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Mainstream, VOL LVI No 33 New Delhi August 4, 2018

Sino-US Trade War

Tuesday 7 August 2018

by Rajaram Panda

This article was sent quite sometime ago but could not be used earlier for unavoidable reasons. It Is now being published as its basic contents have not lost their significance as yet.

In his now well-known disruptive diplomatic style, US President Donald Trump has started a virtual trade war with China whose reper-cussions shall be felt around the world in no mean measure. The world’s two largest economies are now at loggerheads after the Trump Administration imposed tariffs on Chinese goods. Beijing retaliated with tariffs on US goods, only to receive a warning from the US that it will impose fresh tariffs. This tit-for-tat move has its own domino effect on world stocks as investors remain jittery while keenly observing the development.

A trade spat between the top two economies of the world began in April with Trump imposing tariffs on steel and aluminum imports into the US from China. China retaliated by imposing additional tariffs worth about $ 3 billion on 128 US products. The core of Trump’s problem is that his country, the world’s largest economy, has a trade deficit of almost $ 500 billion with China, the world’s second largest economy, and he has said that he wants to correct this imbalance. He has blamed previous US Presidents for allowing such a situation to continue for years.

The bigger question that begs an answer is: is it trade skirmish or war and who gets hurt and how much? In the run-up to his presidency, Trump threatened to upend the global trade system with lots of threats but saw no action in his first year in office. But after his summit meeting with the North Korean leader, Kim Jong-un, in Singapore on June 12, Trump moved swiftly with a 25 per cent tariff on $ 50 billion of Chinese imports, weeks after he had imposed taxes on imported steel and aluminum, including those from close allies like the European Union and Canada. Those actions followed earlier measures on washing machines and solar panels.

Are such actions by the Trump Administration to be classified as symptomatic of a trade war? The more worrying part is: what economic consequences these actions would entail for the US, China and the world in general? A “trade war” refers to measures and counter-measures on import restrictions that escalate over time, causing trade between two countries to break down. Though there could be no specific definition on the term ‘trade war’ as the situation when tariffs are raised could warrant such a measure, there is always a thin line between trade skirmish and trade war. This is subjective.

So, how to explain the current trade frictions between the US and China? Opinions could differ on how one looks at it. One way to see is that the Trump Administration will meet Chinese retaliation with further retaliation and that the two sides are no longer engaged in productive talks to defuse tensions. The other way to see is that it is not a trade war as yet. This view holds the position that a trade war begins when countries start responding unilate-rally, and without respect to international rules in terms of levels of tariff retaliation that they engage in. In the current case of the US-China spat, China, the European Union and other trading partners have responded within the confines of the World Trade Organisation rules and so the frictions do not qualify to be labelled as trade war. Trump is aware that American companies frequently allege of being treated shabbily while doing business with China. US companies are often forced to partner with Chinese companies to be allowed to do business in the country. They also allege that their most advanced technologies are stolen. There are other concerns as well. The Trump Adminis-tration has identified a list of goods to be subjected to tariffs in the high-tech sectors, including aerospace, telecommunications equipment and robotics.

Not to remain quiet, China placed tariffs on $ 50 billion worth of imports from America in retaliation. The Trump Administration was quick to respond, thereby escalating by pulling another $ 100 billion of goods into the mix. This increased the possibility that the dispute would spiral to encompass ever larger swathes of goods.

For China, its high-tech industries are the core of its economic strategy of the future and would not be willing to surrender the advantages so easily. On the other hand, as the balance of trade is unfavourable to the US, it implies that the US has more potential Chinese imports on which it could slap punitive tariffs than the Chinese could possibly do. It was only in May, both sides seemed to have successfully reached an accord in which China agreed to buy more American agriculture and energy products. Had that been honoured, the US trade deficit with China could have been reduced somewhat. But since the accord did not address the longer-term issues around technology theft, the accord fell apart. Had Trump taken US allies such as Canada, Japan and the European Union on board, he could have found himself in a stronger negotiating position. But Trump spoilt relations with Canada by publicly rebuking the Canadian Prime Minister at the G-7 summit, thereby leaving the issue of steel and aluminum tariffs unaddressed. This left Trump to deal with China all by himself.

Why has Trump chosen such an aggressive trade policy and is it going to severely impact the US economy? Given the US gross domestic product of nearly $ 20 trillion, a new tax on $ 50 billion or on $ 200 billion which Trump has threatened on Chinese imports is unlikely to help much the US economy. The fear of Chinese retaliation damaging individual American industries is also likely to be minimal as most of the economic activity in the US is for domestic consumption and little for export that constitute about 12 per cent of the GDP.

