The US-China Trade War Could Be Disastrous For The World Economy

Posted by Mahesh Kumar Kamtam in GlobeScope, News
July 21, 2018

For a long time, U.S. President Donald Trump has accused China of  ‘unfair trade practices’ for not opening their markets to U.S. companies. He also accused China of theft of intellectual property rights. Fulfilling the electoral mandate, initially, the Trump administration slapped trade tariffs of 25% on nearly $50 billion worth of Chinese goods. The Chinese swiftly retaliated by imposing tariffs on nearly 545 U.S. products worth $34 Billion including agricultural commodities such as soybeans, aircraft carrier parts etc. In a public statement, the Chinese Foreign Ministry condemned  U.S. action as “unilateral and causing disruptions in the global trading order thereby hampering global economic recovery”.

In 2015, during the run-up to the presidency, Donald Trump had alleged China of taking advantage of the global trading system and creating an asymmetric trade balance with the United States. To woo the popular base and restore manufacturing jobs and counter the cheap Chinese imports, Trump pledged to impose as high as 45% tariffs on Chinese goods. The United States with its automation and tech innovation has moved from a manufacturing economy to a more service-dominated and automated economy, which resulted in a change in the nature of jobs and decline of manufacturing jobs. China, on the other hand, with its cheap labour, large-scale manufacturing and rapid export growth has largely dominated the global trade with its cheap imports in more than 120 countries.

Trump’s rudimentary argument was to correct the inequalities in the trading system, and hence, he resorted to tariffs. If imposing tariffs was that easy then why don’t other countries resort to tariffs in order to save their domestic companies? Well, the idea has been tried in the past by European countries between the 16th to 18th century in the form of mercantilism. At this time, countries used tariffs to counter imports from other trading partners and maintain sufficient forex reserves and national economic policies to reduce the trade deficit and current account deficit. However, this had grave consequences, leading to rivalries among nations owing to an eagerness to secure markets in the form of imperialism. Therefore, Trump’s heuristics don’t yield the desired results. Consequently, it raises serious questions of “rule-based global order” and “hegemonic bullionism”.

Potential consequences

Trump shot the first bullet and anticipated to secure a trade deal with China and showcase it as a victory for his next election campaign. What Trump largely does not understand is the possible escalation of threat from China would cause irreversible damage to global trade. It would reduce the trust in trading partners thereby hampering the multilateral institutions. The United States has always had a half-hearted approach in promising multilateralism to secure its interest internationally. China, which has made a transition to integrate its economy with the global supply chain has indeed benefited China and the U.S. alike.

The near possibility of China overtaking the United States in the near future has caused real apprehension among all. Trump’s allegations on China stems out of the domestic fear of China’s rise and the questions on the American monopoly and influence in the international order.

Trump has largely played to a set of audience in America who wish to see America as a winner. The tariff threat would in no way hamper China’s ascendancy as a global power. However, it would delay the rise to some considerable extent.

China is a major exporter to the United States with goods of around $500 billion. Trump imposing a tariff and China retaliating would leave a trade deficit of $375 billion. Even more serious concerns arise from economic analysts who say that China is holding nearly $1.2 trillion of the U.S. public debt. And with an ever-increasing dollar accumulation, this will be a leverage in the future in influencing the United States fiscal policy and interest rates. This also threatens the financial sovereignty of the US. In the age of globalisation, China is making optimum use of the competitive advantage.

With huge export-led growth, China has conquered the world markets, disrupting the existing supply chains and creating its own. Belt and road initiatives signal the new wave of China’s global ascendency in securing its interest abroad. This has future implications from the new kind of challenges from the United States and dealing with it is obviously a herculean task for Chinese policymakers. An interesting observation can be drawn from the recent trade fight between China and the United States. In its retaliation, China has “strategically targeted” the U.S. exports by imposing tariffs on soybean farmers in the states of Iowa, Ohio, Nebraska and Indiana who voted for Trump in the 2016 elections. China in a way has started to influence the domestic politics of the U.S. and this is to continue in the near future.

Unwilling to resolve

Both the sides, for now, are reluctant to engage in serious negotiations and are playing rhetoric to cause more tremors in the market. Trump has threatened to impose another round of tariffs worth $200 billion, while Chinese have referred the issue to WTO for amicable resolution of the dispute. IMF warns of the danger of a possible recession with the ongoing trade fight. Any possible solution should truly recognise the problem of “the inner contradictions of the global capitalist system”  which has mostly worked in favour of developed countries.

Similar Posts
Sharique Umar in GlobeScope
August 8, 2018
Taha Joher in GlobeScope
August 7, 2018