Daily Times

There is much talk about a potential global trade war, arising from the recent tit-for-tat announcements by both Washington and Beijing to impose punitive tariffs on some of their tradable goods. President Trump initiated it, claiming that China must reduce its massive trade surplus with the United States.

It might be recalled than an important plank of presidential candidate Trump’s electioneering was to set right the perceived unfair (to the US) trading regime with its trading partners, particularly China. Which had led China to accumulate large trade surpluses, availing of low US tariffs on Chinese goods, as well as ‘manipulating’ its currency to make its exports even cheaper than they already were with depressed wages in China.

In other words, China had everything going for it to the disadvantage of the United States. And Trump thinks that the US had enough of it. However, interestingly, after becoming President, Trump had toned down, though never gave up, his avowed intention to correct the trade imbalance with China. He paraded his new friendship with President Xi Jinping, and when Xi became China’s lifetime President, Trump even felt that the US might consider some such change for his country.

One important reason for this change of tone might have been to secure China’s cooperation for the denuclearization of North Korea, where the country’s leader Kim Jung-un was busy testing new and more powerful atomic and missiles’ arsenal.

Interestingly, after becoming President, Trump had toned down, though never gave up, his avowed intention to correct the trade imbalance with China

And it would seem that Beijing has managed to put the economic squeeze on North Korea, necessitating Kim’s first visit to China, and now a flurry of summits between the leaders of South Korea and North Korea as well as a planned summit between Trump and Kim Jung-un. Even though nothing much has been achieved so far in terms of North Korea’s denuclearization, the US doesn’t seem as much worried, at least in the short term.

Which might explain the renewed emphasis on the ‘unfair’ trade regime with China. Beijing’s response to Trump’s flurry of tweets and announcement of tariffs has been two fold. First, it has declared that it will fight US tariffs at any cost, and has announced a package to hit US exports to China that will hit Trump’s national constituency, like exports of soybeans that will hurt US farmers.

China’s Ministry of Commerce has said that China would fight unilateral US protectionism ‘at any cost’. To which President Trump replied that further tariffs were being considered ‘in light of China’s unfair retaliation’ against earlier US trade measures.

To quote Trump, ‘In light of China’s unfair retaliation, I have instructed (US trade representative) to consider whether $100 billion of additional tariffs would be appropriate under section 301 and, if so, to identify the products upon which to impose such tariffs.’ In other words, it is a tit-for-tat situation, which has the potential of getting out of control.

The only consolation is that the tariffs being threatened have a time lag of about two months before they become operational. In other words, there is still time for China and the US for calm reflection before the world is plunged into a trade war.

At the second level, China has indicated that it is considering a whole level of changes to open up its economy for more balanced trade with the US and other countries.  And for these new measures, China has set a deadline of June 30. Yi Gang, China’s new central bank governor recently announced these measures. According to Yi, the trade imbalance with the United States was a structural problem and Beijing was prepared to take steps to create a healthy balance by opening up China’s economy.

Among the new measures, ‘Domestic and foreign capital will be treated equally’, thus encouraging foreign investments. And China will be ‘allowing more US companies to invest in services in China.’ And to this end, the cap on foreign investment in securities companies, fund management companies and personal insurance companies will be lifted to 51 percent. It will be abolished completely in three years.

Furthermore, securities companies will no longer require a Chinese joint venture partner, while foreign funded insurance companies will be able to broaden the scope of their business activities to compete with Chinese insurers. And Yi said, “Most of these measures will be implemented by June 30.” Besides, by the end of the year, China will allow foreign investors into the car and consumer finance market, as well as removing caps on foreign investment in new wealth management companies linked to banks.

This is all very well and overdue. But much will be depend on how China goes about implementing the opening up of its services sector.

Besides, any real and visible results from these measures will take quite some time to sell to Trump’s electoral constituency that demands more jobs in the US.

Therefore, even if there might be some easing of trade tensions, the politics of trade will continue to create problems.

The writer is a senior journalist and academic based in Sydney, Australia

Published in Daily Times, April 25^th 2018.