Likely fallout of US-China trade hostilities for Pakistan, world

LAHORE: Although the United States and China are not in a trade war yet, investors have started fleeing the American bourses following President Donald Trump's threats of imposing more tariffs and other forms of trade protectionism against Chinese goods. Trump's threats came after China had announced fresh tariffs on 106 US products on Wednesday last (April 4). A day later, Trump had asked US trade representatives to consider $100 billion in additional tariffs against China. Beijing has responded by saying that it would battle it out to the end, not hesitate to pay any price, resolutely counterattack and take new comprehensive measures in response, British newspaper "The Guardian" has reported in one of its latest editions. Should Pakistan be worried? If one only goes by the bilateral Pak-US trade figures, Pakistan should not be worried as the volume of bilateral trade between the two nations was resting at just $6 billion in 2017. But since the US-Pakistan relations had hit a new low in 2017 after Trump, his vice president, secretaries of defence and state and national security advisers and other senior officials had hinted the suspension of US economic and military assistance if Pakistan hesitated to join the US-led efforts to defeat the Taliban in the battlefield, the growing Beijing-Islamabad friendship might antagonise the White House further.

Remember, in January 2018, the United States had suspended about $2 billion in security aid to Pakistan for failing to clamp down on the Afghan Taliban and the Haqqani Network terror groups and dismantle their safe havens.

The $2 billion security aid includes $900 million in the Coalition Support Funds (CSF) money to Pakistan for the fiscal year 2017.

The freezing of all security assistance to Pakistan had come after Trump, in his New Year's Day tweet, had accused Islamabad of giving nothing to the US but "lies and deceit" and providing "safe haven" to terrorists in return for $ 33 billion aid over the last 15 years.

Pakistan has already shifted its economic reliance on Beijing from Washington DC, therefore, it might face Washington DC's wrath as a result of a looming trade war between United States and China, the two economic giants on the world map.

The Financial Action Task Force (FATF) has already placed the Islamabad on the global terror financing watch-list from June 2018 onwards, so Islamabad's growing business and political relations with Beijing might prompt the world super power to continue highlighting the deficiencies in the Anti-Money Laundering and Countering of Terrorist Financing (AML/CFT) framework of Pakistan.

Despite enactment of legislation, issuance of regulations and guidelines by the State Bank and the Securities Exchange Commission to the financial sector and establishment of the Financial Monitoring Unit etc, Washington DC might continue to label Pakistan more loudly and forcibly as a country where terrorist outfits are still allowed to raise funds.

As China and Pakistan have cemented business ties under the ongoing $62 billion China-Pakistan Economic Corridor (CPEC), new protectionist measures and tariffs might force Beijing to revisit its global investment priorities.

Resultantly, flow of funds from Beijing to CPEC might be hampered and delay China's long-dreamt geopolitical goal of emerging as an alternate power centre to US by expanding its economic footprint across regions.

Pakistan would hence suffer because its infrastructure-laying plans under CPEC would also be delayed due to Beijing's compounding difficulties and trade worries.

And last but not least, Pakistani professionals might of course find it hard to hunt employment opportunities in the United States while those already working there might find their jobs being threatened.

Brief chronology of escalating US-China hostilities:

On April 5, 2018, Trump had issued a statement saying that "in light of China’s unfair retaliation," he has instructed the US trade representative to "consider whether $100bn of additional tariffs would be appropriate", and to identify which products should be affected.

On April 4, 2018, China had set out its list of targets for possible retaliation, including key exports from the US such as soybeans and cars.

Trump’s April 4 tweet: "We are not in a trade war with China, that war was lost many years ago by the foolish, or incompetent, people who represented the U.S. Now we have a Trade Deficit of $500 Billion a year, with Intellectual Property Theft of another $300 Billion. We cannot let this continue!"

On April 3, 2018, the US administration had announced a new list of 1,333 Chinese product categories that could face 25 per cent tariffs.

The USA Today maintains: "Trump announced 25 per cent tariff on 450 billion to $60 billion in Chinese exports to the US, including aerospace, information and communication technology, and machinery. On Monday last, China placed fees on a wide range of US products including scrap aluminum, sparkling wine and apples. Trump then promised tariffs on about 1,300 Chinese products. Hours later, China came out with more tariffs, this time taking aim at Boeing planes. On Thursday last, Trump was entertaining the idea of another $100 billion in tariffs."

On March 23, 2018, the US had imposed new tariffs on steel and aluminum. Most of the largest steel exporters to the US were exempted at least until May 1 this year, but China is among the countries that are hit.

The "Financial Times," a 130-year old Japanese-owned, English language international daily newspaper with a special emphasis on business and economic news, states: "The Trump administration began the latest round of tariff increases in January, hitting solar panels and dishwashers, and followed up with steel and aluminum in March. The stakes were raised dramatically this month, when the US set out planned tariffs on more than $45bn of imports from China, and China issued its own list for possible retaliation. President Trump counter-attacked, saying that "in light of China’s unfair retaliation," he had instructed the US trade representative to "consider whether $100bn of additional tariffs would be appropriate", and to identify which products should be affected.

Having an average daily readership of 2.2 million people worldwide, the London-based newspaper adds: "For now both the US and Chinese tariff proposals are merely threats, but businesses say they could do significant damage to sales, investment and jobs if they are imposed. Businesses are hoping the two countries can reach a compromise to avert a fully-fledged trade war.

