the index with the size of imports (excluding China) gave us a list of countries which are the best candidates to replace the US for China's exports. The five countries that topped our list are Germany, the UK, the Netherlands, France and Italy. Canada and Japan ranked sixth and seventh respectively. Among developing countries, only India stands out.

Our analysis has three main conclusions:

First, the trade relationship between the US and China is deeply entrenched. It is a relationship between a very large and insatiable market and a very well-oiled production machine. Replacing this relationship with any other country is impossible in the short to medium term and possibly in the long term also. "Calm" negotiations between both parties are indeed the only way to resolve the current impasse and a tit-for-tat approach damages both sides.

Second, it is necessary for China to build an even stronger relationship with the EU, as it stands as the only viable alternative to demand from the US. Both western and eastern Europe feature strongly in our analysis. This also implies that initiating a "great" deal with the UK, which is preparing to exit the EU on Oct 31, would be in China's interest.

And, third, developing existing and new markets within China to reduce the dependence on foreign markets is definitely a good idea for Chinese companies.

Bala Ramasamy is a professor of economics and associate dean at China Europe International Business School (CEIBS). Mathew Yeung works for the Open University of Hong Kong.