This is not to say that Chinese retaliation shall leave no adverse impact at all. For example, soyabean prices could fall dramatically as China would buy fewer soyabeans in retaliation. Escalating prices of steel and aluminum could also make US products less competitive against global competitors. Yet, trade disputes if not handled carefully could cause economic damage without triggering a recession.

The escalating trade war between the world’s two largest economies reached a new crescendo when Trump threatened to impose tariffs on an additional $ 200 billion worth of Chinese goods unless Beijing ceases its “unfair practices”. This threat came after China responded by saying it would hit 659 US products worth $ 50 billion after Trump applied tariffs on $ 50 billion in Chinese imports. Trump insists that China has been unfairly benefiting from a trade imbalance with the US for years and asserts that China is determined to keep the US at a permanent and unfair disadvantage, as reflected in the massive $ 376 billion trade imbalance in goods.

Trump ordered the US Trade Representative (USTR), Robert Lighthizer, to identify a second tranche of goods imported from China for tariff of 10 per cent. After the legal process is complete, these tariffs worth $ 200 billion, for a possible total of $ 450 billion, will go into effect if China refuses to change its practices and increases its tariffs yet again. The legal processes are subject to a public comment period, a public hearing and some revisions.

Trump has threatened further action by pursuing additional tariffs on another $ 200 billion of goods, if China increases its tariffs yet again. Trump expects the trade relationship between the two countries to be equitable. Trump is also angry that China has not demonstrated to change its unfair practices related to the acquisition of American intellectual property and technology. He expects China to change its unfair practices, open its market to US goods and accept a more balanced trade relationship with the US.

Not to be outdone, China’s Commerce Ministry responded swiftly, warning that if the Trump Administration followed through, China would “have to adopt comprehensive measures combining quantity and quality to make strong countermeasures”. It gave no details, however, how it would “defend the interests of the Chinese people and enterprises”. Beijing was not happy that US Secretary of State Mike Pompeo accused China of engaging in “predatory economics” that it operates against the rest of the world and this problem is “long overdue in being tackled”. Pompeo made these remarks at the Detroit Economic Club as global markets reacted to trade tensions between the two countries. He said China’s recent claims of “openness and globalisation” are “a joke”.

Beijing denounced Trump’s threat of new tariffs on $ 200 billion of Chinese goods as “blackmail” and warned that it would respond with “strong countermeasures”. China scrapped deals made with the US to narrow China’s politically volatile trade surplus with the US by purchasing more American farm goods, natural gas and other products. The US and China, having the world’s biggest trading relationship, have strained their official ties over complaints that Beijing’s industry development tactics violate its free-trade pledges and hurt American companies. Though Europe, Japan and other trading partners raise similar complaints, Trump has been unusually direct in challenging Beijing and threatening to disrupt such a large volume of exports.

China’s state-controlled daily, China Daily, in an editorial, slammed Trump’s trade practices as self-harming and affirmed that his Adminis-tration tends to attribute all the successes to its own merits while accusing others of being the cause of all the US’ problems. China has been Trump’s whipping boy. During his campaign trail to the presidency, Trump accused China of being responsible for “the greatest theft in the history of the world” and claimed it was “raping” the US. He promised the people to “cut a better deal with China” to help US businesses and workers compete. 

The daily was scathing in its attack by observing that given an inch, Trump wants to grab a mile. It accused the Trump Administration of trying to “suck the lifeblood from the Chinese economy” and resolved its best to avoid “being a victim of the Trump Administration’s growing blood lust”. 

By escalating the dispute with China, Trump may also be warning other trading partners with whom he has been feuding, including Canada and the European Union. The Wall Street viewed the escalating trade tensions with wariness and feared that they could strangle economic growth. Others feared that a “tariff battle” could result in price inflation and consumer debt, “historic ingredients for an economic slowdown”.

Both the US and China put together account for about 40 per cent of the world’s gross domestic product. An exchange of sanctions and retaliatory measures between the two will inevitably increase concern among markets and companies, leading to stagnation of the trade and investment in the world. It is for sure that such moves would hamper the growth of the global economy, besides exerting serious adverse impacts on both the United States and China. It is desirable, therefore, that both the feuding parties engage in dialogue to resolve their differences on trade issues. By imposing punitive measures, Trump may be aiming to trim the US’ trade deficit with China and thereby curb China’s attempt to build economic hegemony in leading-edge industries.

The manner of Trump conducting trade diplomacy demonstrates that there is a trust deficit between the US and China, making it difficult for constructive trade negotiations to continue any longer. It is desirable that Trump drastically amend his negotiating tactics to press trade partners to make concessions and be more accommodative to the concerns of partner countries.

