The two economic behemoths, U.S.A. and China, were found with their horns locked in 2018 that kick-started an unwanted trade war that was to impact the global economy in ways more than anticipated. Though relationship between the two countries was never sweet since introduction of Donald J. Trump to the world forefront as POTUS, the degeneration became more visible when China decided to boost the intensity by threatening to slam products from the US with additional levies.
Chinese prompt retaliation to Trump’s decision of hike in duties was not received well by the US President and he in turn took it to Twitter as well on August 23, 2019 to announce his plans to impose further duties on Chinese imports that were also subjected to high tariffs very recently. This obviously took the inauspicious trade war to the next level and the US retaliation received unpleasant rejoinder from both domestic and international stakeholders and within no time it eventually reflected in stock markets of the world.
Two of the oldest and un-disputedly most important members of the World Trade Organization appear nowhere near a truce that may lead global markets out of the catastrophe and exterminate the prevalent uncertainty among world business community. Nevertheless the evidence is overwhelming that shows that both countries are being affected in terms of economy and business whereas the negative spillover effects raise concern for several global actors.
Trump’s New Battle Front: Trade War with China
The feud began with an American examination of the claims of Chinese theft of US intellectual property under Section 301 of the Trade Act of 1974. The findings thereby determined what many in the business community had been talking for years: that China abused its US partners, stole the IP of American companies, forced those companies to reveal their technology to Chinese counterparts, and muscled US firms out of the Chinese economy in favor of state-owned enterprises.
The issue was classified as a problem beyond capacity of the WTO and, therefore, the Trump-led administration decided to act on their own will in order to teach China a lesson. The retaliation, however, ensued a sequence of significant increments on tariff rates by both countries for each other’s imports in the months to follow.
Although the two countries appeared to have lowered their arms in December 2018 as the dialogue process had gained momentum, no concrete outcome was recorded as no treaties were signed. The development was later termed as “less a breakthrough than a breakdown averted” by the New York Times.
The countless issues that surrounded bilateral trade between US and China includes swelling US trade deficit as a prime concern. The increase is often associated with China – largest trade partner of the US for decades – as its exports to the US increased much more rapidly than the imports from the US over the years. The rising concern for both economists and policymakers have been on the cards lately. While some of them believe it to be an indicator of unfair trade practices of China, others point out towards studier Chinese economy with its production systems profoundly influenced with state interventions.
The countless issues that surrounded bilateral trade between US and China includes swelling US trade deficit as a prime concern.
Furthermore, economists of the world have long accused China for its underlying deliberate labors to keep the currency undervalued for many years. The same has driven global trade leaders to keep a close watch on Chinese policies pertaining to currency valuation and exchange. China is now forced to move towards a more market-based currency rate. Atop the rest, China’s support for state-owned enterprises and the disagreement over its fulfillment of WTO obligations including its failure to protect US intellectual property supplied ingredients to a war that can no longer be taken lightly.
A trade association that swelled from a mere $4 billion partnership to over $600 billion in four decades after the signing of a bilateral trade agreement between US and China witnessed its lowest in the past one year. China retained status of the largest trade partner of world’s only superpower for several years, becoming its major supplier of advanced technology products.
Over the time Chinese exports to the US has shifted to low value, labor intensive products to more capital intensive goods and services. However, past February 2019 China became the third largest trade partner after Canada and Mexico for obvious reasons.
Until 2018, US’ largest supplies of goods came from China when the total import of Chinese products were estimated at $539.5 billion in worth i.e. 21.2% of the total US imports. It marks an increase 59.7% in the past one decade whereas a total increase of 427% since accession of WTO in 2001. The services industry – transport, travel, research & development etc. – constituted $18.4 billion alone in 2018 of the total that is in itself a 68.3% surge in the last decade whereas a 414% swell since 2001.
Electronics, machinery, plastics, furniture & bedding, toys and sports equipment are among top imports from China. Similarly the agriculture imports that include vegetables, fruits, spices etc. and other food items such as vegetable & fruit juices, snack foods etc. touches $4.9 billion making China the third largest supplier of edible products for US.
The export of goods to China from the US equaled $120.3 billion in 2018 making it the third largest export market of the United States i.e. 7.2% of the overall US exports. It was a 72.6% increase since 2008 and a whopping 527% swell since WTO accession. The chief items included in the list of exports were aircraft, machinery, electrical machinery, optical & medical instruments as well as vehicles.
The export of goods to China from the US equaled $120.3 billion in 2018 making it the third largest export market of the United States i.e. 7.2% of the overall US exports.
The services exports encompassing travel, transport and computer software saw an increase of 272% in the past one decade and an astounding 997% since establishment of WTO – estimated at $58.9 billion in 2018. In the agriculture category, US exports corresponded $9.3 billion in 2018 rendering China the 4th most favorite for exports. Soybeans, cotton, coarse grains, hides & skins, pork & meat etc. were among the actives.
No Clear Winner
The trade war escalated dramatically when both US and China began imposing additional tariffs on each other’s goods later this year, thus, sending shockwaves through the global economy. US goods export to China declined 7.4% ($9.6 billion) and imports upped 5.5% during 2017 under Trump’s first year in the office – taking trade deficit to new highs.
