US-China trade war: A new phase of global recession?

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New Delhi | Published: July 9, 2018 1:07:47 AM

This trade war will hurt not only both the economies, but will also disturb global trade and may begin a new phase of global recession. The German central bank has slashed growth rate owing to the hovering “global trade disputes.”

At present, the US-China trade deficit is the highest in the world—at 5.2 billion (as of 2017).

American President Donald Trump, since assuming office, has consistently shown a dislike—both through words and policies—towards immigration, Islamic fundamentalism and trade protectionism by foreign states. The Trump administration has, beginning 2018, imposed fresh import tariffs on a number of countries spanning the globe. The countries include China, India, Canada, Mexico and a few others. Many authors and global observers have labelled this aggressive protectionist measure as yet another evidence of Trump’s ultra-nationalism.

China, India and Canada are amongst the countries that have decided to counter the new US tariffs in kind. For instance, India has hiked the import tariff on as many as 30 American goods after the metals including steel and aluminium from India were subjected in March 2018 to tariff hikes by the US. The Indian government has repeatedly confirmed that the hike was in order to maintain the balance in trade with the US, and also to recover additional duty. In addition, many other countries have decided to revise their tariffs on American goods.

At present, the Trump administration, more than any other country, is taking a particular interest in China—for good reason. The prominent view of the Trump administration is that the American economy has suffered greatly due to “unfair trade practices” and state-sponsored “Intellectual Property Theft” by China. In fact, on April 4, 2018, Donald Trump had tweeted “…Now we have a Trade Deficit of $500 Billion a year, with Intellectual Property Theft of another $300 Billion. We cannot let this continue!”

In light of these allegations, the US has already announced a tariff of 25% from July 6, 2018, on a broad range of Chinese goods, worth $50 billion, i.e. 10% in value of the total Chinese goods imported by the US each year. This specific amount of $50 billion has been fixed based on the lost corporate earnings of American companies.

Notably, China has also threatened with a retaliatory tariff on as many as 128 items imported from the US—these include steel scraps, steel piping, soybean and many others. Amid the escalating tensions, the US has warned of an additional round of tariff hikes on Chinese goods worth $200 billion. Interestingly, both China and the US are actively considering a complaint before the World Trade Organisation (WTO) for unfair trade practices.

The Trump administration has clarified on two important aspects—that it is not interested in a trade war with China, and that the revised tariffs are inevitable to protect the interests of its economy.

At present, the US-China trade deficit is the highest in the world—at $375.2 billion (as of 2017). Further, the investigations have revealed that China has used its foreign investment restrictions to compel foreign companies to transfer its technology to domestic companies. There have also been various instances of stealing trade secrets of US companies through cyber attacks originating from China. All this, coupled with weak intellectual property laws in China, make it, in turn, a difficult market for American companies. In very critical terms of the United States Trade Representative (USTR) Robert Emmet Lighthizer, “Markets do not run better when manufacturing shifts to China largely because of the actions of its government.”

The new tariff hikes by the US find the force of law, under the Section 301 of the US Trade Act of 1974, which vests the US President with unbridled power to deal with such cases of unfair trade practices by foreign countries. Section 301 allows investigation into trade practices of other countries and taking counter-measures, including hiking import tariff in response.

The fact is that this trade war of the US with China will hurt not only both the economies, but will also disturb the global trade and may begin a new phase of global recession. The Central Bank of Germany, the Deutsche Bundesbank, has already slashed the growth rate of its economy owing to the hovering “global trade disputes.” The European Union, Canada, India and Mexico have gradually started hitting back with retaliatory tariffs on US imports.

Still, there is a growing consensus among the economists that in the probable case of intensifying the US-China trade war, it is China that will ultimately suffer more. The same looks true since China exports goods worth $500 billion to the US, and imports American goods worth only $150 billion. In the case of a lost US market, no other existing country has an economy large enough to absorb such a huge amount of Chinese goods. The lost market for goods may potentially lead to retrenchment and unemployment, and eventual insolvency of many Chinese companies. However, apart from such speculations, one thing we can be sure of is that such measures will ultimately hurt world trade and investor confidence in foreign investment—putting the global economy and people at the bottom of the pyramid at risk. On the sidelines, such measures from the US may also be beneficial for Sino-India ties, as China would like to improve relations with its biggest importer in South Asia. The signs of the same are already becoming visible.

There is another moot point for the economists. Many have already concluded that such unilateral severe measures will only do more harm than good to the US economy. For instance, a retaliatory tariff hike by other countries would reduce the market penetration of American companies in foreign countries. Also, many of the items, such as steel, will become unreasonably expensive after the tariff hike for small and midsized American firms, resulting in job losses. The gain is expected to be limited to a few big American companies.

Another important question is: Can India be the next victim of Trump’s ultra-nationalism? The answer, for now, seems to be in negative for two reasons. The US-India trade deficit is a paltry $22 billion, and goods from India, unlike those from China, are considered non-sensitive by nature.

By- Abhishek Mishra, Professor, OP Jindal Global University

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