The spectre of an ugly trade war looms. At the core of this ‘trade war contingency’ lie constructs that define the structure of markets and visceral behavioural factors that have altered the psychology of strategic decisions, both for the United States and China.
The spectre of an ugly trade war looms. At the core of this ‘trade war contingency’ lie constructs that define the structure of markets and visceral behavioural factors that have altered the psychology of strategic decisions, both for the United States and China. The US’s domestic politics, leading to decisions such as tariff setting, will only benefit a small minority. Unexpected global consequences would result from such vote-bank policies and trade-war talk. Even if there was to be a complete walk-back, the structural and behaviuoral constructs would have altered the global trading environment irrevocably.
First, outcomes. Quite rapidly, domestic prices of consumption goods in the United States will go up by the amount of imposed tariffs. The enhanced cost of manufacturing American goods will be factored into prices, and cost-pass-through mechanism will ensure that such increases are factored into final product prices. Switching to another low-cost alternative is not feasible in the context of tariffs placed on Chinese imports. There are limited alternative domestic suppliers. The tariffs are meant to protect American manufacturers. Tariff benefits will be concentrated in sectors and geographies.
Yet, asymmetries are substantial. The tariffs imply vote bank politics, meant to benefit a specific constituency. But, their impact is widespread. Their costs will be diffused basis all over the United States geographic markets; and elsewhere, where goods produced, using Chinese imported items, are exported to.
Contours of the trade war
The United States would want tariffs be imposed on imports from China’s manufacturing sector. These imports provide the foundation materials for the contemporary United States economy to operate. For many items, China’s 21st century production prowess has turned it into a monopoly producer. The United States may have no recourse other than to source the needed items from China.
China, with a massive population, and extensive urbanisation, has become the world’s largest purchasers of food commodities. China’s urbanisation takes away agricultural land, reducing commodity outputs. China’s market demands, as buyer of agricultural commodities, turns it almost into a monopsony purchaser of food grains.
A soya bean example
To understand how the trade war may play out, either as it happens or as a threat, let us take an item affecting China as a major consumer and the United States as a major producer: soya beans. The United States is the world’s largest producer of soya beans. It produces over 100 million tons per year, with the production increasing to that level from 60 million tons in 1985.
Brazil is the second largest producer, at around 80 million tons per year. Argentina is the world’s third largest producer at around 60 million tons per year. Both Brazil and Argentina had zero soya bean production in 1985. In just under 35 years, their combined production exceeds almost one and a half times that of the United States. Latin American production has made it the most important global location for soya bean production.
The top three exporters of soya beans currently are the United States, Brazil and Argentina. The top three importers are China, the European Union and Japan. These account for about two-thirds of global imports. China alone consumes over half of the world’s imports.
Economic implications of tariffs
Two issues arise. Can United States suppliers switch their market, and find another major soya beans buyer, if China reduces imports from the United States because of imposed tariffs? No. The United States faces a monopsonist.
Can Chinese importers switch their purchase of soya beans to another country because United States imports are to cost more? Yes, certainly. Chinese importers can source soya bean shipments from Brazil and Argentina. The United States is not a monopolist soya bean producer. Also, the larger and combined Argentinian and Brazilian production is growing at a faster rate than that of the US. Could China’s switching supply sources from the United States to Brazil and Argentina have a material United States domestic impact? Yes. Soya bean is produced in the United States heartland.
Eleven states—Arkansas, Illinois, Iowa, Indiana, Kansas Minnesota, Missouri, Nebraska, North Dakota, Ohio and South Dakota—are important for soya bean production. These states account for bulk of the United States mass. These states represent the vote-bank holding the balance of power in elections. If the livelihoods of the producers of these 11 states are compromised, that can impact voters’ moods and play out badly at future hustings.
Strategic outcomes from the trade-war threat
In the absence of a trade war, are the livelihoods of the producers and residents of these heartland states compromised, because of trade-war talk? Unfortunately, yes. In strategic negotiations, credible commitments are key. Can the United States credibly commit to carrying out its threat to impose tariffs on Chinese imports? No. The costs for the United States are too high. They will be felt in the entire United States. Obviously, the nation will forcefully express its views in the market for electoral office. But, has the world perspective changed because of fighting talk? Absolutely!
Will China, faced with the threat of tariffs, seek alternative sources of soya bean supply? Likely. Soya bean is a major food item in China. China is a large purchaser of soya beans from Argentina and Brazil. It will ramp up its purchases from these countries, giving these third-country economies a much-needed boost.
China will ramp-up its own global production platforms for agricultural commodities. China has acquired land in Africa and Southern America to enhance its long-term food security by controlled food production. Thus, the increasing Chinese control of land resources will alter Southern America’s political geography. Will this affect the way, in the two Americas, viz. how the South deals with the North? Certainly.
Will the Chinese response to an unconsummated tariff threat permanently affect the welfare of a fifth of the United States? A supplier switch by China, to Argentina and Brazil, can permanently alter soya bean production patterns in the heartland of the United States. This will matter immediately. Hence, the consequences of this trade war between China and the United States can be immensely profound. During World War II, a much-publicised slogan was ‘careless talk costs lives.’ Today, it can be amended to ‘careless talk costs livelihoods.’
By Sumit K Majumdar
Professor of technology strategy, University of Texas at Dallas e-mail: email@example.com