For two years, the Trump administration has sought to pressure China to make sweeping changes to its policies on intellectual property protection, forced transfers of technology to Chinese firms, industrial subsidies and market access. Meanwhile China has consistently denied Washington’s accusations of its involvement in unfair trade practices, vowing to fight back in kind and criticizing US protectionist measures under Trump’s leadership.
While many in the US seem convinced that this recent strife could be a product of China’s unfair trade practices coupled with its cynical currency control mechanism, the US President also appears convinced with the same discourse. Considering it a problem beyond capacity of the WTO the US announced increase in duties on Chinese products in order to avenge Chinese alleged treatment to its intellectual property.
A war like situation originated with China’s refusal to stand down as it threatened to impose additional tariffs, in return, on $75 billion in American goods including soybeans, meat, automobiles as well as the crude oil. China’s Commerce Ministry proclaimed that on Sept. 1 and Dec. 15 it will impose additional tariffs of 5 to 10 percent on a total of 5,078 products originated from the United States and re-institute tariffs of 25% on cars and 5% on auto parts which were suspended last December as US-China trade talks accelerated.
The changing US attitude towards the world under the namely protectionist regime may have energized China’s politically motivated duty hike that targets Trump’s key political constituency – the agricultural belt – at a time when he enters into Election 2020 campaign period. As a result, Trump’s tweets of August 23 caught the world by surprise wherein he broadcasted his plan directly to bolster existing tariffs on $250 billion worth of Chinese goods to 30% from 25% starting October 1. He also hinted his decision to tax an additional $300 billion worth of Chinese imports at a 15% rate, beginning September 1.
Beijing’s refusal to accede to US’ trade demands largely stalled talks between China and the United States. Mr. Trump, on the other hand, takes a scattershot to spur economy as economic damage from the yearlong dispute mounts. The US President counts on Mr Jerome Powell, chair of the Federal Reserve, to help blunt the effect of his trade war by cutting interests rates to keep the economy pulsating.
The Fed has already lowered its key rate for the first time since 2008 by a quarter percentage point this year mainly due to the ongoing trade war and slowing global economy. However, Mr. Powell explains his concerns on constrained ability of the central bank in limiting economic damage if the war prolongs. Oxford and Goldman Sachs predict another cut by the end of the year if the situation do not protract.
The tariff wars have hurt American farmers and companies as well as contributed to a global slowdown. Higher rates will only add to the misery of current financial pan as prices are already too high for businesses and consumers across the globe. Even at 25 percent rate, tariffs were expected to cost the average American household more than $800 a year, that according to research by none other than the Federal Reserve Bank of New York itself.
US’ next $300 billion tranche will now affect consumer products like toys, smartphones and clothing. The analysis portraits 25% of US export loss, perpetrating a $35 billion blow to Chinese exports in the US market for tariffed goods in the first half of 2019. This figure also shows the competitiveness of Chinese firms which maintained 75% of their exports to the US despite the substantial tariffs. Trade of tariffed goods in sectors such as chemicals, furniture, office machinery, communication equipment and electrical machinery also dropped considerably.
Hiked up prices for Chinese consumers and losses of US exporters have opened up a competitive opportunity for other players in the US market and triggered a trade diversion effect. About 63% of Chinese export losses in the US market i.e. $21 billion are diverted to other countries such as Mexico, Vietnam, Taiwan etc. The remaining of $14 billion was either lost or captured by US producers.
Reportedly Taiwan gained $4.2 billion in office machinery and communication equipment whereas Mexico earned $3.5 billion in the agriculture-food, transport and machinery in additional exports to the US in first half of 2019. The European Union grossed $2.7 billion due to increased exports and Vietnam’s exports to the US increased by $2.6 billion. Trade diversion benefits to other countries range from $0.9 billion to $1.5 billion whereas that favoring African countries have been minimal.
Investors, who were unhappy with the recent tariff hikes anyway, now fear that the escalating trade battle between two large economies will slow the global economy. China already has duties in place on about $110 billion worth of products generating from the US whereas only $10 billion worth of its exports, majorly aircraft by Boeing, left untouched. Chinese latest move targets US crude oil for the first time with a 5% tariff. US soybeans and beef & pork will be subjected to an extra 5% and 10% tariff respectively.
Analysts have found monthly job reports of the US government to be overshadowed by worries about trade. U.S. companies could be forced to reduce domestic production or move it outside of the US to avoid the tariffs in case of a further Chinese retaliation. That could have a straightaway negative effect on jobs. Retails sales, on the other hand, is also feared to fall in such situation as increased tariffs could trigger widespread store closures across the country.
Optimism is in short supply since the brinkmanship is unlikely to cease unless something prompts a major rethink in Beijing or Washington. The situation is likely to linger on considering attitudes of the leadership on both sides. Great store in autonomy of the Chinese leaders and Mr. Trump’s public campaign of criticism of Chinese policy do not get along quite well.
Furthermore, in presence of factors such as geopolitical rivalry, personal one-upmanship and disputes over Taiwan and the South China Sea may hinder smooth reversal of the situation if it doesn’t de-escalate immediately. Still trade talks often stall and then revive. The period after Election 2020 may turn out to be different in case the regimes changes. Wars are easier to start than end.