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US-China trade war: Implications for Bangladesh

Ali Ahmed and Nesar Ahmed | December 11, 2018 12:00:00

What seemed like the rumbling of distant clouds during the noisy election campaign of candidate Donald trump came to be a stunning reality with American people electing him as President. Many in the United States (US) and elsewhere still hoped that his utterances during the campaign trail were just rhetoric meant only to dupe the blue-collar workers, the unemployed and the marginal population, whose real income had gone down, or so they thought, during the decades of unprecedented opening up of the world economies through enhanced trade and commerce, generally known as globalisation. But these optimists should have known and understood better. First, the message carried through the election of Donald Trump is unequivocally loud and clear. The majority of the population of the United States have hitched their fate, for good or for bad, with the Trump bandwagon. Second, what a large number of print and electronic media in the US and elsewhere, now appear in hindsight to have failed to gauge the depth of the discontent among the majority of the US voters. And there were genuine reasons for that discontent.

While the global wealth, including that of the US, had grown manifold in the post-war world, especially since the opening of the world economy through enhanced integration and trade, inter- and intra-state economic inequality has markedly increased during the same period. While most of the economists and politicians preferred to take a macro-economic view of the phenomenon and patted on their own backs on the unprecedented reduction in poverty and enhancement of national and per capita GDP in the world as a whole, little did they care to note the stagnation, or even decline, in the real income in some parts of the world, or of some countries. The post-1970s US is paradoxically such a country. Research findings by reputed firms and institutions have been pointing towards that phenomenon even before the candidature of Donald Trump for the US Presidency was announced. The US working class was the highest paid in the post-world war-II economic boom. But its wages entered a downward spiral in the mid-1970s. Today it is the lowest paid among the OECD countries, with the greatest proportion of low-wage jobs, defined as paying less than two-thirds of the nation's median income. Over a quarter of jobs in the US fell into that category, earning less than US$ 23,390 in the OECD's 2014 report.

In 2013, the median annual income in the US was $35,080, according to the Bureau of Labour Statistics' Occupational Employment Statistics programme. Under the OECD's definition, then, a low paying job would earn less than about $23,390.

The above figures and the bar-graph clearly point towards the relatively poorer conditions of the wage-earners in the US compared to those in other OECD countries. But we will shortly see the inter-regional difference in the country as well.

Most media reports have been writing about 'stagnating' US wages. The reality was, in fact, worse. It had been steadily sliding. The US Midwest comprising the states of Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, North Dakota, and Wisconsin, as bracketed by the US Census Bureau, is said to be the bastion of Donald Trump during and since the last Presidential election of that country, has been faring even worse than the US average. The following Table clearly shows that.

This was the state of the economy in the US, in general, and that of the Midwest, in particular, when Mr. Trump announced his intention to run for the US Presidency. He was a business tycoon, no doubt, but a political novice. Once a declared Democrat, he conveniently switched side and declared his intention to contest the polls as a Republican. But the Republican leadership and policy makers were probably not even surprised; they, or at least most of them, must have laughed at this craziness of Trump. The reaction in the rest of the world was not much different. They felt rather amused to find that the most powerful country in the world, both economically and militarily, could throw up such a candidate for its highest post. The US media, its intelligentsia and those of the rest of the world tried, initially, to laugh it off. But they soon became serious and continued with their denunciation as the candidate came out with newer and newer antics. But, finally, he won, and the thoughtful section of the people of the United States along with those of the rest of the world was simply stunned.

But how could he win the election? It obviously could not have come down as a gift from heaven. The majority of the members of the electoral college of the country, and through them the people, had to cast their votes in his favour. It was not at all easy as the stalwarts among the Republicans were unwilling to accept him as the party's candidate. It was only after his convincing victory in the primaries that the party decided to cast in its lot with the Trump camp. One has to remember that the Democrats were, naturally, against him. But the Republican stalwarts were rather forced to lend their support for his party nomination, they did start supporting him in order to see their party capture the Presidency. We have to look back to the unfolding drama of world economy during the nearly three decades and a half prior to Trump election. We already have noted how the US economy, after a phenomenal growth in the few decades following the Second World War, took a downward spiral in the 1970's. We also have seen how its economy fared worse compared to all other OECD countries in the second decade of the 21st century. It was also in the 1970s, albeit in the penultimate year of the decade, that the Chinese opening and modernisation began with their leader, Deng Xiao Ping. And with the founding of the World Trade Organisation (WTO) at the beginning of 1995, and China's joining the multilateral trading organisation a few years later, global trade and connectivity got an unprecedented boost. Despite there being many provisions in the legal text of the WTO, not quite favourable to the interests of the Least Developed and the developing countries, and unreasonable obstructionism, in many cases, by the developed countries, the WTO, for the first time in global history, introduced a rules-based multilateral trading system. Almost all the countries of the world, including the major economies, were either founding members of the organisation, or shortly joined it, as China did. The world trading system became not just rules-based, but the basic principles of the WTO, like the Most-Favoured-Nation (MFN) and the Country Treatment brought in a non-discriminatory global trade regime, or so it sought to.

