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Trade War – US Trumps China

Trade War – US Trumps China

As part of a worsening trade war, President Trump on Monday, September 17th, 2018 announced a slew of new tariffs on imports worth $200 billion from China. A 10% tariff will come into effect later this month which will then rise to 25% from January 2019. Not to be outdone, China too has responded with tariffs on $60 billion of US goods that includes meat, nuts, alcoholic drinks, chemicals, etc.

These announcements come in the midst of an already expanding trade and sanctions regime that has already engulfed the EU, Mexico, Canada, Iran and Turkey in its wake. But the response from most nations have been predictable. Fully understanding the potential threat to their vulnerable economies, Mexico and the EU quickly sued for peace.Canada too is in advanced negotiations to resolve outstanding issues. That leaves behind Iran and China in the crosswire.

This has sent shock waves in stock and currency markets all over the world. Many national currencies have tumbled, including India’s Rupee. But the collateral damage will be broader and deeper and continue to strike at the very root of “free trade” as we understand it today.

Several pundits have faulted Trump for his ‘aggression’ on China and have blamed him for what many see as the coming collapse of international trade. While one may disagree with the way Trump has executed the tariffs, he is absolutely right on taking on China. In fact the US has been very late in getting its act together on China.

A patient review of the events and facts may suggest the urgent need to hit the reset button on China. China is, by no means, a saint and has been violating every bilateral and multilateral agreement to further its trade. In fact many nations, particularly the smaller economies in the developing world have long complained of dumping of Chinese goods on their markets that led to the decimation of local businesses in these countries.

US too has long been wary of China stealing civilian as well as military intellectual property for several decades now. Further, China’s scant respect for international law – from its defiance of the International Court of Justice on the South China Sea judgement to coveting its neighbor’s land – is all well known.  If the international community has very little regard for China as a responsible world citizen, it has only itself to blame.

China may be believing it has arrived on the world stage as a super economy and a super power. That probably is the reason it decided to defy the US and impose counter tariffs. The ground reality, though, is that the US is still the largest economy with the most powerful military in the world.

Unlike China, the US has the power and means to impose sanctions and enforce it. The sanctions on Iran is a case in point where it has successfully prevented other nations from buying oil from it.

The Chinese on the other hand have a false sense of their international influence and authority. Their recalcitrance at the negotiating table earlier with the US has indeed surprised many. They seem to have played their hand wrong to their own detriment. The bottom line is that in the current trade war with the US, China will be alone as no other nation will openly defy the US to support them.

As regards the sustainability of the trade war, it is anybody’s guess as to how long this will last before a diplomatic resolution is negotiated. But given the asymmetry in trade – China exports over $200 billion compared to $80 billion of imports from the US – it is more vulnerable and will cave in sooner than later. China’s defiance is ill advised and amounts to a hara-kiri. Delay in arriving at a negotiated settlement will be a punishing setback for China and will undo decades of economic progress.

It must be mentioned here that international trade as we understand today is built on the twin pillars of economic pre-eminence and military might. These two pillars are then artfully packaged and deployed using sophisticated diplomacy to gain maximum commercial and economic advantage. Countries endowed with both emerge leaders and winners. That is the winning formula and all nations understand this very well. But for China to pretend it is on the same footing as the US is indeed churlish.

We must note here though, that history is a mute witness to the fact that when push comes to shove, the true intentions of nation states have emerged. The US and its allies have a track record of not hesitating to weaponize their trade relations and impose sanctions, which really is a proxy for their overwhelming military might, to ‘straighten’ things out.

Of course, this is not to suggest that the current crisis will transmogrify into open armed conflict. Far from it. But the consequences could be as devastating. However, in international relations, the dynamics and power equations keep changing depending upon the underlying economic fortunes of the country. The EU for example, given its weak fundamentals, may not be able to stand up to China. But the US, on the other hand, buoyed by a booming economy, has staying power.

For China, a prolonged face off with the US can have disastrous consequences at home. From unprecedented levels of unemployment to internal unrest and rebellion, anything in between may be a potential outcome.

The ongoing trade war between the US and its major trading partners has powerful lessons for India. India is caught between the US on one side and some of its own major trading partners – Russia, China and Iran – on the other. How India manages to successfully maneuver its way around these treacherous waters of international sanctions will determine – to a large extent- the survival and long term growth of India. But it certainly cannot adopt a confrontationist approach vis-a-vis the US. A collaborative approach will take it places, literally. Prime Minister Modi seems to be on the right track.

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Posted by on September 19, 2018 in China, Donald Trump, Economics, India, Trade

 

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US – CHINA TRADE WAR – Why Trump will Win

US – CHINA TRADE WAR  – Why Trump will Win

 The rising trade tensions between the US and its major trading partners, particularly China and European Union have been making news for some time now. It may be recalled that the US imposed tariff on imports of Chinese goods worth $200 billion and had also threatened to impose tariffs on cars imported from EU.

