After a third round of trade talks between China and the US ended in stalemate a US$100bn trade war is on the horizon. America has published a list of 1,300 Chinese products which it proposes to hit with a 25% tariff. China has it own list covering 106 categories. As the Chinese embassy in Washington DC said “As the Chinese saying goes, it is only polite to reciprocate.” See graph below from The Economist.
US list covers Chinese products worth – $US$46bn in 2017 – 9% of exports to USA.
Chinese list covers US products worth – US$50bn in 2017 – 38% of exports to China
Historians of trade have an advantage over those who study wars of the military kind. Each side is a trade dispute lays out in detail the products to be affected. That makes it easier to analyse their strategies. Trump’s blunt attack targeting of a particular industry – steel and aluminium – is to supposedly make the industry in the US stronger. China retaliated by placing tariffs on US$0.2bn-worth of iron and steel tubes, pipes and hollow profiles, and US$1.2bn-worth of aluminium waste.
The US face a trade-off between protecting their own industries with import tariffs at the same time as increasing the cost of goods for its consumers. There is also the likelihood of causing disruptions to the US economy by increasing the cost of intermediate goods (aircraft parts, robots, semiconductors) which ultimately leads to higher prices.
Good long-run deal for China
It seems that China has the dominant position for the following reasons:
- China can stop purchasing US aircraft
- Impose an embargo on US soybean products
- Dump US Treasury Bills and other securities
- Chinese companies could reduce demand for US business services
- The government could persuade firms not to buy US products
China is indirectly one of America’s biggest employers. China could look to buy all it commercial aircraft from European consortium Airbus rather than Boeing. That move alone wold cost 179,000 US jobs. China controls key components in global supply and production networks
Initially a trade war would mean job losses for both countries but in the long-run with China looking to develop a more domestic led consumption model the export market becomes less significant – Project Syndicate. See video below:
Source: The Economist – Blow for Blow – April 7th 2018
In his US Presidential campaign one area that Donald Trump was clear about was trade. During the oil crisis years of 1973 (oil prices quadrupled) and 1979 (oil prices doubled) the traditional US car / truck became very expensive to run and Americans started to buy significant numbers of Japanese cars which were much more reliable and cheaper to run. Trump alluded to this and stated that Japan was robbing America blind. He also criticised inept and corrupt elites for moving jobs abroad – ‘China is killing us’ he said.
In order to even the playing field he has vowed to:
- impose a 45% tariff on imports from China to compensate for their manipulation of its currency.
- impose a 35% tariff on goods from Mexico in order to protect American jobs.
- renegotiate existing agreements like the North American Free Trade Agreement with Canada and Mexico
- pull out of the Trans-Pacific Partnership and the Transatlantic Trade and Investment Partnership.
- Trump has threatened to withdraw from the World Trade Organisation (164 members)
America has free-trade agreements with 20 other states and the percentages below tell you how important trade is. See also the graphic from The Economist.
- 33% of America’s imports come from countries they have free trade agreements
- 50% of Americas’ exports come from countries they have free trade agreements
If Trump does go ahead with a trade-war it is estimated employment in private companies employment would decline by 4.8m jobs by 2019. It is ironic that the very group that supported Donald Trump will be the most disadvantaged. Furthermore, with anti-free trade policies comes higher prices which will harm living standards and worsen Americas fiscal position. Although it might preserve some jobs it will worsen prospects and lower well-being for others – OECD.
With America pulling out of the TPP China maybe keen to take the place of the US in this agreement with 11 other Pacific nations.
TPP [would be] a good thing in the long run because it sets high standards for international trade and investment,” says Prof. Larry Qiu, of Hong Kong University’s School of Economics and Finance. He adds that what the world needs is not “more trade and investment … but higher quality and better ordered trade and investment
In yesterday’s Wall Street Journal there was an article on New Zealand Wine and Protectionism. With wine consumption increasing significantly in countries like China and Russia there is the fear amongst New Zealand growers about knockoff wines posing as premium labels exported from regions like Marlborough and Central Otago. NZ winemakers are lobbying for the same legal protection that French producers won for Champagne 20 years ago which prevents winemakers in other countries using the names of local brands. The WTO recognise geographical indicators and this comes under its protection.
The value of New Zealand’s wine exports has risen 33% to 1.2 billion New Zealand dollars (US$983.4 million) since 2008, with shipments to China alone jumping tenfold to 2.2 million liters. That is offsetting flatter growth in traditional markets such as Australia, the U.S. and the U.K., which remain the biggest buyers of New Zealand wine.
“The New Zealand wine industry has raised concern with me about the possible growth of counterfeits in our export markets,” Craig Foss Commerce Minister.
Here is another worthwhile video from Phil Holden. This time he is talking about Tariffs and Protectionism which is in Unit 4 of the AS course. However you will be expected to know this at A2 level also. Remember the following reasons for barriers to trade:
a) Safeguard home country employment
b) Correct balance of payments disequilibria
c) Prevent labour exploitation in developing countries (or other political – not economic – goals)
d) Prevent Dumping
e) Safeguard infant industries
Having finished the trade topic in the AS course I was interested to read that although global trade is on the increase the World Trade Organisation (WTO) are still concerned about the level of protectionism that countries seem to implementing. When the Global Finaincial Crisis (GFC) started to impact on global growth the G20 countries, which account for 85% of global GDP, were determined not to replicate the protectionist measures of the 1930’s when the world economy went through a depressionary phase. China and India are steaming along and China accounts for 20% of India’s trade deficit – in the last year India has a trade deficit with China of US$40bn. According to the Economist for US$1 worth of exports to China, India imports US$3. What is also significant about world trade is that later this Russia joins the WTO and it is assumed that foreign direct investment in Russia will increase significantly. HSBC have suggested that the value of global trade will increase by 90% over the next 15 years.
However the WTO are not so sure of the growth in global trade. They believe that protectionist measures are a real threat to the free movement of goods and services. The barriers include higher tariffs and import and custom controls but more significant is the less obvious barrier which is excessive regulation/red tape. The graph below shows that China is the country targeted by the most governments for protectionist measures. Fifty-five countries have passed measures that hurt Chinese exports. That is followed by the U.S., with 49 measures against it; and Japan, with 46. Source WSJ.
Here is a clip on Free Trade and Protectionism. Although quite long it is very good as an introduction to the Trade topic – Unit 4 of the Cambridge International AS course.
Societies have traded for thousands of years. However, the last 35 years have seen an explosion in world trade. How has this global integration affected the world’s economy and individual markets and how are the overall gains of world trade distributed?