The US-China trade war may be defusing but it is nowhere near an end. US President Donald Trump lifted a deadline of March 1 for China to agree to concessions on trade.
It is encouraging that negotiations are underway, showing that there is a serious commitment towards resolving the trade dispute. If the deal is missed, the troubling prospect is that the US will impose punitive tariffs on $200 billion worth of Chinese exports, badly affecting the Chinese economy. The impact on the American economy will be no less agonising.
During 2018, the Trump administration imposed tariffs on approximately $283 billion of Chinese exports, with rates ranging between 10 percent and 50 percent. In response, China retaliated with tariffs averaging 16 percent on approximately $121 billion of US exports.
Trump demands China cut $419.2 billion of its inflating trade surplus with the US and contain its unfair trade practices including forced transfer of technology, intellectual property theft and grant of excessive subsidies to state-owned enterprises. If China is willing to cooperate, it will simply have to buy more American goods, allow more foreign companies to access its economy and enforce strict compliance of intellectual property rights to appease US interests. This way, the US might be able to reduce its trade deficit, create more jobs and restore manufacturing, in the hope of pressuring Beijing to support more favourable terms of trade for its beleaguered economy.
It is pertinent to evaluate the cost of the trade war and its impact on regional dynamics. Wally Tyner, an agriculturist economist at Purdue University, has termed it a “lose-lose” for both China and the US because it has resulted in billions of dollars of losses for both sides. According to his study, US and Chinese economies lose about $2.9 billion annually due to tariffs China imposes on soya beans, corn, wheat and sorghum. As a consequence, US agricultural export shipment to China declined for the first ten months of 2018 by 42 percent. To compensate the suffering farmers, the US got $11 billion allocated $ in direct payments and bought agricultural goods for government food programmes. China had to buy soya beans from Brazil to support its livestock industry, raising the cost for Chinese importers and reducing the sales of US exporters. Increased inspection and inexplicable rejection from Chinese Customs added to the cost of US trade.
The fear of China as an emerging techno-superpower is worrisome and that accounts for US tariffs on imported Chinese products; this has cost the technology industry an additional $1billion per month.
Amiti, Redding and Weinstein in their research paper, ‘The Impact of the 2018 Trade War on US Prices and Welfare’, have empirically shown that the “US experienced substantial increases in the prices of intermediates and final goods, large changes to its the supply chain network, reductions in availability of imported varieties, and complete pass through of the tariffs into domestic prices of imported goods.”
They estimated that tariffs were costing consumers $1.4 billion a month and businesspersons an additional $3 billion a month in 2018. If the tariffs were to continue, they estimated, an approximately $165 billion dollars of trade per year would continue to be lost or redirected thus imposing large costs on firms that had invested in the US and China, as they would have to move their facilities to other locations or find alternative sources of import and export destinations. Already, Japan has shifted production of devices for cars, eg radio, from China to Mexico. Apple has announced a cut in revenue forecast, blaming ‘economic deceleration’ in China and citing the US-China trade friction.
If the trade friction accelerates, one point of view suggests that regional rivals will step in and benefit from the trade conflict. Taiwan and Malaysia are vying for high-end manufacturing, and high wages in China will push labour-intensive industries like garments and footwear towards poor Asian countries. The question is whether the gains for Asian countries will offset the trade advantages of China? Such a transition does not seem likely. China is the heart of Factory Asia, integral to the web of supply chains clustered around it, and caters for everything manufactures need – from electronics to automobiles to heavy industry. There are certain compelling factors that encourage manufacturers in China to remain loyal to it; its large size of consumer market; good roads and ports; and automation that others lack. Even if tariffs rise further, Chinese companies will rely on robots (automation) to remain competitive and efficient. In 2017, China’s installation of industrial robots rose by 59 percent, more than America and Europe combined. The upshot is that China can be hurt in the short run but not easily replaced by the trade war.
By taking unilateral measures for protectionism, Trump has upended the rules-based multilateral trading system and subverted the work of his predecessors. Whenever disputes arise, members take complaints to the judges of the WTO dispute settlement body – and if accusations are upheld, limited retaliation is permitted as per law. Trump’s deviation from the procedure of the international order has merely provided an opening for China to emerge as a defender of the global trading order in its favour.
With signs of slowing growth on both sides, it is in the interest of both the US and China to rein in the tensions and strike a deal. According to the ‘Financial Times’, “Even a bad deal, if it prevents an all out trade war, is better than no deal.”
The writer holds an LLM degree in international economic law from the University of Warwick.