So far, we have seen mostly threats and all stakeholders are hoping that both sides shall return to the negotiating table to resolve the issue. The risk is that if both sides do not ease their hardened stance, it could lead to a full-blown trade war, which is avoidable at all cost. If Trump stands by his resolve and triples the amount to potentially $ 450 billion, it would mean hitting about 90 per cent of all Chinese imports to the US. According to the US Census Bureau, in 2017, China exported almost $ 506 billion of goods to the US and imported about $ 130 billion from America.

The first tranche of tariffs are set to take effect on July 6 on 818 types of goods imported from China valued at about $ 34 billion. The US Trade Representative’s office is compiling a list of an additional $ 16 billion worth of products that would be assessed 25 per cent duties at a later date. The products coming under the US’ high tariffs include a variety of tech-related products and parts, and are meant to slow China’s advancement in cutting-edge technologies and industries. The US goods that China has targeted for duties include many farm goods such as soyabeans, hitting farm states that are home to many Trump supporters.

As China imports only one-fourth as much as it sends to the US in goods, its ability to keep retaliating dollar for dollar shall remain limited as the commodity basket for targeting tariffs available to Trump shall put him at an advantage. China will soon run out of imports of US goods on which to impose retaliatory tariffs as it imported only $ 130 billion worth of goods from the US in 2017.

However, there are other risks as American businesses have invested far more in China than China has in the United States, which could allow Beijing to retaliate against US firms operating in China by, for example, delaying transactions, increasing inspections on imports, or applying domestic laws more strictly. It remains unclear how much such Chinese punishment shall hurt American businesses in China.

In his disruptive policy style, Trump is trying to rewrite the global trade rules on his own terms, something Beijing has been accused of for sometime now. His “America First” policy has already caused plenty of disruption in his first year in office and more are likely to come during the remainder of his term. Besides escalating a trade war with China, Trump is battling on a global front, taking aim at allies and adversaries alike, and even levied tariffs on products imported from India. India too has retaliated with commensurate tariffs on US products it imports. Compared to Sino-US trade, Indo-US trade is small. In 2016-17, India’s exports to the US stood at $42.21 billion, while imports were $22.3 billion and therefore make no big news as the Sino-US trade spat. Trump has levied global tariffs on metal imports that include those from Europe, Canada and Mexico, while threatening to tear up the North American Free Trade Agreement.

These countries are fighting back. Though China’s target list remains limited, it is not shy to hit where it hurts Trump the most—his political base. Its initial retaliatory response focuses on American products such as beef, poultry, tobacco and cars. The trade actions could ripple through the global economy, fracturing supply chains and costing jobs at American companies that will be forced to absorb higher prices. Things could get worse if both ratchet up their actions. The message that Beijing wants to send Trump is that it would not capitulate to US demands. How either side takes measure to de-escalate the tension is anybody’s guess. The truism is that Trump is unwilling to digest China’s explosive rise and not prepared to accept the emergence of this economic powerhouse, whose economic interconnectedness across continents through projects, lately the BRT, has helped increase leverage on any world economic event. However, there could be several opinions if Trump’s protectionist approach, backed by his trade advisors Lighthizer and Peter Navarro, could stand scrutiny in the current international trade regime governed by common rules.

The Trump Administration justifies that the measures are necessary to reset the trade relationship with China, which is accused of manipulating economic rules that are costing millions of American jobs. The tariffs are likely to drive up prices for American consumers purchasing products at retail stores as well as for businesses that depend on China for parts used to make other goods in the United States.

The advisory firm Oxford Economics opined that tariffs came “at a bad time for the world economy”. According to it, the short-term economic impact of the dispute is likely to be modest, lowering growth by a fraction of a per cent in both countries. But the risks will weigh on business confidence and investment, leaving an adverse impact on growth, in China, the US and elsewhere. So, what could be the likely scenario in the coming weeks and months?

One is both sides back down, putting the trade war on hold. The second is China blinks as it could feel that a trade war might disrupt its management of the economy. The third is the US blinks as Trump might be wary of the impact of Chinese retaliation leaving a potential blow to rural states that backed him in his 2016 presidential election and could damage his chances if he aspires for a second term. The worst case scenario would be all-out trade war as neither side would like to appear as weak and would not back down. A trade war could leave lots of collateral damage to American workers, farmers and consumers. Such a scenario could be scary with consequences beyond the US and China. It is desirable, therefore, that Trump and Xi Jinping sit together and resolve the issues that are mutually acceptable and without adverse consequences for the world economy. Both should take some lesson from the Trump-Kim summit in Singapore and follow a similar path in the interest of the world’s welfare.

Dr Rajaram Panda, a former Senior Fellow, IDSA, was until recently the ICCR Chair Professor at Reitaku University, Japan. He can be contacted at e-mail: rajaram.panda[at]gmail.com

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