US-China trade war creating international tensions

The US-China trade war has been escalating in the recent weeks, with both countries announ­cing new tariffs on each other’s goods.

It may be recalled that this ball game started on 6 July, 2018, with both countries announcing tariffs at 10 per cent on products valued at US Dollar 34 billion being traded between the two countries. On 23 August, 2018 another US Dollar 16 billion of products came within this paradigm. Subsequently, there was a steep rise on 17 September, 2018 with the US announcing that 10 per cent tariff would apply on US Dollar 200 billion of Chinese products. China took a similar measure on 24 September, 2018 with regard to US products entering China valued at US Dollar 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 10 May, 2019, the friction escalated once again with the USA announcing that tariffs on US Dollar 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 Dollar 60 billion at the rate of 25 per cent.

These measures with both countries announcing new tariffs on each other's goods have helped generate further misunderstanding and apprehension. 

Trump, launched his trade war last year in a bid to reduce the US trade deficit with China and also force Beijing to undertake economic reforms. He has also used these measures seeking to dominate global industries who 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 taxes, even though his economic advisor, 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. Duties imposed on a wide range of imports, from steel to washing machines, cost US firms and consumers about US Dollar3 billion a month in additional tax costs. The studies also identified a further US Dollar1.4 billion in losses linked to depressed demand. Another interesting bit that emerged from these studies was that 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% last year. However, trade flows to the US appears to have slipped 9% 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. This aspect has also come under serious scrutiny elsewhere. Strategic analysts have subsequently held 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 have also been referring 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% 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 $1.1bn in 2011. Their investigation also 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".

American negotiators have, in June, alleged that their Chinese counterparts have reneged on their previous commitments. However China on 2 June has retorted by saying that the US should bear “sole and entire responsibility” for the setback in negotiations. They have also 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 2 June, the Chinese Vice Commerce Minister Wang Shouwen has drawn attention to another interesting data. He has 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 has informed that the US goods and services deficit with China is actually closer to US Dollar 150 billion and not the US Dollar 410 billion quoted by US officials. he has also said in his press conference that China does not instruct domestic companies to acquire certain projects and related technology. Wang has also noted that the Chinese Commerce Ministry is investigating reports of delays in customs checks. He has also added that China will make efforts to cut length of customs checks and also reduce cost of importers. He has also mentioned that China is 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”.

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 Dollar 2 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 Dollar 1.6 trillion in market capital. Other stock markets have also suffered.

It has also been revealed by Reuters from London and Hong Kong on 3 June that factory activity contracted across Asia and Europe in Mayas 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. It is being pointed out by economists 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 have consequently started hoping that this evolving paradigm will receive focused attention during the forthcoming G-20 Summit being convened in Osaka, Japan at the end of June. 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. Central banks in Australia and India have also expressed their concern regarding the trade impasse.

JP Morgan, aware of the possible implications 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 also 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 specialized in foreign affairs, right to information and good governance.