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The Financial Express

Are US allies paying the cost for US-China trade reconciliation?

Poonam Mulchandani   | Published: February 18, 2020 20:12:52


Are US allies paying the cost for US-China trade reconciliation?

Signing of phase 1 trade deal between US and China has come at a cost for other partner countries. Bilateral deals are usually dictated by discrimination. With the increasing proliferation of trade agreements in post-WTO era, it can be seen that there is a shift from multilateralism to bilateralism. Under these agreements, member countries extend concessions to increase the welfare and trade competitiveness in regional market. However, the diversion and reorientation of trade can create a negative material shock for other suppliers.

The tariff battle between the two most important trade partners of the world has ceased with an interim trade agreement. The two significant economies were finally able to conclude an agreement after a series of tit-for-tat tariff rates followed by multiple rounds of negotiations. However, this truce doesn't suggest that the uncertainty won't affect the global growth this year.  A lot of areas are still in discussion, and the picture will be more clear after the second phase of the agreement.

The trade tensions began on March 01, 2018, when the US announced an increase in tariffs for steel and aluminum products initially, this raise was to be implemented for all countries, but soon the US made its intentions clear by imposing 25 per cent tariffs on $100 million worth of imports from China. All the traditional US allies were given exceptions. The US targeted China with the arguments of the massive trade deficit with the partner country. Since 1985, the US trade deficit with China has been soaring high. In 2018, it had a trade deficit of $419 billion. The conflict of trade was not only limited to tariff rates or traded products, but it was extended to financial markets, businesses and technologies as well.

Trade war has made producers shift their manufacturing location out of China to its neighbouring countries and hence South East Asia has proved to be a benefactor in this situation. According to an analysis by Japanese Bank Nomura, Economy of Southeast Asia has seen a boost in its economy. Additionally, Producers of agriculture goods like Brazil and Argentina have also benefitted from Trade war. According to the trade statistics by United Nations Conference on Trade and Development (UNCTAD), during the period of the trade war, China's import of soybean from the US has reduced by 49 per cent, whereas Brazil benefitted and witnessed an 85 per cent increase in its soybean exports to China.

US authorities raised the tariffs to protect the US manufacturing sector. Trump believed that the US needs to be protected from the unfair trade practices of China, and hence the war of retaliatory tariffs began. It is quite intriguing to note that developing countries have always complained about the unfair deals of trade but now similar complaints are emanating from developed countries who established these rules at the first place. This majorly accrues to changing trade winds and increasing competition. However, a lot of empirical studies do suggest that the trade war was nothing but a source of uncertainty and thus has contributed to a global slowdown. A research paper by Flaaen and Pierce, Federal Reserve board has empirically concluded that tariffs have not led to increased manufacturing activity in US. Higher input costs and costs of retaliatory tariffs outweigh the small boost received from import protection tariff.

PHASE 1 OF THE AGREEMENT: According to the Phase 1 agreement, Beijing will have to purchase an additional $200 billion of goods in the next two years in return to US cutting tariffs on Chinese goods. According to US data, China bought $130 billion in goods and $ 56 billion in services in 2017 before the trade war. According to the agreement, China has to purchase an additional $77.7 billion in manufacturing goods and $52.4 billion in energy purchases and $37.6 billion in services from US companies over the two years. (See table I)

The United States has halved the duties imposed on Chinese goods worth $120 billion to 7.5 per cent. Proposed tariffs that were scheduled to go into effect by December 15 have also been rolled back by both the nations. However, despite the deal, the US hasn't changed the tariffs of 25 per cent on $250 billion of Chinese goods, and they are to be modified in phase 2 of the trade deal. It is quite clear that with tariffs still imposed on 2/3rd of Chinese exports, Trump wants to make sure that there exists no possibility of tariff snapbacks for China. The agreement also talks about the regular assessment and the verification of accords implementation.

However, China is a trade-dependent economy and its constant fears of damage have forced them to agree for an unequal treaty. In 2019, the growth rate of China's GDP was 6.1 per cent i.e. slowest in 3 (three) years. The slowdown can be attributed to China's declining demographic dividend, changes in structural workforce and uncertainties in trade. Chinese officials have accused US of forcefully asking them to accept the unequal treaty.

Though Beijing has committed to buy an additional $200 billion of American goods in the next two years, it will be intriguing to observe the same. There are two possibilities, either China will fail to honour the deal or it will substitute other countries with the US. This substitution can be a cost to some of the trade partners which includes Europe and other Asian countries. These countries will not be very glad to lose a huge market in China.

According to a recent study by Germany's Kiel Institute for the World Economy, European Union (EU) ends up losing market share worth US $11 billion next year. After the current deal share of China's import increases from 10 per cent in 2017 to 15 per cent in 2021. However, the share of imports from the rest of world can decline from 74 per cent to 70 per cent along with a decline in EU's share from 16 per cent to 15 per cent. Share of foreign trade for Europe's economy is more significant than the share for China and US. According to World Bank data, the share of trade for Europe was 83 per cent whereas for the US and China it was 27 per cent and 38 per cent respectively.

Also, European countries have other reasons to dislike this unilateral agreement. American tariffs on high tech goods which includes electric cars and commercial aircraft is locked at 25 per cent and since these goods are subsidised by Beijing, their exports could be diverted to European countries. This can hinder the objective of European countries to sell their own cars and aircrafts instead of being flooded with artificially low-priced goods by China.

The figure 1 below depicts major exporting partner for China's major agricultural commodities. Some of the top imported agricultural commodities consist of yellow soyabeans, Palm olein, frozen boneless meat and other food preparations. The major import sources for these goods are Brazil, USA, Argentina, Canada, New Zealand and Australia. Therefore, China's commitment to increase import of agriculture goods from US can affect these trading partners.

The figure 2 shows the suppliers of energy goods. Petroleum oils and oils obtained from bituminous minerals, crude and bituminous coal and medium oils and preparations are some of the articles which are majorly imported by China. The top suppliers of these products are Russia, Saudi Arabia, Iraq, Australia, Qatar and Malaysia.

Figure 3 gives insights about the energy goods. Some of the major goods imported are Electronic integrated circuits, parts of telephone sets, printed circuits and parts of aircrafts. Top suppliers which can be affected through the trade deal are Malaysia, Vietnam, France, germany, Canada and Brazil.

The above pive charts depict the import partners of China and it can be witnessed that the share of US has declined after the trade war. To honour its commitments, the country has to increase the volume of imports from US and as a result, it has to substitute US for other trading partners. European countries along with some Asian partners will be disrupted to a great extent. It could be said that after China, UK and Europe are on US to-do list. These commitments do have a political angle to it, and it describes how if the US has a victory in this trade deal, it can prove to be a help for strengthening trump's election-year campaign. 

US Commerce secretary said in a World Economic Forum (WEF0 conference at Davos that the fears of the other countries are unfounded and he cited the example of American oil and gas where European companies do not compete and hence they won't be affected. A former Russian Commerce Minister has termed the trade deal as ticking time bomb for international trade.

These changing trade winds are now source of debate between bilateralism and multilateral formats. However, using trade policy as a traditional tool for protectionism can lead to disastrous results especially in the current scenario where globally interconnected supply chains complicate everything. If it is carefully analysed, it seems that developed countries are modifying the rules of trade to thwart competition and not to level the playing field.

Poonam Mulchandani is PhD Scholar, Department of Economics and Finance, Birla Institute of Technology & Science (BITS), Pilani , Rajasthan, India

pmulchandani50@gmail.com

 

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