The age of trade wars
The United States, with a GDP of US$20.1 trillion and China with US$14 trillion, constitute the world’s two dominant economies. Judged by purchasing power parity (PPP), some analysts would put the two economies at par, although significant differences remain in terms of per capita incomes and level of technological development. The mandarins in Beijing are always wary of such comparisons, preferring to pursue their national goal of quiet and “peaceful development”. America and China control not only a third of the world’s total wealth; they also account for the bulk of its international trade and investments.
According to the Office of the U.S. Trade Representative, by year’s end 2016, US-China trade stood at US$648.5 billion. The balance was overwhelmingly in favour of Beijing which exported US$478.8 billion into the American market while taking in only US$169.8 billion worth of goods and services from the United States. Chinese exports to the U.S. comprise mainly of goods and manufactures (US$462.6 billion) as against US$115.6 billion of goods from the United States. The goods trade deficit has been in favour of China to the tune of US$347 billion. The overall volume of services trade between the two countries amounted to US$70.3 billion, of which Chinese exports to the U.S. stood at a mere US$16.1 billion while exports from the U.S. into China amounted to US$54.2 billion, giving the U.S. a surplus of US$38 billion. While China enjoys a goods trade surplus against the United States, the latter enjoys a services surplus against Beijing, albeit at a much lower scale.
With its open liberal macroeconomy and spendthrift habits, the United States has become the world’s largest debtor, with an external trade deficit exceeding US$600 billion and a national debt that currently stands at a staggering US$21 trillion. China, on the other hand, has a trade surplus with all its trading partners of the order of magnitude of US$509.71 billion. With its strong exports drive, combined with a conservative exchange rate policy, China has managed to accumulate a war chest in terms of external reserves that stand at a staggering US$3.112 trillion as of June this year.
During the electoral campaigns in the race for the White House and during his swearing-in as President in January last year, Donald J. Trump did not mince words in warning that he would take every measure to redress what he regards as an iniquitous trade imbalance between the United States and China. Among the first decisions he took was withdrawal from the Trans-Pacific Partnership (TPP). Although he is yet to do it, he also warned that he would revise the North American Free Trade Area (NAFTA) to ensure a more balanced trade partnership in favour of the United States.
True to his word, this year opened with a round of new tariffs against America’s major trading partners, particularly China, the EU, Canada and Mexico. It all began in March with Trump slamming tariffs worth US$3 billion on Chinese exports. Almost immediately, Beijing retaliated in an equivalent amount of punitive tariffs on American exports into China. In the following month of April, Washington announced another round of tariffs on Chinese exports, this time to the tune of US$50 billion. Beijing reciprocated to the same order of magnitude. By July, Trump again slammed another round of tariffs against China, amounting to US$34 billion. Ditto from China.
What is particularly worrisome is that the administration in Washington has not made explicit what it would consider a fair trade balance between the two countries. Nobody is even sure what they precisely want. According to some sources, President Trump wants to see reduction by more than US$200 billion of the trade deficit between the two countries. Others speculate that he wants nothing less than imposition of tariffs on Chinese exports worth US$500 billion.
Similar tariffs have been slammed against the EU, Canada, and Mexico, with different levels of retaliatory responses by those countries. The EU has imposed retaliatory tariffs on US jeans, Bourbon Whiskey and other goods worth Є2.8 billion. Canada has imposed countermeasures worth US$12.5 billion on US steel and on products such as yoghurt, whiskey and coffee. Mexico on its part has imposed 25% more tariffs on American steel and on products such as cheese and pork. Last week, EU Commission President Jean-Claude Juncker, visited Washington to do some damage control. He has promised to buy more US soybeans as well as LNG, in exchange for which Trump has agreed to hold back on additional tariffs while they continue to explore the way forward.
So far, China has borne the brunt of this new trade war. Some 25% of tariffs have been imposed on semiconductors coming from China; chips that are crucial inputs in the manufacture of television, computers, smart phones and cars. Tariffs have also been imposed on a wide variety of Chinese products ranging from nuclear reactors to plastics and dairy making equipment. About 90% of all the goods on the U.S. tariff list are principally intermediate goods that are crucial in U.S. manufacturing and the capital goods sector. The Chinese have given as much as they have received by way of countermeasures. Matching tariff level by tariff level, China has targeted 545 products in agriculture, automobiles, medical products, coal and petroleum.
As these things go, the impact is being felt on both sides. Automobile giant Daimler has warned that their earnings forecast for this year will be “slightly below the previous year” because new taxes will reduce sales in the Chinese market. Ford, General Motors, Fiat Chrysler and Tesla are all reeling under the impact of this new trade war. Jaguar Land Rover, Britain’s biggest automobile manufacturer, has reported a loss for the first time in 3 years, citing the fact that customers are delaying purchases to see how things will pan out. Coca Cola has announced that it would have to increase prices in the North American market to compensate for higher freight and metal prices. Chinese countermeasures in the farm sector have forced the Trump administration to provide some US$12 billion in subsidies to U.S. farmers, which remain an important electoral base for the administration.