But the European Commission led by Jean-Claude Juncker quickly visited Washington DC and appears to have successfully negotiated and resolved the trade issues, at least for now. The EU plans to buy more US liquefied natural gas (LNG) and soybeans and has agreed to work with the US “toward zero tariffs, zero non-tariff barriers, and zero subsidies on non-auto industrial goods”. Trump seems to have won hands down in the trade frictions with the EU.

But the trade war with China, on the other hand, seems to be following a different course with no resolution in sight yet. China too had imposed retaliatory sanctions on goods imported from the US. The US has further accused China of manipulating its currency and is now considering additional tariffs on goods worth $500 billion.

The consequences of this internecine tension could be severe and reverberate throughout the world. The IMF has warned that the current trade war could slow down world economic growth by 0.5% or cost the world $430 billion by 2020.  In its World Economic Outlook Update published in July 2018 IMF has warned that the global expansion that was witnessed over the last two years has plateaued and has become less balanced. It projects global growth to stay at 3.9% over the next two years. Translation – any trade tensions, particularly among key economies at this juncture may be injurious to all.

While the specter of a full blown trade war is never benign, a close examination of US-China trade data that is publicly available, courtesy US Dept. of Commerce, Census Bureau is indeed revealing. Data for the last eight years (i.e. 2010 through 2018 May) shows US exports to China has been   consistent at just over a US$100 billion. On the other hand, imports from China have steadily grown from US$ 365 billion in 2010 to US$505 billion in 2017. Imports for 2018 will probably be at the same level as 2017.  Please see chart.US China Data1

US imports are almost four times its exports to China thus giving rise to a yawning trade deficit that is undesirable for any county, and most certainly for the US. But President Trump, by imposing high tariffs, may have converted this liability into a powerful weapon. Given its four to one advantage, China is four times more vulnerable, in dollar terms, than the US. The current impact of Chinese tariffs on US farm sector has been stemmed by a $12 billion federal subsidy announced by the department of agriculture.  Hence, any retaliation – both current and proposed – from China will have minimal effect on the US. Trump seems to have the upper hand with China.

One of the key reasons for the imposition of additional tariffs on China – at least the stated objective of Trump – was bringing jobs, particularly manufacturing jobs, back to the US. On this count, however, Trump may have miscalculated. America must wake up to the reality that manufacturing jobs that were squirreled away to China over the decades will never come back.

The fact is that the US is a high cost economy and the final landed cost of manufacture is very high. Secondly the strong US dollar does not help either. Bringing back manufacturing jobs will only price its products out in a fiercely competitive export market. Most manufacturers may not take the bait.

The US government fully understands this. Consequently, over the decades, it has successfully encouraged the migration of the economy to a trade and economic culture that is largely dependent and sustained by innovations and cutting edge technologies. This has helped in the creation of new markets and orient them to where the US will continue to enjoy obvious advantages and hence dominate.

China too understands the nuances of this game and has been in an extraordinary hurry to acquire new technologies at any cost. Hence it is no surprise that China has been consistently accused, over the decades, of industrial espionage and theft of intellectual property (IP) by many countries including the US. It is no surprise that under the given circumstances, President Trump was left with limited options in dealing with an aggressive trading partner like China.

China has not played a good citizen of the world. At every opportunity, it has seized its neighbor’s land in its infamous ‘salami slicing’ strategy to fulfil its expansionists ideology. It has shown no respect for international law – be it the annexation of Tibet or in the blatant militarization of the Spratly Islands in South China Sea, despite the International Court of Justice (ICJ) verdict against it.

If today China has a negative residue of international goodwill, it has only itself to blame. Its emergence as a big economy and world player has not been peaceful.

The fact that China has used the BRICS forum to speak out for “free trade” only underscores its desperation. Further, recent reports have indicated that behind its brave façade of resisting US tariffs, China is deeply worried about the potential for many of its companies to file for bankruptcies.

It is indeed impossible to guess as to what is on President Trump’s mind in dealing with China. Is he playing hard ball to get China to the negotiating table for a better trade deal? Or is the US planning to bring China on its knees without firing a shot, given China’s flagrant violation of international law in the South China Sea? Or is it Trump’s larger game plan to cut unfriendly nations to size, given his recent experience in winning over North Korea without firing a shot.

Whichever way you look at it, China seems to be the obvious loser. It is only a matter of time before China will get to the negotiating table to work out a “reasonable agreement” very much in line with the EU example. Before long, normal trade will resume, albeit under circumstances that are lot more favorable to the US.

 
 

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