Trump intensifies trade war with China: Its ramifications

Muhammad Mahmood | Published: October 06, 2018 21:32:22 | Updated: October 07, 2018 21:29:28

This navy image obtained by naval website shows a confrontation between the USS DECATUR, left, and a Chinese destroyer in the South China Sea on September 30, 2018. -US Navy photo

President Trump has further intensified trade war with China by slapping new tariffs on Chinese imports into the USA. The latest round of tariffs involves the imposition of 10 per cent tariffs on US$200 billion worth of Chinese goods, with the provision of escalating the rate to 25 per cent next year. His latest round of tariffs has come with a threat 'if countries will not make fair deal with us, they will be 'tariffed'. Trump extols the virtue of tariff as a weapon of trade war. His threat also includes imposition of tariffs on further US$267 billion worth of Chinese goods which will practically cause all Chinese goods to face varying degrees of tariffs in the US market. The Washington Post described the new round of tariffs on Chinese imports as "one of the most severe economic restrictions ever imposed by a US president''.

In response, China announced new tariffs on US$60 billion worth of US goods. This will likely prompt Trump to follow upon his next threat, a further tariff on US$267 billion worth of Chinese goods.

Earlier tariffs mainly used to target intermediate inputs but new tariffs include consumer goods. The latest round of tariffs and retaliatory tariffs will likely to kill off any tentative trade talks between the two countries. Washington has already identified China as a strategic competitor, meaning a military threat, and that remains the inherent logic of the US trade war with China. Such a policy will inexorably lead to military confrontation as we are already seeing the US navy is provoking China by violating China's territorial water in the South China sea on the pretext of freedom of navigation. Such provocations have potential to turn into a shooting war.

This intensification of trade war has caused significant concerns and tensions around the world. It has now become a source of uncertainty for the global economic outlook. Christine Lagarde, the Chief of the International Monetary Fund (IMF), has already sounded the warning bell by issuing a call for countries to "to de-escalate and resolve the current trade disputes.'' Her call came at a press conference held recently in Washington. But her warning will fall into deaf ears because objective of Trump's trade war in not simply to narrow the trade gap between the USA and China but goes far beyond that.

The trade war with China is also driven by a determination of the USA to halt, even reverse, advances in China's industrial and technological base as encapsulated in the "Made in China 2025" Plan.  The plan was devised in 2015 primarily to further the plan to narrow the income gap between China and the advanced economies over a period of 40 years. The US views this plan as a challenge to the US dominance and control of leading-edge technologies. They further view that the Plan is not about China's desire to join the club of technologically advanced countries like Japan and Korea which poses no challenge to the USA. But the Plan is considered by the USA as a scheme to overtake all of them which will put China in the position of leadership in advanced technologies. The trade war has now become a ploy to thwart China's technological advance. But such an aggressive policy in effect might backfire because it would strengthen China's resolve to enhance its innovation and gain technological supremacy as they now realise they cannot rely on others.

Trump has already threatened the World Trade Organisation (WTO): ""If they don't shape up, I would withdraw from the WTO." He further said the establishment of the WTO "was the single worst trade deal ever made''. Robert Lighthizer, the US Trade Representative,   considers it was a great mistake to let China into the WTO which was promoted by the Clinton administration in 2001. The idea at the time was that China would remain at the bottom of the value chain and that would be beneficial for the USA.  But China has moved up the value chain in a very short period of time and overtook Germany in export of goods by 2009 and its share of global manufactures exports went up close to 20 per cent now.

A US withdrawal   from the WTO will have far more devastating effect on the global economy than an escalating trade war with China. This will completely put in disarray not only the global trading system but also investment and manufacturing. The IMF Chief, Christine Lagarde now advocates a global trade system "fit for the future'' and has said "the stakes are high because the fracturing of global value chains could have a devastating effect on many countries, including advanced economies''.  Trump and his economic advisers are in effect trying to do exactly what the IMF Chief fears. With their rallying cry of "America First" imbued with economic nationalism, they are attempting to break up the global value chains to bring manufacturing back to the USA on the ground of "national security''. But Trump and his economic advisers are not alone in this endeavour, they have strong support from the US military-industrial complex, trade unions and a section of the Democrats. In effect US trade policy has got entwined with national security policy in view of China being viewed as a strategic rival.

Buoyed by his success in renegotiating the North American Free Trade Agreement (NAFTA) with a new US-Mexico-Canada Agreement or USMCA, Trump is now demanding the same kind of preferential treatment from China and other countries around the world who are on his radar screen at the moment. One of the clauses in the USMCA confers power to the USA to veto any move by Canada or Mexico to enter into a free trade agreement with a "non-market economy'' a clear reference to China. This success has emboldened Trump and his team so much that they are now evermore determined to undermine the WTO and pursue the policy of negotiating bilateral trade agreements outside the WTO where it can use its economic power to bully the other side into accepting its terms and conditions. Mike Pompeo, US Secretary of State, said "to the extent one wants to call this a trade war, we are determined to win it''. Larry Kudlow, White House economic advisor, is working on a ploy to put up a joint front against China where the EU, Canada, Mexico and Japan will join together with the USA to isolate China.

There are signs that the Chinese economy is facing some head winds due to the US tariff measures against China. The Chinese currency depreciated by about 6.0 per cent since June this year. This obviously partly offsets the impact of US tariffs. In effect such a depreciation will increase China's international competitiveness. China can use other policy instruments to enhance its competitiveness by deploying wages and price controls and boosting productivity.

Chinese exports to the rest of the world account for only 18 per cent of its gross domestic product (GDP) which is still high relative to other larger economies in the world but declined from 35 per cent in 2006. This indicates domestic consumption has been expanding at a much faster rate.  China has been shifting towards a growth model based on increased domestic consumption than on exports and investment. With Trump's tariffs on Chinese goods, he is practically helping China to do what it has already been trying to do.

Chinese exports to the USA account for 4.0 per cent of its GDP. This includes export of goods containing US intermediate inputs. It is now estimated that real impact of Trump tariffs on the Chinese economy would be equivalent to 1.5 per cent of Chinese GDP adjusted for re-exports of US intermediate inputs.

Trump's vision to recreate the USA of the 1950s and the 1960s based on manufacturing activities of that time is unlikely to materialise. Manufacturing has undergone profound transformation which will not be able to provide jobs for those very people whose cause he champions in his public declarations and not to mention the negative consequences on employment arising from his trade policy.

Muhammad Mahmood is an independent economic and political analyst.

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