The cumulative results emanating out of the rules-based trading system, the opening of China and enhanced integration of the world trade and economy have proved a great boon not just for China, but for the USA and the rest of the world as well. Whereas the world GDP in 1995, when the WTO was founded, was $30.85 trillion, it reached $80.68 trillion in 2017.

GDP of the US for those two years was $7.66 trillion and $19.39 trillion, respectively. The same for those two years for China was $734.54 billion and $12.23 trillion, respectively, no doubt an exponential growth! China started with a substantially lower poverty rate in 1995 at 7.1 per cent of its population and brought it down to 3.1 per cent in 2017, whereas the US, for those two respective years, had a poverty rate of 13.8 per cent and 12.3 per cent. Poverty in the rest of the world, including Bangladesh, has also substantially decreased. Starting with a rate of nearly 50 per cent poverty in the early 1990s, Bangladesh now has roughly 21.8 per cent of the same. The world, as a whole, has also made tremendous progress during this period. Beginning with a total world trade worth $6.1 trillion in 1995, the world may rightfully boast of having posted a cumulative figure of $23 trillion of exports, a nearly 400 per cent growth! But this global growth has not been uniform across the world. Nor has it been equal, or even equitable, throughout all parts of any single country. That is how the problem arose.

East Asia, in general, and China, in particular, experienced a phenomenal economic growth spread over a period of more than three decades. Southeast Asia also joined the fray, but its growth rate, though ongoing still, has not been as dizzying as that of China. Never before in human history have so many people been lifted out of poverty in so short a time. A double-digit economic growth of so vast a country for such a prolonged period has almost been an economic miracle. The rest of the world had to take notice of this phenomenal success story. But the Western developed countries, especially the USA, not just took notice of it; they appear to have been alarmed. The informed circles in the US, and their scholars, think-tanks, universities and the media started discussing the phenomenon with utmost seriousness. Tons of papers and hours and hours of scholars' time were devoted to analysing the Chinese phenomenon, with the sole aim of trying to explain the reasons behind this what in their minds appeared like a surrealistic affair. And they tried to forecast how far this will go. Pundits in the US predicted, quite rightly as is now corroborated by reality, that this double-digit growth will, ultimately, dwindle to single-digit growth; but for how long even that would continue, nobody could say with any measure of certainty. Some of them predicted, first, that China will overtake the US by 2050. It later came as close as 2030. The readers of the elitist Western press like the weekly Economist of the UK and the Foreign Affairs, the New York Times, the Washington Post, etc. of the US, to name just four out of an innumerable deluge of print media and, of course, even the occasional watchers of some of the major Western television channels will surely recall these matters.

The Chinese, on their part, remained calm as it appeared from the surface, and talked of a 'peaceful rise of China'. But they started sending hundreds and thousands of their brilliant boys and girls to the best universities in the West, especially in the US, closely followed by those in the UK, Canada, Australia, etc. And taking the advantage of the various proviso of the legal text of the WTO, China started outselling all types of goods and, later, services to all those Western countries as well as in other markets throughout the world. But, in the eyes of the US, the Chinese goods appeared omnipresent there and the ethnic Chinese started becoming all too visible in the West. The US started taking too close a notice of them than, probably, did the other countries, both in the East and the West, although they all became uncomfortably aware of this. No sooner had these young Chinese men and women started going back home after receiving all the technical knowledge and training than they started applying them, under state patronage, to lay a very strong technological foundation in their home country. The result is for everyone to see today. They are now at par with, and in some cases even superior to, the West they have acquired those skills from.

