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US-China trade war escalating international tension

Muhammad Zamir | June 24, 2019 00:00:00

CHINESE DEFENCE MINISTER WEI FENGHE (RIGHT) AND ACTING US DEFENCE SECRETARY PATRICK SHANAHAN MEETING ON THE SIDELINES OF THE SHANGRI-LA DIALOGUE ON MAY 31, 2019: The detracting aspects of US-China face-off were clearly evident during the recently concluded Shangri-La Dialogue in Singapore. —Photo: Reuters

Analysts have started questioning as to who is losing out because of the US-China trade war. It has been escalating in the recent weeks, with both countries announcing or threatening new tariffs on each other's goods.

This ball game started on July 06, 2018, with both countries announcing tariffs at 10 per cent on products valued at US$ 34 billion being traded between the two countries. On August 23, 2018 another US$ 16 billion of products came within this paradigm. Subsequently, there was a steep rise on September 17, 2018 with the US announcing that 10 per cent tariff would apply on US$ 200 billion of Chinese products. China took a similar measure on September 24, 2018 with regard to US products entering China valued at US$ 60 billion.

Subsequently, some degree of hope was raised with both countries agreeing to enter into negotiations on this issue. This led to a temporary pause with regard to imposition of new tariff between December, 2018 and March, 2019.

On May 10, 2019, the friction escalated once again with the USA announcing that tariffs on US$ 200 billion of Chinese products would now be at 25 per cent. China retaliated with the announcement that it would also undertake application of tariffs on US products worth US$ 60 billion at the rate of 25 per cent.

Trump, launched his trade war last year in a bid to reduce US trade deficit with China and also force Beijing to undertake economic reforms. He has used these measures seeking to chastise global industries which, as he alleges, are not only using unfair state subsidies but also acquiring American technology through forced transfers without respect for intellectual rights.

US President Donald Trump has said repeatedly that China will pay these tariffs, but his economic adviser, Larry Kudlow has recently admitted that US importers, not Chinese firms, pay the tariffs in the form of taxes to the US government. Christophe Bondy, a lawyer at Cooley LLP firms and senior counsel to the Canadian government during the Canada-EU free trade agreement negotiations, has confirmed this. These additional costs are then simply passed on to US consumers in the form of higher prices.

It would be interesting to note here that academic studies carried out recently by economists from the Federal Reserve Bank of New York and also from Princeton University and Columbia University have indicated that American businesses and consumers paid almost the entire cost of US trade tariffs imposed on imports from China and elsewhere last year. The biggest victims of Trump's trade wars were farmers and blue-collar workers in areas that supported Trump in the 2016 election.

It may be mentioned here that despite the growing sensitivity, China has remained America's top trading partner, with exports rising 7.0 per cent last year. However, trade flows to the US appears to have slipped 9.0 per cent in the first quarter of 2019, suggesting that the trade war is starting to bite. Despite this, economists have noted that there is no evidence that Chinese firms have cut their prices in a bid to keep US firms buying their products. There has been a slight change in the routine. Some exporters of highly substitutable goods have just dropped out of the market as US firms have started importing from elsewhere. This dynamics is however not applying for Chinese manufacturers who are selling highly differentiated goods and have not reduced their prices. This is probably because US importers rely on them to a great extent.

This evolving situation has led many to question as to why US firms do not substitute purchasing Chinese products from other sources when Chinese manufacturers do not reduce their price. Strategic analysts hold that such a measure is not as easy as many think. They have observed that it takes a long time for productivity and value chains to be reoriented and that all comes at an extra cost. Added to that is the fact that China is also a manufacturing powerhouse, hard to replace within the global supply chain framework.

Socio-economists refer in this context to the findings of the research carried out by the Peterson Institute for International Economics in 2012 after US President Obama in 2009 had placed a steep tariff of 35 per cent on Chinese tyres, citing a surge in imports that was costing US jobs. The research found that the cost to American consumers from higher Tyre prices was around $ 1.1 billion in 2011. Their investigation revealed that although about 1,200 manufacturing jobs were saved, the additional money US consumers spent reduced their spending on other retail goods, "indirectly lowering employment in the retail industry".

