The Financial Express

US and China harden positions as trade war heats up

Trump has weaponised trade for his economic wars

| Updated: May 18, 2019 22:07:54

Trump has weaponised trade for his economic wars

The United States and China both hardened their bargaining positions on Monday (May, 13) and now face a deadlock over their trade negotiations.  US President has warned China to act now to strike a trade deal or face much worse terms if the deal is negotiated after his re-election in 2020 of which he appears to be quite confident. China responded by saying that it would not swallow any "bitter fruit'' that harmed its core interests. The essential reason for the breakdown of the talks lies in the fundamental differences in the positions both the sides have taken.

The key issue, among others, that led to the breakdown of talks centred around the lifting of the tariffs imposed on Chinese goods on which an agreement was reached. But the US insisted that they must remain in place until China agree to "very strong'' enforcement measures to the satisfaction of the US. The US effectively blindsided the Chinese delegation in believing that they were moving towards a resolution of the trade conflict when actually the US was planning new trade offensive. The Chinese were taken by surprise.   The US demand was rejected by China on the grounds it represented unequal treatment - and it was rightly so. Such belligerent rhetoric from the US was matched by action with new scaled-up tariffs on Chinese goods with promises of more to come in the near future. In turn, China also responded in kind.

The Wall Street Journal confirmed that the sticking point was the US wanted to keep the tariffs on Chinese goods in place even after a trade deal was signed. Vice Premier Liu He clearly presented the Chinese position on this issue while he was in Washington. He said China needed a dignified trade agreement - a deal that must be balanced. That would require lifting of all punitive tariffs on Chinese goods and include "realistic'' agreements for China to buy US goods, he elaborated. In effect what the US did, it just moved the goal posts before Vice Premier Liu He arrived in Washington to finalise the deal. They announced a list of alleged backtracking by China and presented it with a fait accompli to take it or leave it. If one wants to scuttle any negotiations, this is the perfect way to do it.

Trump is rather more convinced now than ever before that the tariffs would help to bringing in billions of dollars and move jobs back to the US. He repeatedly hailed his tariffs claiming that would reinvigorate the US economy and China will foot the bill for that. But he does not see retaliations coming from China or other countries including from the neighbouring countries on whose products also he has imposed hefty tariffs. Trump has deployed tariffs not seen on a scale in decades or even close to a century. The problem with any tariffs is that once imposed they create vested interests and become difficult to remove.  Tariffs are always far easier to impose but very difficult to remove. No wonder when China wanted the tariffs on Chinese imports be removed once a deal is struck - which is a very reasonable and logical demand, Trump balked. And this turned out to be the major issue that led to the breakdown of trade talks. As the vested interests get further deeply entrenched over time, that will make it also difficult for Trump's successors to remove the tariffs on China. In effect, tariffs are a mechanism for redistribution income from US consumers to politically connected industries. US consumers also foot the bill for each new job such created in the protected industries by paying higher prices and also it does not create general economic prosperity.

Furthermore, farm exports from the US to China have been hit hard by China's retaliatory tariffs. Farm bankruptcies are rising and prices of farm products are falling. To ameliorate their difficult and challenging situation Trump has dished out US$15 billion in subsidies to the farmers and promised more were in the pipeline. He is blaming China for giving subsidies to Chinese manufacturing firms when he is doing the same to US agriculture sector. The US doles out every year billions of dollars worth of R&D (Research and development)  funds to the war industry to develop new weapons which is for all practical purposes are massive state subsidies to the industry enabling it to become the major export industry in the country. The US also subsidises its corporations with massive tax cuts, Export-Import Bank and direct handouts. Trump's tariff war has steadily been disrupting the global trading system and global supply chains. In fact, the rules-based global trading has now been rendered nearly dead. Trump has given a new lease of life to the long discredited and discarded economic concept of "Mercantilism'' where might prevails in conducting  trade relations.

The collapse of the trade talks in Washington was almost foretold. The nature of the  negotiations had undergone qualitative change as the US began to widen the scope of the negotiations by dictating the terms for changes in Chinese laws and economic policy. But China attended the negotiations with the objective of preventing any escalation of the trade war. But now the prospect of a trade deal has become very limited as both sides have stiffened their positions.

It has become very clear that the US has other issues to resolve with China and is using the trade leverage to achieve that. That will make the trade negotiations a very lengthy process and any outcome that may result from it remains very unclear. Even when the trade negotiations were underway, the US intensified its aggressive posturing in the South China Sea.

Trump is not alone in his determination to reshape China and its economic system. His views are also shared by the Democrats, powerful sections of the business establishment, in particular the war industry, national security establishment and trade unions. They all share the view that China has manipulated the global trading system to its advantage and to the disadvantage of the US.

Trump and his advisers are now warning about China's economic and military ambitions in very stark terms. Also, of particular concern to the US its new industries with new technologies with serious military implications. If China reaches parity or leapfrog the US in these areas, it could seriously put a very big dent into the US military's global dominance.

While visiting London last week, US Secretary of State Mike Pompeo drew similarities between China on the one hand and Russia and Iran's  ambitions, on the other hand. He went further highlighting the danger China poses and said it is "a new kind of challenge; an authoritarian regime that's integrated economically into the West in ways the Soviet Union never was''. The Office of the Secretary of Defence in its latest report to the Congress clearly outlined China's determination to be the pre-eminent power in the Indo-Pacific. China now has been identified as the existential threat to the US economic and military dominance across the globe. The US is not much interested in reducing the trade deficit or accept trade and investment concessions offered by China, they want to box China to thwart its ability to develop the next generation technological advances in  areas such AI, 5G, Cybersecurity and other wide range of technologies. The US is demanding China must halt its efforts to develop hi-tech industries and at the same time also put a brake on developing its own domestic market with state assistance

Trump's trade war indeed has elements of real war incorporated into it. In effect, the trade is just one war among other wars on many fronts Trump is waging now. He has sent very recently warships to the South China Sea into the waters claimed by China making it a potential flash point. The US also rescinded the waiver on the ban on the purchase of oil from Iran putting China in a difficult situation to procure oil. This ban is tantamount to economic sabotage of China as China is largely dependent imported energy. This will have serious consequences for Iran also. The US has already sent an aircraft carrier and battleships close to the Iranian territorial waters. Trump also imposed new economic sanctions and tightened the existing ones on Venezuela, North Korea and Cuba. Trump in effect has completely weaponised trade for his economic wars afoot against many other countries also. He has now created a world of chaos and made the US imperial operational system pretty overloaded. China, Iran, Venezuela, North Korea, to name a few but they constitute quite a formidable list. He does not understand that the US imperial system was not designed to face crisis after crisis. He has created a state of permanent chaos. Trump does not understand that the main objective of any imperial power is to maintain order over its imperial reach, not to create chaos - and exactly that's what he is doing. There is a trend emerging in Trump's dealing with countries he considers not toeing the US line - to use high-risk brinkmanship. He is doing that not only with China but also with Iran and Venezuela now.

Muhammad Mahmood is an independent economic and political analyst.



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