Trump's trade war and the global economic outlook

Muhammad Mahmood | Published: August 04, 2018 21:27:06 | Updated: August 31, 2018 21:35:28

Robert Salomon, associate professor of International Management at New York University, is interviewed by Xinhua at his office in New York City, the United States, August 02, 2018: He told Xinhua that the Trump administration's tariff strategy is based on a faulty understanding of trade, and in particular trade deficits. — Xinhua

As President Trump is doubling down on his threat of imposing further tariffs, markets around the world are taking the likelihood of a trade war far more seriously. He definitely upped the ante by declaring to impose further 10 per cent tariff on US$200 billion worth of Chinese goods coming into the USA. The latest decision comes on top of the imposition of 25 per cent tariffs on US$34 billion plus another US$16 billion imports from China.

The products targeted in this latest round range from seafood to furniture to electronic components. The products targeted are beyond goods related to China's "Made in China 2025'' strategy which has been at the centre of Trump's campaign. China also retaliated with its own tariffs, particularly targeting US agricultural products and cars. It is getting clearer that China and the US are on the brink of a trade war. Furthermore, China is also known for applying indirect barriers including delays at the border in the event of any trade confrontation.

A recent survey found that US companies operating in China are overwhelmingly opposed to Trump tariffs and fear a corporate backlash against their operation from Beijing in view of the rising trade tensions between the two countries. Yet about 60 per cent of US companies indicated to increase their investment in China this year. More surprisingly almost half of US companies see revenue opportunities from China's 'Made in China 2025' than a threat. The survey definitely debunks Trump's tariff policy in so far as to its ability to onshore US companies and the threat posed by China's technology policy.

But Trump is willing to wall up 326 million US consumers and deprive them from benefitting from lower prices and negatively escalating impact on the US economy with the hope for extracting trade and investment concessions from China. But China's retaliatory tariffs have enhanced trade tensions between the two countries. These trade tensions will inevitably cause collateral damage in a world where supply chains and intermediate inputs have become increasingly global in nature. But Trump refuses to acknowledge that his trade policy will impose costs on the US economy and the rest of the world. His usual tactics is to blame others for any problem he might face and he firmly believes he is always right. He also does not seem to be bothered about retracting from what he says from one day to the other.

In fact this approach of his self-righteousness extends beyond china to the rest of the world. He has already imposed tariffs on steel and aluminium which will affect the European Union (EU) and Canada and has already threatened to impose tariffs on imported cars which will particularly affect Germany, Japan and South Korea. Trump even declared the EU to be as bad as China, only smaller. His latest tariff measures against China are seen as a clear signal to the EU that the US would not back away from the trade fight. In effect many observers believe that his latest tariff measures against China signal that the trade war is officially underway. Even the truce declared on July 25 with the EU has started to come apart.

The US under Trump's presidency is backing away from multilateral trading arrangement that has prevailed until now. He has shown his dislike for the World Trade Organisation (WTO) both in action and utterances. With the US now hostile to open trade, the EU, China, Japan and most other major trading nations in Asia renewed their commitment to the open multilateral trading system. Japan and the EU have already signed a free trade agreement. Chinese Premier Li Keqiang visited Germany and he and German Chancellor Angela Merkel pledged to uphold the rule-based global open trading system. German Chancellor further hoped that China and Germany "won't get caught up in a global spiral of protectionism''.

Such a commitment is worth pursuing as these countries' prosperity was built on trade. Given Trump and his trade nationalist policy and ideological orientation, the US is unlikely to return to the rules-based global trading arrangement in the foreseeable future. Even if a full-blown trade war, which is in no country's interest, is averted with the US, trade relations will not return to what we have had until now and the US will go for some sort of managed trade solution for resolving  its trade disputes with major trading partners with the consequences that entail in such an arrangement.

The Chinese newspaper People's Daily accused the USA of politicising trade, which it said would have negative impact on the global economy. Now the International Monetary Fund (IMF) has also come to the same conclusion. Maurice Obstfeld, IMF Chief Economist, unveiled the latest global economic outlook in mid-July this year where he warned that the US President's tariff hostilities were "the greatest near-term threat to global growth''. He further said that if the threatened tariff measures were materialised, global gross domestic product (GDP) would fall by 0.5 per cent from the projected figure and that would wipe off US$435 billion from global GDP in 2020.

Focusing on the US economy, Obstfeld warned that the US economy would be "especially vulnerable'' resulting from tit-for-tat retaliation against the USA. Ironically, IMF further projected that the US current account deficit would further widen despite the Trump administration's drive to reduce it because of tax cuts and increased government spending which would increase demand for imports.

Earlier this year IMF Chief Christine Lagarde warned that the US was in danger of "tearing apart'' the post-war global economic system. Obstfeld further said that greater use of protectionist measures could hinder business investment, disrupt global supply chains, slow spread of productivity-enhancing technologies and raise the price of consumer goods. Beyond trade war, he noted other risks include ballooning debt, both public and private, and associated problems faced by central banks under the current economic climate. He also blamed "non-inclusive growth and structural transformation" for the "political malaise'' represented by Trump's protectionism. He further said that "the political future will only darken'' if policies do not address issues of equity.

The effects of the trade war in progress will  remain confined not only to the countries involved but also impact on developing countries like Bangladesh. While the overall effects of trade war will be substantial arising from declining volume of trade and shrinking markets, there will be variations how the impact is felt - some countries more so than others. This is largely due to differences in export composition and destinations. Countries whose export composition is highly concentrated and if their export markets can exercise substantial market power, would suffer most. No country wins in a trade war but poorer countries are likely to bear its brunt more than the richer countries.

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