The West, and especially the US, started feeling more and more uncomfortable with this state of affairs. But having befriended China in the early 1970s to counter the then Soviet Union, and coming very recently as they did out of the nerve-racking tensions of the Cold War, the successive US administrations did not want to fall out with China so easily. They nudged and, at times, admonished China for its alleged overly-protected market, artificially pegged currency and utter disregard for intellectual property rights. China made some concessions from time to time, but appears not to have opened up its economy to an extent as the West had done. And China's trade surplus reached trillions of dollars, it being $375 billion in 1917 and $225.79 billion from January-September, 2018 against the US alone. Moreover, some Chinese enterprises and individual tycoons started acquiring renowned US and some other Western business conglomerates. So while the relations between China and the US on the surface, and at the political levels, appeared calm, the sentiments of the people in general became incendiary. Their fear of China of not just overtaking them economically and militarily, but also taking over their country and its economy became palpable. The outside world, as it now appears, failed to properly appreciate this state of the broad US sentiment, and continued to carry on business as usual. This mood of the people of the US seems to have been captured by the film director Jay Roach in his 2012 film Campaign, a comedy of a political satire, based on a book written by Shawn Harwell and Chris Henchy. The film depicts the story of a local election (obviously between candidates of the two major contending parties of the United States). It shows the kidnapping of one candidate by his rival, or one of them going into hiding and the other getting blamed for his disappearance, a usual affair in many a local elections in banana republics. But the most noteworthy matters brought to the fore in the satiric film is racism and apparently a genuine fear, although unfounded, among the electorates against Chinese and of China. China, of course, epitomises 'the other' in the film, which drops a broad enough innuendo to encompass the non-Americans, or even non-whites. Religious bigotry also plays quite an important part in the film. Some of the characters there loudly profess the US to be not just a Christian country, but even that Jesus Christ himself was born in the US! The writers of the book, and the maker of the film out of it, have, no doubt, made a very honest attempt, in this very successful satire, to portray the mood and the thought process of the average American, who actually decides the course of the US politics and society. I have dwelt on this satire in some detail only to drive home to our readers that the rise of populism, 'make America great again' type of nationalism, racism and fear of the outsiders, especially in the face of an unprecedented rise of China, prepared the necessary breeding ground for the rise of politicians like Donald Trump and his ilk. What we see all around us in today's world, in respect of the kind and quality of political leadership, does differ from one another only in degree not in kind.

Donald Trump's campaign rhetoric actually has now turned out to be his real promises as part of his election manifesto. The majority of the Americans felt elated with his promise of 'making America great again', and seriously took his pledge of 'building a fine wall on the US border with Mexico and make Mexico pay for it' or 'imposing 40 per cent tariff on all Chinese imports to America' to achieve that goal. Most of the Democrats, the enlightened Republicans, or the informed outsiders of America and of the rest of the world considered those promises to be too wild to believe, and thought the US electorate, or at least the majority of them, would actually do so. But the reality of Trump's election victory has proved otherwise. Although Donald Trump has lost his grip on the House of Representative in November's mid-term polls, he has managed to tighten his hold on the Senate. We do not dwell at any length on the outcome of this on the US politics. But we may still say that the President continues to have a great following, in fact two-thirds of the Americans, as a recent poll has shown, expressed their readiness to sacrifice by paying more prices for everything that is most likely to result in Trump's highly protectionist policy. Trump, in fact, has been successful to convince them that- -- (a) the outside world, especially China, has stolen their jobs taking the advantage of lax economic policies of his predecessors, creating unemployment, especially among the not-so-educated white Americans; (b) that they have been able to do so through unfair trade under institutions like the WTO; (c) that they have forced American companies operating in China to share their technological secrets with the Chinese, who then copied those to sell goods in the US and elsewhere at a price cheaper than America's, causing loss of American business even in the home country; and (d) that they have manipulated their currency by keeping it artificially pegged to discourage imports and encouraging exports over the past decades creating a huge trade and balance of payments surplus. Donald Trump vowed to rectify all these and to 'make America great again'. And the American electorate, on balance, was swayed by this.

The first salvoes of the cannon were fired, as could only be expected, by the Commander-in-Chief of the Armed Forces of the United States of America, President Donald Trump. It was in January, 2018, when the US imposed an additional tariff on solar panels, most of which are manufactured in China. On July 6th of the same year, US imposed tariff at the rate of 25 per cent on $34 billion worth of imports from China. They were mostly flat-screen televisions, aircraft parts and medical devices. A further tariff of 25 per cent was imposed on $200 billion worth of imports from China. These were in addition of 10 per cent duty on aluminium and 25 per cent on steel not only of Chinese origin, but across the board on those of all US allies in Europa and East Asia. And the US President's terming of the NAFTA 'the worst trade deal ever made' led, ultimately, to re-negotiating a new accord, first, with Canada. Mexico later joined it, and the new pact is called USMCA (United States-Mexico-Canada Agreement). This re-negotiated NAFTA has been hailed by Donald Trump as 'a historic transaction', although The Washington Post columnist Anne Applebaum commented on October, 01, 2018, a day after the deal was concluded, "….which it is-----if you believe that history is made everyday the Sun rises." This USMCA is supposed to take effect from 1st January, 2020. Canada, as a small economy compared to that of the US, felt compelled to save as much of the NAFTA as was possible, especially her dairy and steel products. Mexico felt helpless and agreed to accept the condition of being allowed to export cars and their parts manufactured by labourers with an hourly wage of not less than US$16.00, more than three times the actual wage in Mexico. The US has shoved it down the gullet of Mexico to retain the competitiveness of the US car industry, but the buyers in the US would be required to pay more than they do now for the relatively cheaper cars made in Mexico. Not just cars, Trump's protectionism may, in the short term, create some new jobs and some of the closed factories in the US might be opened. But in the medium- and the long-run, cost-pushed inflation might be too much for the American citizenry to bear for long. And since most of the components of the technological firms are sourced from China, the USA might lose its competitiveness in the world market because of its short-sighted policy.

