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U.S., China trade war could have global repercussions

Friday, June 08, 2018
By Ranajoy Sen

A perceptible trade war, risking a beginning count of $75 billion, is lurking within the global economic firmament. Its principal propellers are United States of America and China – currently the largest and second largest economies, respectively. The principal contentious issue is American federal dispensation’s expressed accusation of the Chinese government of perpetrating unfair trade and economic practices with America.      

Pointedly, several countries also share this American perspective. It entails a Chinese strategy of brazenly seeking opportunities to subsidize exports, discourage imports, and rampant theft of intellectual property, thereby, waging a sort of undeclared economic war against other major economies. India has not yet countered comprehensively to this Chinese economic aggression. The Indian annual trade deficit with China, at present, is about $52 billion.  

The choleric American President, Donald Trump, did not hesitate to aver that if Chinese economic-sharp practices continued, he would slap high punitive tariffs upon China. During his electoral campaign, Trump had described it as “the greatest theft in the history of the world”. Following up on his utterances, Trump is venturing towards downright economic action on an allegedly culpable China.

Trump’s angry steps
Akin to a thriller that precedes the screening of a film show, Trump has announced 25% tariffs on steel imports and 10% on aluminium imports from EU, Canada and Mexico. It has invited disapproval and annoyance from the targeted countries. To queer the pitch, the Trump administration stated that it would, if necessary, have no qualms on imposing tariffs – tax or duty levied on any product when it crosses national boundaries -, initially amounting to $50 billion on Chinese imports, as also constrict Chinese investments in America and impose tighter export controls.

Initially, the current Chinese foreign ministry spokesperson, Hua Chunying, had stated that “all countries, especially the major economies, should resolutely oppose all forms of trade and investment protectionism”. Thereafter, Chinese media entities, titled Xinhua and Global Times stated that China would respond appropriately to American economic sanctions. It would interpret previous economic and trade agreements and achievements struck between China and America as annulled. China would be compelled to prepare for the long haul. It is very averse to a trade war. Nevertheless, if necessary, it would not fear to respond adequately if one such comes by: China would respond with tariffs on a range of American goods - notably cars, aircraft and soybeans.

Just a month ago, America and China had an agreement at Washington D.C., which spelled out Chinese acquiescence to significantly increase its purchase of American goods and services. Within that context, the two sides had satisfactory confabulations, notably on arenas of agriculture and energy. What had seemed to be a smooth road appears to be now marked by a major obstacle. Both sides are sparring angry accusations at each other. Washington D.C. and Beijing have warned of tit-for-tat tariffs on goods, which could spiral to the numerical count of $150 billion, for each.

The American Commerce Secretary, Wilbur Ross, was in Beijing very recently. He conferred with the Chinese Vice-Premier, Liu He, there. Duration of talks did not bring to the fore any satisfactory consensus to lower the rising mercury of differences in economic relations between America and China. Any meaningful breakthrough proved far-fetched and elusive.  

Tariffs could be effective to enable any economically beleaguered or dilemma-prone segment of a country’s economy to recover from an economic morass. But, its efficacy is, at best, for any particular period of time. If tariffs are imposed thoughtlessly or prolonged for undue stretches of time, the very purpose of its implementation is defeated.

American farmers and some industrial workers, in particular, might be benefited initially. Tariffs would, to some extent, protect domestic employment and wages, help create a more level playing field for American external trade and equate the cost of imported products with the cost of domestic import-competing products. Moreover, it could grant a temporary, requisite breather to certain American economic entities from competition from Chinese, Indian and European entities; thereby, allowing them the necessary reboot.

If continued unabated, the burden of tariffs would initially fall on American producers through payment of duties to the country’s federal government. But, importers would try to shift the burden of increased costs to consumers through relative price increase. Additionally, American exporters, facing tariffs, would bear higher costs; ultimately it would have an adverse effect on competitiveness. Meanwhile, the liability of retaliatory tariffs by China and other affected countries would also have to be borne by American exporters. Hopefully, neither side would stretch it too far.   

Post 1945, America, in most part, has ably guided and assisted by global institutions as the World Bank, WTO and the IMF, to provide an underlying infrastructure of a global economic system which has enabled economies to rise from ashes of war, created jobs, rising incomes and widespread economic amelioration. It has also lifted hundreds of millions of people out of poverty. As other countries, whose list includes China, have joined in this system, they share the benefits and have responsibilities to ensure that this Global economic architecture is not unduly disturbed.

Thwarting Chinese free ride?
The “U.S.- China Strategic and Economic Dialogue” has helped build a coherent working relationship among concerned officials from the two countries. In particular, it offers scope for discussing with China of that country’s steps of enabling organised market activities a decisive role in its economy and also regarding embrace of more transparency and predictability in its policymaking. Parameters of this framework need greater utilisation to prevent a Sino-American trade battle.  

Repercussions of such a trade conflict, if spread unchecked, would strike undesirable affects on notable swathes of today’s increased international-interactions attributed Global economy. It could also decelerate the current global economic recovery. With South China Sea region already tense, a proliferating economic conflict risks a spillover to international political conflict.

America should restrain its accusations from degenerating to undue emotional, if not arbitrary acts. China might be realising that a relative free ride, which it carried out during the Obama Presidency, would have to be halted.

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