(References/Sources: The US International Trade Commission, Peterson Institute for International Economics and the Financial Times)

US-China trade statistics and imbalance:

The United States' goods and services trade volume with China was approximately $638 billion in 2017. The American trade deficit with China was $375 billion in 2017.

The trade deficit has resulted because U.S. exports to China were only $130.369 billion while imports from China were about $506 billion.

The United States imports consumer electronics, clothing and machinery from China. A lot of the imports are from US manufacturers that send raw materials to China for low-cost assembly. Once shipped back to the United States, they are considered imports.

As of January 2018, the US debt to China was $1.17 trillion. That's 19 per cent of the total public debt owned by foreign countries. Many economic pundits were hence concerned that these figures gave China political leverage over US fiscal policy.

Quoting data released in February 2018 by the United States Commerce Department, the "New York Times" had stated that the gap between Chinese goods imported to the United States and American goods exported to China rose to $375 billion in 2017, up from $347 billion in 2016. The overall United States trade deficit in goods and services with the world widened 12.1 percent to $566 billion in 2017, the largest gap since 2008.

The prestigious American newspaper had stated: "Economists said the growing trade deficit stemmed largely from the strength of the United States economy, which helped American consumers afford more imported electronics, clothes and appliances. The declining value of the dollar last year, which makes American products cheaper to buy overseas, also helped to lift exports, but not enough to prevent the gap from widening."

The likely global impact of US-China trade tiff:

"The Guardian" writes: "Trade barriers would not only damage both countries but would also disrupt global supply chains, raising prices for consumers worldwide. Any disruption to supply and distribution chains, which are a key part of world trade, could have a lasting impact. In the worst-case scenario, companies may have to relocate factories or distribution centres. Investment decisions affect employment and taxes raised, and are in some ways more disruptive than tariffs, which can be reversed more easily."

The British media outlet asserts: "This escalation would be damaging for the US and Chinese economies since global companies, such as Apple, invest in both countries. This would affect not only US businesses but also American consumers. Retailers such as Walmart import goods from China, so prices would go up and living standards would be squeezed. And since US goods are sold worldwide, if they are reliant on parts from China, consumers here in the UK and in the rest of the world would also be affected. The same applies to Chinese consumers and producers, particularly since about half of Chinese exports are made by enterprises with foreign investors."

Fears of German companies:

The "Financial Times" holds: "German companies fear they could suffer considerable collateral damage from US president Donald Trump’s import tariffs because machines and cars made by their subsidiaries in China and exported to the US could end up being hit just as hard as all-Chinese products. As an export-driven economy heavily reliant on open borders and free trade, Germany has watched the tit-for-tat conflict between Washington and Beijing with growing alarm. The fear is that the tariffs threatened by the US and Chinese governments, if imposed, will have a massively disruptive effect on the entire complex web of global value chains, harming other nations not directly involved in the trade war."

The newspaper opines: "But German companies fear they will get dragged into any conflict between the two economic superpowers. One particularly vulnerable sector is cars, a pillar of the German economy. For example, BMW and Mercedes parent Daimler would be highly exposed to any Chinese import tariff on US cars because they are the largest vehicle exporters from the US by value and China is their number one market. The two luxury carmakers export around 115,000 vehicles to China from the US each year, while Fiat-Chrysler, Ford and General Motors together export fewer than 30,000 vehicles, according to Evercore ISI, a research firm."

European Union finds itself caught in the crossfire too:

The "South China Morning Post" views: "China has reached out for Europe’s support in its growing trade war with the US, leaving the European Union at risk of getting entangled in a conflict with repercussions around the world. The EU is caught in a bind: It shares many of Washington’s grievances with Beijing’s trade practices, but is also under a threat of protectionist measures ordered up by US President Donald Trump. In a rare diplomatic plea, China called on the EU to take a joint stand against US protectionism after Trump warned that he could slap another US$100 billion of extra tariffs on China’s imports."

The Chinese newspaper adds: "The EU and the US themselves nearly descended into a trade war after Trump in March threatened to impose tariffs on steel and aluminum imports that would, if confirmed, punish European manufacturers. Trump granted Europe a last-minute exemption, giving EU negotiators until May 1 to come up with a solution to unfair trade policies alleged by the US leader."

How a US-China trade war can hit or affect Indian market:

The "Indian Express" states: "If the trade war were to intensify — and that’s a big if — there is a possibility that a diminished US-China trade engagement could have positive results for countries such as Brazil and India from a trade perspective, at least in the short run. In case of soybean, for instance, one of the key items in the list, there could be a cascading impact in terms of openings for India to enter other markets, according to the Soybean Processors Association of India. The bulk of China’s annual soybean import of around 100 million tonnes is for domestic consumption; the rest is used in the manufacture of soybean oil and meal for export. If the levy hits China’s import, exports could be dented, a space that India could potentially fill to meet the demands from other countries."

The esteemed Indian newspaper apprehends: "But in the long term, a full-fledged trade war is bad news. It invariably leads to a higher inflationary and low growth scenario. Inflation is generally good for assets such as gold, while having a negative impact on currency and some sectors in the equity market. A greater worry for India could be the indirect impact — the potential cascading inflationary impact of the decision in the US itself. Within the US domestic economy, higher tariffs on a range of imported products escalate the threat of higher consumer prices, caused by importers passing on their increased costs of raw material. This could force the Federal Reserve to frontload its interest rate glide path — raise rates faster than it would have done otherwise."