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Trade War… Not quite yet

Biswadeb Chatterjee |

The US and China, the two top trading countries of the world, are seemingly poised to wage a trade war by imposing tariffs and counter-tariffs on their respective import of different commodities and thus distort the concept of free trade as enunciated by the WTO.

The move gained momentum with President Trump announcing tariffs on American imports of steel and aluminium to the extent of 25 per cent and 10 per cent respectively from March 1 this year. Although it shocked its other trading partners with much larger exports of the metals, the target was China, as he had hinted.

Although China retaliated with counter-tariffs on major US exports, it is yet to fully accept the trade war supposedly launched by the US. While Mr Trump tweets that trade wars are good and are easy to win, China asserts that a trade war can never do good to any party as there is no winner in it. However, it is confident that it will withstand such a war should it happen. India, with a burgeoning trade surplus with the US of more than $30 billion, has reasons to be unnerved.

The US has levelled a serious charge against China that it has abused bilateral trade by stealing its manufacturing technology and thereby violating the TRIMS (Trade Related Investment Measures) and TRIPS (Trade Related Intellectual Property Rights) provisions of WTO. China made this “theft” of intellectual property rights possible by its coercive provision that any US firm, while making investment in China, must take an indigenous firm as its partner.

As the cheap labour in China coupled with massive infrastructure have attracted numerous US firms to leave their country, it has robbed the homeland of thousands of factories and lakhs of jobs. The US says that it has been negotiating with China on this massive deprivation of its technological advancement for the last fifteen years but without result. Rather, trade deficit with China has risen to $308 billion or a little below 40 per cent of its total global deficit of $800 billion over the years.

Another allegation often levelled against China is that of manipulating its exchange rate to gain a competitive advantage as its cheaper currency makes it easier to sell its goods abroad. Now Trump says that talk is not cheap and it is time to take action as the US had erred in supporting China’s entry into the WTO in response to a proposal by India.

President Trump has recalled his pledge to the electorate that unlike his predecessors, he must thwart the huge trade gap with China, which he dubs to be the economic enemy, and, in the process, with other countries as well. China is still silent against such serious US allegations of distorting the WTO norms of investment and trade.

It is, however, a surprise that the US, being the major proponent of WTO, is now on the back foot. Its own trade has been vitiated as China wants to emerge as the major player by using the liberal world trade. So apart from trade restrictions, the US also plans to impose new investment restrictions on China apart from complaining to the WTO.

So far, the US has proposed tariff measures, directed towards Chinese imports, to the extent of $ 656 billion starting from 3 April to the first week of August. On the other hand, China has so far proposed tariffs to the extent of only $100 billion from April to June and has actually fulfilled $37 billion. In case of both the US and China, the last dose of such tariffs of $34 billion came on 6 July.

A total of 818 Chinese products including machinery and components like semiconductors, were taxed against 130 US products including soyabean, other agricultural products and automobiles, steel, aluminium, washing machines and solar panels.

This has been regarded as true retaliation. For the US, this is the most extensive import protection since the days of the Great Depression of the1930s. However, experts still believe that this is not a trade war, but a tariff battle only. But while the US has kept a comprehensive list of 1100 Chinese products ready, China has listed 128 US products to be taxed in phases.

Although US has declared its trade protective tariffs in haste, it has to consider the ramifications at home and abroad and has announced compulsory waiting for 60 days to receive public comments as Trump’s ultimate aim is to win the mid-term election this year and the presidential election in 2020.

Trump gets the mixed reaction in the political arena as a section of the Democratic Camp applauds his aggressiveness in targeting tariffs on a country which is clearly cheating. However, the US must express concern over the cases of its major allies providing a much larger quantity of steel to it such as the EU (21 per cent), Canada (17 per cent), South Korea (9 per cent), Brazil and Mexico (8 per cent each) and Japan (5 per cent).

Evidently, the US steel tariffs will do more harm to them and so Trump, as of now, is trying to pacify them after keeping the operation of tariff suspended for them. The US administration, however, says any country with a trade surplus over $30 billion is the target of US tariff. The Chinese experts think that by imposing the steel tariff against their country, Trump is trying to test the water and is likely to extend his tariff measures to many other commodities fearing a trade war.

Trump is desperate to keep his electoral commitment to reduce America’s enormous trade deficit which is never possible unless China’s export bill is substantially cut. In fact, China apprehends such a step to block its trade and is determined to complete its massive OBOR projects against huge spending to boost trade in so far as the “non-reached areas” of Asia, Europe, Africa and Latin America are concerned. But if the US goes on imposing restrictions on China’s larger exports such as electronics, machinery, furniture, toys and footwear, it will definitely react and retaliate.

Reports out of Washington suggest that initially Trump wants to go with tariffs up to $60 billion a year to target China’s major exports. But, at the same time, the US administration has realised that tariffs are damaging the taxable capacity of its consumers by raising domestic prices.

As for example, tariffs of $30 billion a year would wipe out over a third of the savings American families could make from doubling the standard deduction in the recent tax reforms by the Trump administration. In case of tariffs being $60 billion a year, the impact would be more devastating causing severe damage to the US economic growth and job creation, apart from breaking out a fatal trade war.

The US must show concern with its agriculture as China buys some $14 billion worth of soyabean from the US every year, which is nearly one-third of its total produce. Chinese tariff on it will damage farm profit in the southern states, indeed the Republican support base.

China can retaliate against every US tariff with a counter-tariff, but it wants to react slowly believing that, in a globalised world, one cannot target a country without larger consequences both at home and the world. China is the biggest exporter of goods, worth more than $2 trillion a year, but at the same time a leading market for other countries ranking second as an importer of both goods and services with its trade surplus on the wane from below
10 per cent in 2008 to 1.4 per cent in 2017.

So it is better for China, as economist Xu Bin avers, to pre-empt the US tariffs not by retaliation but by reaching a compromise. China wants expansion, not contraction, of its trade to supplement the domestic demand crunch arising out of low growth in consecutive years with last year’s rate coming down to 6.5 per cent and so needs a cautious approach.

Considering concerns of both sides, many in the US and China feel that a trade war is a long way away and imposition of tariffs is the US ploy to bring China to the negotiating table so that the latter restricts its disruptive trade practices to prosper in bilateral trade in a more of level playing field.

The writer was in the West Bengal Education Service, and retired as Associate Professor in Economics.