The trade war

The two economic behemoths, the USA and China, were found with their horns locked in 2018 thatkick-started an unwanted trade war that was to impact the global economy in more ways more anticipated. Thoughthe relationship between the two countries was never sweet, since the introduction of Donald J Trump to the world as the president of the United States, the degeneration became more visible when China decided to boost the intensity by threatening to slam products from the US with additional levies.

China’s prompt retaliation to Trump’s decision of hike in duties was not received well by the US president.Through Twitter on August 23, 2019, he announced his plans to impose furtherduties on Chineseimports that hadbeensubjected to high tariffs very recently. That took the inauspicious trade warto the next level.TheUS retaliation receivedan unpleasant rejoinder from both domestic and international stakeholders, and within no time itreflected in various stock markets of the world.

Two of the oldest and undisputedly, most importantmembers of the World Trade Organisation (WTO) appear nowhere near a truce that may lead global markets out of the prevalent uncertainty.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.

The feud began with a US 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 about for years: that China betrayed its US partners, stoleIPs of American companies, forced those companies to reveal their technology to Chinese counterparts, and muscled US firms out of the Chinese economy in favour of state-owned enterprises. The issue was classified as a problem beyond the capacity of the WTOand therefore, the Trump-led administration decided to act on their own in order to teach China a lesson.

The retaliation, however, ensued a sequence of significant incrementson tariff rates by both countries for each other’s imports inthe 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 the US and China include the swelling US trade deficit as a prime concern. The increase is often associated with China-the 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 has been on the cards lately. While some of them believe it to be an indicator of unfair trade practices of China, others point out towardsthe sturdier Chinese economy withits production systems profoundly influenced by state interventions. Economists of the world have long accused China ofits underlying deliberate actions to keep the currency undervalued for many years. The same has driven the 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.

China has consistently denied Washington’s accusations of its involvement in unfair trade practices, vowing to fight back in kind

China’s support for state-owned enterprises, and the disagreement over its fulfilment of WTO’s 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 the US and China witnessed its lowest in the past one year. China retained the status of the largest trade partner of world’s only superpower for several years, becoming its major supplier of advanced technology products. Over time, Chinese exports to the US has shifted to low value, labuor intensive products to more capital-intensive goods and services. Post February 2019, China became the third largest trade partner after Canada and Mexico for obvious reasons.

Until 2018, US’s 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 percent of the total US imports. It marks an increase of 59.7 percent in the past one decade, whereas a total increase of 427 percent since the accession of WTO in 2001. The services industry-transport, travel, research and development etc-constituted $18.4 billion alone in 2018 of the total, and that is in itselfa 68.3 percentsurge in the last decade, and a 414 percent swell since 2001. Electronics, machinery, plastics, furniture and bedding, toys and sports equipment are among the top imports from China. Agriculture imports that include vegetables, fruits, spices etc and other food items such as vegetable and fruit juices and snack foods touch $4.9 billion, making China the third largest supplier of edible products for the US.

The export of goods to China from the US equalled $120.3 billion in 2018, making it the third largest export market of the United States i.e. 7.2 percent of the overall US exports. It was a 72.6 percent increase since 2008, and a whopping 527 percent swell since the WTO accession. The chief items included in the list of exports were aircraft, machinery, electrical machinery, optical and medical instruments, and vehicles. The services exports encompassing travel, transport and computer software saw an increase of 272 percent in the past one decade, and an astounding 997 percent since the 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 fourth most favourite for exports. Soybeans, cotton, coarse grains, hides and skins, and pork and meat etc. were among the actives.

The trade war escalated dramatically when both the US and China began imposing additional tariffs on each other’s goods later that year, sending shockwaves through the global economy. US goods’ exports to China declined 7.4 percent ($9.6 billion) and imports upped 5.5 percent during 2017 under Trump’s first year in the office, taking trade deficit to a new high. 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 criticising US protectionist measures under Trump’s leadership.

While many in the USseem convinced that this recent strife could be a product of China’s unfair trade practices coupled withits cynical currency control mechanism, the US president also appears convinced about the same narrative.Considering it a problem beyond the capacity of the WTO, the US announced an increase in duties on Chinese products in order to avenge China’s alleged treatment ofUS’s intellectual property. A warlike 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 and crude oil. China’s commerce ministry proclaimed that on September 1 and December 15, it would impose additional tariffs of 5 to 10 percent on a total of 5,078 products originated from the United States, and reinstitute tariffs of 25 percent on cars and 5 percent on auto parts, which were suspended last December as US-China trade talks accelerated.

The changing US attitude towards the world under the newly protectionistregime may have energised China’s politically motivated duty hike that targets Trump’s key political constituency-the agricultural belt-at the time when he enters into the Election 2020 campaign period. As a result, Trump’s tweets of August 23 caught the world by surprise wherein he broadcasted his plandirectly to bolster existing tariffs on $250 billion worth of Chinese goods to 30 percent from 25 percent, starting October 1. He alsohinted about his decision to tax an additional $300 billion worth of Chinese imports at a 15 percent rate, beginning September 1.

Beijing’s refusal to accede to US’s trade demands largely stalled talks between China and the United States. Trump, on the other hand, takes a scattershot to spur economy as economic damage from the yearlong dispute mounts. The US president counts onJerome 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, 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 does not protract.

The tariff wars have hurt American farmers and companies as well as contributing to a global slowdown. Higher rates will only add to the misery of the current financial pan as prices are already too high for businesses and consumers across the globe. Even at25 percent rate, tariffs were expected to cost the average American household more than $800 a year, according to research by none other than the Federal Reserve Bank of New York itself. US’s next $300 billion tranche will now affect consumer products like toys, smartphones and clothing.

The analysis portrays 25 percent 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 percent 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 otherplayers in the US market and triggered a trade diversion effect. About 63 percent of Chinese export losses in the US market i.e. $21 billion are diverted to other countries such as Mexico, Vietnam and Taiwan. The remaining $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 the first half of 2019.The European Union grossed $2.7 billion due to increased exports, andVietnam’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 favouring African countries have been minimal.

Investors, who were unhappy with the recent tariff hikes, now fear that the escalating trade battle between the 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, aircrafts by Boeing, are left untouched. China’s latest move targets US crude oil for the first time with a 5 percent tariff. US soybeans and beef and pork will be subjected to an extra 5and 10 percent tariff respectively. Analysts have found monthly job reports of the US government to be overshadowed by worries about trade.

US companies could be forced to reduce domestic production or move 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 are also feared to fall in such a 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 the attitudes of the leadership on both sides. Great store in autonomy of the Chinese leaders andTrump’s public campaign of criticism of China’s policy do not get along quite well.

In the presence of factors such as geopolitical rivalry, personal one-upmanship and disputes over Taiwan and the South China Sea may hinder the 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.

The writer is an Engineering graduate and is currently working for a foreign envoy