SETBACK IN NEGOTIATIONS: American negotiators have, in June, alleged that their Chinese counterparts have reneged on their previous commitments. However China on June 02 retorted by saying that the US should bear "sole and entire responsibility" for the setback in negotiations. They have accused Washington of repeatedly changing its demands. In the meantime the situation has exacerbated due to the US moving to blacklist Chinese tech titan Huawei over national security concerns.

On June 02, the Chinese Vice Commerce Minister Wang Shouwen drew attention to another interesting data. He pointed out that the United States has overestimated the trade deficit between the two countries and China should not be blamed for job losses in the US manufacturing sector. He claimed that the US goods and services deficit with China is actually closer to US$ 150 billion and not the US$ 410 billion quoted by US officials. He said in his press conference that China does not instruct domestic companies to acquire certain projects and related technology. Wang also noted that the Chinese Commerce Ministry was investigating reports of delays in customs checks. He added that China would make efforts to cut length of customs checks and also reduce cost of importers. He mentioned that China was willing to meet other countries' requirements for rare earth consumption - an important ingredient for digital technology equipment.

A Chinese statement has also stated that "the US tariff measures have not boosted American economic growth. Instead they have done serious harm to the US economy. The trade war has not made America great again".

FEARS OF GLOBAL ECONOMIC DOWNTURN: In the meantime, trade fears between these two economic giants have cast a long shadow on the global stock exchanges. At the end of May, 2019 reports have surfaced indicating that global stock markets have shed over US$ 2.0 trillion in value in May, 2019. The S&P 500 dropped 1.3 per cent, bringing its loss for May 6.6 per cent, equivalent to about US$ 1.6 trillion in market capital. Other stock markets have also suffered.

Reuters reported from London and Hong Kong on June 03 that factory activity contracted across Asia and Europe in May as the trade war escalated between Washington and Beijing. This has raised fears of global economic downturn and added pressure on policymakers to roll out more stimuli. Economists have pointed out that imposition of higher trade tariffs is bound to take its toll on global commerce and further dent business and consumer sentiment. This would lead to job losses and delays in investment decisions.

Economists hope that this evolving paradigm will receive focused attention during the June 28-29 G-20 Summit in Osaka, Japan. They are looking forward to US President Donald Trump and Chinese President Xi Jinping addressing this factor. It is being underlined that the current geo-political matrix is in trouble as it will have to resolve the impact that is bound to rise from several contentious issues- Brexit, US-Iran dispute and that of China and the USA.

Some economists are predicting dire consequences unless this convoluted issue is resolved. They are predicting that its complicated facets are bound to lead to a renewed race to the bottom on interest rates if trade tensions fail to ease. In Britain, the Brexit stockpiling boom of early 2019 has given way in May to the steepest downturn in British manufacturing in almost three years as new orders have dried up, boding ill for economic growth in the second quarter. In similar vein evidence has emerged that the Eurozone economy is also under pressure and will likely be of concern to policymakers at the European Central Bank (ECB). Central banks in Australia and India have also expressed their concern regarding the trade impasse.

JP Morgan has also indicated that they now expect the US Federal reserve to cut rates twice in the remaining portion of this year. This needs to be considered as a major change from its previous forecast that rates would stay on hold until the end of 2020.

Both China and the United States might claim that their economy is not being affected because of this exercise. However, they both need to step back from the precipice, take a fresh look as to where they are presently located. They also should understand that the osmotic effect of their controversial exercise is affecting socio-economic interests all over the world.

This can only create instability, not promise of a better future for the majority of the world's population. This growing face-off between the world's two largest economies is increasing anxiety among smaller Asian states. The detracting aspects were clearly evident during the recently concluded Shangri-La Dialogue in Singapore.

Muhammad Zamir, a former Ambassador, is an analyst specialised in foreign affairs, right to information and good governance.

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