The research firm Goldman Sachs says that inflation in the US, as a result of these tariff impositions, may rise between 0.03-0.05 per cent. Morgan Stanly predicts that global GDP growth, as a result of this Trade War, may go down by 0.81 percentage points. The primary losers of Trump's Trade War are surely going to be the American consumers. The creation of some new jobs in inefficient and hitherto-shutdown American factories, as we now watch, are going to be more than offset in the form of higher prices paid by the American consumers in their nation's market place. Many other specialists have voiced similar concerns. Stanford's Hoover Institute's Research Fellow, Russ Roberts has also said that if the trade war between the US and China as well as between US and the EU intensifies, it may lead to a recession, which would be bad for everyone in the world. In the US, it will cause consumers to cut back on their domestically-produced more expensive goods. That will lead to a recession. And if Trump Administration repeats the folly caused during the Great Depression of the 1930s by Smoot-Hawley Act of raising tariff wall to steady its domestic demand, the Recession might spread globally like in the 1930s.

After this bird's eye view of the global position should Trump continue with his extremely protectionist policies, we may now take a brief look at what might befall Bangladesh, when the country is actually on the cusp of coming out of the LDC status and dreams to be a developed country by the year 2041.

We may classify the potential impacts on Bangladesh into three categories, namely (1) Export, (2) Import, and (3) Investment. We are told by the industry leaders in the RMG sector that many US and other overseas buyers have started coming back to Bangladesh. But that is still very marginal. Bangladesh's share in the total US RMG market has grown from 6.41 per cent to 6.46 per cent in 2017. An article in a recent issue of the Economist titled 'Asia and the Trade War', it has been said that Bangladesh will gain mostly in the RMG sector, although that is also likely to be less than Vietnam, but other growing Asian economies like Cambodia, and even Myanmar are likely to be benefited more. Bangladesh is also likely to be benefited by a lowering of tariff for Bangladesh, India and two other countries by China. But China has already started depreciating her currency in order to retain as much of her global competitiveness as possible. That is going to whittle down some of the export benefits Bangladesh might otherwise get in the Chinese market.

We may now consider the impact of the trade war on imports by Bangladesh. Chinese tariff on the US cotton and soybean has reduced their international market price by around 10 per cent. But we import only around 20 per cent of our cotton from the US, and the rest from India. With imposition of tariff on the US cotton by China, she has started shifting orders for the same to India. Taking advantage of this higher demand, India has increased the price of her cotton by 10-12 per cent. So, Bangladesh does not seem to have much edge here unless she diverts her cotton procurement to the US.

Soybean consumers might get some benefits in the form of lower prices as Chinese tariff on the US soybean has already depressed its global price. Imports of all kinds from China would now be cheaper compared to that in the recent past as she has depreciated her currency. But the danger is that the cheaper Chinese goods might flood Bangladesh markets as they will become still cheaper, and China would likely be pushing for their enhanced sale in countries like Bangladesh.

The principal raw materials of our steel industry are steel scraps. The major source of this is the US. But its price has started going up for no clearly understandable reason. Because US tariff on Chinese and Indian steel should make them easily available to Bangladesh at a relatively lesser cost. We have a feeling it will soon be so.

The impact of the trade war on investment in Bangladesh deserves a very closer look. The impact on global FDI flow has registered a 23 per cent decline in 2017 to $1.43 trillion from $1.87 trillion in the previous year. One expectation of investment inflow to Bangladesh is through factory relocation. It was predicted even before the start of the trade war as the rising wage-levels in fast-growing China could not support their labour-intensive, low-technology industries like RMG. The US has so far been very careful about avoiding imposition of any new tariff on Chinese RMG as it would most certainly affect almost everybody in the US. But some other industries like steel or electronics might be relocated to Bangladesh. But if Bangladesh cannot quickly improve her infrastructure and substantially reduce the cost of doing business here, the dream of relocation of Chinese or any other industry would never be a reality. But over and above this, if the trade war persists for long enough, global supply chain will get distorted and raise cost of production, globally. Consumer demand may be shifted harming Bangladesh's exports. The worst of all fears for Bangladesh is that if the trade war actually does not end soon, its economy might take a battering and face all the undesirable consequences.


Ali Ahmed now works as the Chief Executive Officer at the Bangladesh Foreign Trade Institute, Dhaka. He was a former Member(Customs) at The National Board of Revenue. aahmed48@gmail.com

Nesar Ahmed now works as the Director, Bangladesh Foreign Trade Institute, Dhaka. He was previously a Joint Secretary at the Ministry of Commerce.

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