There will be no winners in US-China trade war

Published: May 18, 2019 1:25:50 PM

While Trump and Chinese President Xi Jinping are engaged in “Who will blink first” gamesmanship, its effects are beginning to be felt.

In spite of several rounds of bilateral talks over the past 17 months, major differences between the two countries remain unresolved. (Reuters File photo)

By Frank F. Islam

The United States and China, the two largest economies in the world, are currently engaged in what might be called the mother of all trade wars. The first salvo of the trade war was fired by President Donald Trump in January 2018 — less than a year into his presidency — when he announced tariffs on products of several nations, including Chinese solar panels and washing machines.

In spite of several rounds of bilateral talks over the past 17 months, major differences between the two countries remain unresolved. It looked like this would potentially end this month when a Chinese delegation came to Washington, D.C., ostensibly to agree on a trade deal. That did not occur, however, as President Donald Trump accused the Chinese of negotiating in bad faith and changing the terms of a possible trade agreement.

As a result of this failure, Washington and Beijing escalated the trade war with tit-for-tat increases in the tariff. First, the United States increased tariffs to 25 per cent on $200 billion worth of Chinese goods. Then, China announced that it would retaliate by raising its tariffs on $60 billion worth of American goods.

While Trump and Chinese President Xi Jinping are engaged in “Who will blink first” gamesmanship, its effects are beginning to be felt.

Even before the latest round of tariffs kicked in, consumer and industrial activities slowed down in April in both countries. Analysts warn that tariffs will impact both economies negatively.

It is projected that China could shed more than 1 per cent of its GDP, if there is no de-escalation. The consulting firm Trade Partnership Worldwide estimates that a trade war could result in the loss of more than 2.23 million jobs annually in the United States. In the U.S., though, the biggest
losers will be American consumers, who will see their cost of goods go up and their wallets shrink because of the tariffs.

Impact on India

How will the US-China trade war impact India?

Some see “silver linings” or “golden opportunities” for India in the impasse.

Anand Mahindra, Chairman of the manufacturing behemoth Mahindra Group, has said that a “wave of Chinese investment in India may be imminent” as a result of the higher US tariff on Chinese products. He tweeted earlier this week: “Even if they settle, a Chinese firm with large exports to the U.S would be wise to hedge & invest in a subsidiary in India & transfer its scale- manufacturing skills. Direct exports would simply become indirect.”

The United Nations Conference on Trade and Development (UNCTAD) predicts Indian exports to grow by 3.5 per cent because of the US-China trade war. One sector in India that is expected to benefit is manufacturing.

Among those who have forecast manufacturing gains for India is Lei Jun, founder of the Xiaomi, the largest smartphone manufacturer in China. He said in an interview to an Indian newspaper that, because of the trade war, some of the investments are likely to be redirected to India.

Apple has already shifted some manufacturing to India in an attempt to reduce its dependence on China. Now, in the wake of the escalation of the trade dispute, the world’s leading phone maker is reportedly going to shift the production of its low-cost iPhone SE to India as well.

Another tech giant that is preparing a contingency plan to move production out of China is Asustek Computer, the fifth largest PC maker in the world.

These are some of the potential positive effects for of a China-U.S. trade war. They should be viewed with caution, however.

One reason for this is that India does not have a manufacturing ecosystem comparable to China. At the very best, the country could handle only a tenth of Apple’s total Chinese production. For now, India lacks the infrastructure to attract a “wave of Chinese investment.” That could change
if New Delhi eased some of its byzantine regulatory restrictions.

Even if that was done, whatever gains India might secure from the US-China trade war could be offset by its negative ripple effects. Indian investors have already lost billions as the country’s stock markets, like bourses everywhere else, have reacted negatively to the trade war.

Impact on the World

The impact of this trade war will not be restricted to China and the U.S., or what it means for India.

As the UNCTAD notes in a recent report, “The impact of trade tensions goes well beyond that of reshaping international trade flows. They also hinder cooperation efforts to find solutions to global challenges, from improving the multilateral trading system to achieving the Sustainable Development Goals adopted by the international community in 2015. In the long run, this will be the most damaging effect of all. Nobody will win.”

So, in this interconnected and interdendent world, it is in everyone’s best interests — including India’s — for Beijing and Washington to resolve their differences quickly, without creating further conflict and consternation in the global economy worldwide.

Unfortunately, the chances of that happening do not appear very bright, at least in the short run. This is the case because hardliners within the Trump administration are under the impression that global trade wars or the threat of them is good both policy-wise and politically.

This belief reflects Trump’s approach to “deal-making” in all areas during his tenure in office. He goes on the offensive, threatens, speaks in bellicose terms, bullies, and then withdraws from negotiations if he doesn’t get his way.

While this might work within the ranks of the Republican Party, there is substantial evidence in the U.S. that it does not work domestically. This confrontation with China proves that it does not work in the international arena either.

That said President Trump and his advisors will not back down. They need to be able to “win” or to claim they have won in order to make a deal. That was demonstrated by the process and outcomes of the renegotiated North American Free Trade Agreement (now called the United States-Mexico-Canada Agreement), which resulted in only nominal changes to the original agreement.

So, if that is any indicator, this China-U.S. dispute may play out the same way. Eventually, there will be a deal. The question becomes how long that eventually will be. The longer that period the more severe the consequences for the U.S., China, and the world economy.

Recognizing this, it is imperative for those who are interested in promoting economic growth and development through cooperation and collaboration rather than conflict and unhealthy competition to support the early resolution of this war. Such a resolution will lead to the long- term benefits for developing and developed countries alike and enhance sustainability and stability in a world that is become more and more fragile.

That will help countries build their economies through trade rather than trade wars. It is a win-win formula as opposed to the lose-lose formula being pursued at present.

(Frank F. Islam is an entrepreneur and thought leader based in Washington, DC.)

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