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A possible trade war between the United States and China has rattled businesses across the globe, including in India where the stock market responded quite adversely to a perceived global trade war. The US President Donald Trump, living up to his election promises of ‘America first’ and preventing China from indulging in unfair trade practices imposed heavy tariffs on the import of Chinese goods in the end of March 2018, thereby inviting a retaliatory action from China.
What is a ‘Trade War’?
Simplistically put, a trade war may be called a dispute between trading nations arising out of clash of interests, wherein a country imposes tariffs on certain imports in order to restrict trade and in response, the country or countries affected by those tariffs impose their own fees on imports.
‘Tariffs’ are basically fees or taxes assessed on certain products when imported into a country.
Trump’s Reasons for Imposing Tariff on Chinese Goods
At present, the United States has a trade deficit of $500 Billion a year. A trade deficit occurs when a country is importing more goods that it is exporting. In other words, trade deficit represents an outflow of domestic currency to foreign markets.
Besides, China has been indulging in cyber and intellectual property theft of US technologies, which is being assessed by Trump’s administration at another $300 billion of loss to US economy.
President Trump blames China for unfair trade practices that drive the trade deficit, along with barriers to market access, forced technology transfers and intellectual property theft.
The main objective of the move by President Trump to slap 25% tariffs on $50 billion to $60 billion in Chinese exports to the US, including aerospace, information and communication technology, and machinery is apparently to restrict China from demanding technology transfers from US companies in return for access to China’s market.
Retaliatory Action by China
China was quick to retaliate by matching Trump’s proposed tariffs, with tariffs worth $50 billion on wide range of US products, including scrap aluminum, small aircraft, soybeans, pork, sparkling wine and apples.
The escalation matrix kept climbing as Trump promised tariffs on about 1,300 Chinese products, China, within hours responded with more tariffs, this time taking aim at Boeing planes, cars and chemicals.
Action by US on Chinese Retaliation
President Trump called the Chinese retaliation as ‘unfair’ and on 05 April 2018, said that “I have instructed the US Trade Representative Robert Lighthizer to consider whether $100 billion of additional tariffs would be appropriate under section 301of the Trade Act of 1974 and, if so, to identify the products upon which to impose such tariffs.”
The above said direction of President Trump sets into motion the process of instituting sanctions, which begins with a 30-day review period in which the White House will seek public comments on the proposal.
“Made in China 2025” Program
The “Made in China 2025” program, calls for Chinese government assistance of $300 billion to 10 important industries that have been identified so as to achieve self sufficiency by 2025.
The plan’s mechanism is simple: It would provide large, low-interest loans from state-owned investment funds and development banks; assistance in buying foreign competitors; and extensive research subsidies, all with the goal of making China largely self-sufficient in the targeted industries.
The plan envisages accelerating R & D on artificial intelligence, integrated circuits, bio-pharmacy, 5G mobile communications and other technologies by developing industrial clusters in these fields.
The “Made in China 2025” program also covers the manufacturing of aircraft, robots, electric cars, rail equipment, ships and agricultural machinery. China seeks to wean itself off imports from companies like Boeing, Airbus, General Electric, Siemens, Nissan, Renault, Samsung and Intel.
Chinese government’s plan says that these selected Chinese industries should own as much as 80 percent of their home market in the next eight years.
The global players in these fields, especially from the United States feel the threat of being forced out from abroad and Chinese government-subsidized global players would compete unfairly with private competitors.
Implications of US – China Trade War
Implications for USA
US economists and senators are criticizing Trumps actions, which have raised fears of a wide-ranging trade war that could impact the American agriculture, manufacturing and technology sectors.
In a hard hitting remark, US Senator Ben Sasse, said that “Hopefully the President is just blowing off steam again but, if he’s even half-serious, this is nuts. China is guilty of many things, but the President has no actual plan to win right now. He’s threatening to light American agriculture on fire. Let’s absolutely take on Chinese bad behavior, but with a plan that punishes them instead of us. This is the dumbest possible way to do this.”
The United States has placed levies on Chinese products that American households routinely purchase. Hence, American consumers are likely to face higher prices on furniture, televisions, shoes, clothes and possibly even iPhones.
The Chinese have tools other than tariffs at their disposal, including limiting the operations of American banks and other service providers in China.
When we consider all the products that China has threatened to put tariffs on so far, it is likely to affect about 2.1 million jobs in US. Hence, the actions taken by Trump administration with the view to put America first seem to be counterproductive when looked upon in its entirety.
A trade war could derail the current global economic expansion and cripple American businesses that depend on business with China, e.g. cars like Chevrolets and Fords, even though those are built almost entirely from Chinese-made parts and assembled in factories in China.
Furthermore, it could also further complicate geopolitical priorities given the Trump administration has enlisted the help of the Chinese in scheduling historic talks with North Korea next month.
China could try to raise the temperature in the South China Sea dispute by installing more military equipment on the artificial islands that it has recently built in close proximity to the shores of Indonesia, Malaysia and the Philippines.
Lastly, Chinese President Xi Jinping runs a communist country, where he has absolute control over the media in his country and can shape the opinion of Chinese people to withstand US sanctions.
Moreover, at present, China has trade surplus cash of about $3 trillion that he can use to aid Chinese companies that get hurt in the coming months and subsidize soybean prices so Chinese consumers don’t face massive sticker shock at the store.
Implications for China
China would have trouble finding enough American goods to penalize if it sought to impose a proportional retaliation. China bought only $130.4 billion worth of American goods last year, while the United States bought $505.6 billion worth of Chinese goods.
In the overall analysis, China has more to lose economically in an all-out trade war. The Chinese economy is dependent on exports, and nearly 20 percent of its exports go to the United States.
However, in the midterm, China can withstand much more than what the US can withstand because China is not constrained by the rule of law or a representative democracy.
In the coming months, China can make life harder for US companies operating in China, such as Nike, Disney or Apple, while the Trump administration, does not even have the corresponding moves on the table, as the US government does not have as much direct control over companies operating within its borders.
US may use coercive diplomacy to apply pressure on China. President Trump has mentioned that, if China does not agree on economy and trade reforms that are conducive to American interests, then US will reconsider its stance on issues that affect China, including the South China Sea and Taiwan.
Implications for India
A diminished US-China trade engagement could have a positive result for emerging economy’s like India and Brazil, at least in the short run.
The void created due to disruption in trade ties between US and China can serve as an opening for India to enter the market, for instance, if import of Soybean by China from US is hit by tariff, the exports of soybean oil and soya meals could be dented. The space so created can be filled by India to meet the demands of other countries.
However, a long term full-fledged trade war is a bad news for India, as it will slow down global growth and increase inflation. High inflation will have a negative impact on currency and rupee may further fall in comparison to dollar. It will also adversely affect some sectors in the equity market.
There are three basic issues between the US and China trade relations that have resulted in the ongoing impasse:
High US trade deficit accruing out of unfair trade practices by China.
Cyber and intellectual property theft of US technologies by China.
“Made in China 2025” program that will provide unfair advantage in China’s home court.
A number of foreign companies are caught between China’s industrial ambitions and Washington’s efforts to stop them, including major aerospace companies and carmakers. Tariffs could hurt such companies if the United States and China follow through on their plans.
Moreover, if Beijing succeeds in subsidizing the creation of large Chinese rivals in the industries targeted under Made in China 2025 program, these foreign companies will be at a risk of losing their competitiveness. JAI HIND