The impact on China has been devastating. In the month of July, the Chinese manufacturing sector underwent a significant slowdown. The stock exchange lost as much as US$2 trillion in a new wave of fear, mania and panic. The Chinese have not taken it lying down. According to the state-owned Xinhua newspaper, ”The United States has repeatedly resorted to threatening and deceitful routines, trying to force China to compromise, both overestimating its own bargaining power and underestimating China’s determination and ability to defend its national dignity and the interests of its people.”
In response, Secretary of State Mike Pompeo remained steadfast on Washington’s push for what they believe would be a fairer trading relationship with Beijing. He was quoted as saying: “President Trump inherited an unfair trade regime where American workers and American companies were not treated reciprocally or fairly by the Chinese, and the efforts of the Trump administration are to right that, to correct that.”
There is no doubt everybody stands to lose in this sordid affair. The IMF warns that if things deteriorate to a full-scale global trade war, it might shave off some 0.5 of total global GDP by 2020. Investment bankers Morgan Stanley place that figure as high as 0.8 percent. Given that the Chinese growth rate is 6 – 7 % average per annum as contrasted with a low U.S. average of 2.3%, it’s evident that America is more likely to feel the pinch in terms of deceleration than Beijing would.
The ancient Chinese board game of Go provides important clues of what China could do. It is a two-actor game in which the goal is not only to capture territory but also to surround the pieces of your opponent until they are captured. There is a unique situation known as seki (or mutual life) that can arise in the game, whereby two pieces face each other and neither side would consider it advisable to move, as doing so would spell mutual destruction. Chinese generals and sages from Sun Tzu to LaoTzu have played the game of Go as a form of intellectual recreation. But it has crucially important lessons for military strategy as well as economic rivalry and strategic competition.
China appears to be the weaker partner in this game of wits. But it has some crucial options. For one thing, they can devalue the Yuan as a means of offsetting the high prices of Chinese goods resulting from the new American tariff imposition. They can also impose travel restrictions on Chinese citizens going to the United States. For example in 2017, some 130 million Chinese travelled round the world, spending a whopping US$260 billion. The Chinese can also make a call on their US$1 trillion treasury bills which have helped to shore up the US dollar. This latter option must be weighed against the fact that they also stand to lose the value of their investments should the dollar fall precipitately as a consequence of their action. The Chinese can also cultivate a more insular political economy by concentrating investing in their humongous domestic market. After all, insularity has been more in tune with the Chinese character than their current quest for internationalism.
On the other hand, they may find it more expedient to appease Trump by patronising more US products and opening up their domestic market. This could lead to trade diversion, as countries such as Brazil, Australia and others suffer market share for their own products.
A little-known fact is that Africa has also been at the receiving end of the new mercantilism. A few weeks ago the East African Community took a decision to ban the imports of second-hand clothing that comes mostly from the United States. They cited sanitary factors as well as the need to develop their own textile and garment industry. Washington replied by flexing its muscles. Kenya and the others capitulated. Small Rwanda decided they would go ahead with the ban. It is extraordinary that Washington responded by removing Rwanda from the list of beneficiaries of the American Growth and Opportunities Act (AGOA).
Ours is a rather difficult juncture in international economic relations. Anyone who has closely studied the Western system of power as it evolved since the Treaty of Westphalia 1648 knows that no new power is ever accepted into the exclusive club of the greats without a fight. The Chinese, with all their 3 millenniums of civilisation should have understood this better than anyone. America has exhausted its moral capital and is threatened by fiscal bankruptcy and the prospects of diminished power and influence. China naively believes it can camouflage its world-historic ambitions even as it invests US$2 trillion in its multinational New Silk Road, rolls out its Made in China 2025 project and consolidates its commercial hegemony over the developing world while sabre-rattling in the South China Sea.
There is no disputing that America is within its rights to redress trade imbalances that it has with China or any other country. But it needs to do so within the framework of diplomacy, reciprocity and mutual obligations through existing international institutions such as the WTO, imperfect though they are. Lest we forget: the Smoot-Hawley tariffs unilaterally imposed by the United States in the 1930s led to trades war and beggar-thy-neighbour policies that plunged the world into depression; culminating in the rise of extremist ideologies such as Nazism, and, ultimately, World War II.
Our best hope is that the leaders of Europe and the rest of the civilised world will work with China and the new economic powers to bolster a rules-based international trade system that guarantees a more stable and prosperous global order. The world is in dire need of leaders who understand the imperatives of securing a more orderly system of international economic relations within the framework of a more just and more peaceful global order.
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