Thursday, May 24, 2018

Threats of trade war between China and USA

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The world is in the belief that free and fair trade is one of the most powerful engines for growth, supporting millions of jobs and contributing to prosperity. Bangladesh policy makers also un-willingly and slowly moving toward free economy. The leader of free trade policy, USA has followed the policy from the late 1940s until today with closely zero import tariffs with infrequent exceptions on a few goods such as garment.

All the US Presidents irrespective of political parties in power followed the same policy. After assuming power, President Donald Trump threatened tariffs of 45 percent on China and 35 percent on Mexico, two of the United States' biggest trading partners. Trump wants China to reduce its bilateral trade surplus with the US by USD 100 billion. 

The US President believes tariff on imports of foreign steel would raise the price of imported steel and encourage US firms and consumers to buy domestically produced steel instead. This will benefit US steel industry. His action will protect and create jobs in the US steel industry.

USA yet to announce import tariffs, as declared, on more than 1,300 types of Chinese-made goods worth around USD 60 billion per year. But in early March 2018, Trump unveiled sweeping tariffs of 25 percent on steel and 10 percent on aluminum, which he justified on the basis of national security.

In contrast, Trump has exempted most major exporters of steel to the US. Canada, for example, is exempted on the condition of a successful renegotiation of the North American Free Trade Agreement (NAFTA). However, apart from steel products, the US has decided to impose punitive tariffs on imports from China on the grounds that U.S intellectual property rights, including those over U.S. companies' cutting-edge technologies, are being infringed in China.

The Chinese have a plan to impose tariffs in two stages: first, a 15 percent duty on 120 products, including fruit and wine, and then, after further assessing the impact of the United States' tariffs, a 25 percent tariff on eight other products, including pork, It is especially exported from  farming regions in states that voted for Trump. 

It is a counter-measure taken after the US administration announced a proposed list of products subject to additional tariffs, which covers Chinese exports worth $50 billion. Beijing believes the levies as a possible response if US President Donald Trump imposes threatened tariffs on a $50 billion tally of Chinese imports.

The US announces to start a trade war against China in an arrogant and peremptory way and China has already get ready for retaliatory steps. Nevertheless, bilateral trade friction is feared to intensify.

The decision is inflaming passions and taxing US relationships with key allies. Worst of all, his actions are motivated by pure politics. The EU and the US themselves were about to involve into a trade war after Trump in March threatened to impose tariffs on steel and aluminum imports that would, imposed on European manufacturers.

But US exempted EU, giving them negotiating time until May 1, 2018 to come up with a solution to alleged unfair trade policies of EU countries. The Europeans reject US allegations, which have mostly circled on Germany's auto industry, and prepared a list of counter-measures in case the US reverses course and slaps on the tariffs.

The US trade policy toward others is also discriminatory. Nearly all Bangladeshi imports were subject to US duty and the tariffs on them were equivalent to 15.2% of the total value of that country's shipments to the US-the highest such average rate among the 232 countries, territories and other jurisdictions in the ITC database. In 2017, Bangladesh's exports to the US totaled $5.7 billion, and 95% of them were clothes, shoes, headgear, and related items. On the other hand some other similar countries can export garments and others without any tax in USA market.

The US ally in Europe shall also suffer from the trade war even after US exemptions for EU. Cars are one sensitive US export on China's $50-billion hit-list, which also includes politically charged products like soybeans and aircraft. German carmakers having manufacturing plant in USA like BMW and Mercedes-Benz maker Daimler would be worse hit by proposed Chinese import tariffs than American auto firms, a study has found.

Most of the American-built BMWs and Mercedes sent to China were costly SUVs, which could increase in price by up to 20 percent if Beijing implements its threatened tariff increases.

Business information company IHS estimated BMW would export 89,000 vehicles from America to China in 2018, while Mercedes would ship 65,000, making them by far the biggest US-China exporters. US-made cars accounted for around 280,000 imports into China last year, behind top importer Japan but ahead of Germany.

Before the trade war, both the nations step in an escalating trans-Pacific war of words, Trump said he would slap a further $100 billion of tariffs on Chinese goods if Beijing retaliated. U.S. agricultural exports to China represent almost $20 billion annually for American farmers.

China buys roughly half of the U.S. soybean exports, or about $14 billion annually, and is the second-largest buyer of American cotton. A wide swath of the farm economy could be impacted if China goes ahead with tariffs on soybeans and other lucrative crops. China's list of U.S. goods facing tariffs also includes cotton, corn, wheat and beef.

It is known to all that, Chinese investments in the United States hit $29 billion in 2017, according to the US China Business Council, down 35 percent compared with 2016 due to limits set by Beijing on foreign investment, especially in housing and hospitality. China can divert these investments to other capital hungry countries.

The United States and China are increasingly interdependent on each other economically. If these countries impose high import tariffs on each other despite such relations, their bilateral trade would become sluggish. Moreover, the prices of products imported from each other would rise in their respective markets, increasing the burden on businesses and consumers. If the economies of these countries became stagnant as a result, it would inevitably affect the world economy.

A united US-EU action against China would be more effective than American tariffs alone, but so far Trump has not managed to build one rather make EU concerned of their actions. On the other hand Chinese strategy is to isolate the United States, splitting it from allies in Europe and Asia who otherwise also have concerns of aggressive Chinese trade and investment policies. 

China has already surpassed the US in manufacturing output, savings, trade, and even GDP when measured in terms of purchasing power parity. Today's trade conflict reveals the extent to which America has lost its dominant global position. When a poor, developing China started increasing its trade with the West a quarter-century ago, few imagined that it would now be the world's industrial giant.

Free trade has supported the growth of the post-World War II world economy. If an all-out trade war were to break out between major powers, it would rock the foundations for growth. The United States and China are responsible for not only maintaining international security but also stabilizing the world economy.

China should be aware that it is also responsible for the friction. Japan and European countries have also criticized China for its excessive production of steel and infringements on intellectual property rights. Beijing should step up measures to tackle these problems. On the other hand, US may urge China to rectify its practices and use alternative dispute resolution mechanism of WTO and also talk bilaterally to come to a settlement.

The proposed sanction of US is pending for operationalize by June 2018. The world will expect a peaceful settlement of the dispute.

The writer is a legal economist. Email: mssiddiqui2035@gmail.com

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