The trade war between the United States and China has taken a serious turn. What started off as a baby step of clamping 20 per cent and 10 per cent trade tax by the US government on steel and aluminium has spread like a contagion with both sides competitively hurling tariffs on more products.
The US has expanded new tariffs to 1,300 Chinese products at an average 25 per cent to which China retaliated with tariffs on more than 100 US exports.
The scenario shows the US fighting like an agitator and seeking a level playing field with China after bleeding it with a $500 billion trade deficit.
The US has been airing its public discomfort with China for long alleging unfair trade practices as the cause of its ballooning trade deficit with leading Asian economy.
Trump Denies Trade War
Though the media is jittery that a trade war has started, Trump denies it.
In a tweet, the president said: “We are not in a trade war with China, that war was lost many years ago by the foolish, or incompetent, people who represented the U.S.”
Trump justified his militant posturing on the trade front stating that the US is facing a gigantic trade deficit with China in addition to colossal Intellectual Property theft amounting to $300 billion.
“We cannot let this continue”, Trump clarified.
According to a report, Trump’s tariffs are also aimed at quelling China’s demand for technology transfers from U.S. companies to access its markets.
White House is also discounting all criticism that it kick-started the trade war, saying the tariffs imposed by the Trump administration are only a natural response to China’s cyber and intellectual property pilferage of U.S. technologies.
In its formal stand, the U.S. Trade Representative office said “China’s acts, policies, and practices related to technology transfer, intellectual property, and innovation” are the underlying cause of the new tariffs.
Lewis Alexander, chief U.S. economist at Nomura Global Economics says there is no heroism in escalating trade skirmishes.
“People have known that China has sought to acquire intellectual property through their relationships with foreign businesses,” he said.
JP Morgan CEO Backing Trump
But Donald Trump has got many US economists endorsing his sense of injustice. Jamie Dimon, CEO of JP Morgan Chase has backed Trump’s demand for a level playing field with China.
“When the U.S. administration talks about ‘free’ and ‘fair,’ it essentially means the same on all counts. This is not what has existed,” Dimon wrote in a letter to his team. In Dimon’s view, it is not all unreasonable on the part of the US to press for more equivalency.
Trump is Fighting Shadows
However, Princeton economist Alan Blinder says Trump is unclear on what he is trying to achieve. Trade deficits are natural for all growing economies. In the case of the US, it is on the way to attaining the 3 per cent annual target set by Trump administration.
“He talks as if he wants a balance of trade on China. Can he really?” Blinder asks.
In trying to tame China, if intellectual property protection is Trump’s goal, he must say it up front.
More than China
But many analysts say Trump is making China a punching and to hide his other plans. What Trump wants is the sale of more American cars and trucks in other countries. The very intent of slapping global tariffs on aluminium and steel was lifting domestic production of those goods.
Having fired the first shot of the trade war the US is confident that it will be victorious. According to White House Press Secretary Sarah Sanders, Trump will win the trade war against China if he leads the negotiations.
“The president feels like if he is in charge of those negotiations, absolutely, he’s the best negotiator at the table,” Sanders said.
The Trump administration is not highly worried about US stock market swings over the trade tariffs on China or others. The outcome expected from China is making a clear change in “unfair practices,” Sanders said.
China is equally bullish that the trade war will end in its favour and it will not surrender to the US pressure. In terms of posturing, China has been projecting itself as a fair player in the free trade.
In fact, China’s top leader Xi Jinping has taken a high moral ground by twisting the trade standoff as a mask of the United States plan to contain China’s rise.
“China is not afraid of a trade war,” the vice minister of finance, Zhu Guangyao made clear at a news conference.
To reiterate China’s resilience, he quoted new China’s unprecedented economic growth in the last 40 years and said China would “never succumb to external pressure.”
At the same time, he said China is open to negotiating.
“The door is open,” Zhu adds.
But many analysts say China’s blustre that no trade war can injure its economy must be taken with a pinch of salt. China is certainly vulnerable to choked trade and will be hurt in a serious trade war irrespective of the brave face.
Exports are Backbone
As long as exports remain a growth driver of China’s economy from where the United States has been importing so much Washington’s withdrawal can adversely hit Chinese manufacturers.
Another soft point of China is the limited scope it has in hitting back at US exports with penal tariffs. China has already targeted one-third of what it buys from the United States under the net of retaliatory trade tax.
Better Political Management of Xi
However, the after-effects of the trade war will be better managed by China. Top leader Xi has a tight grip on the media and the Chinese party apparatus. He can stave off any criticism.
But Trump will have to face the dissent and resentment of American companies and consumers along with the pressure of midterm elections in November.
Since state-run companies are at the commanding heights of many industry sectors, China can ask the banks to infuse operating capital to prevent job cuts or closures coming from American tariffs.
China’s Policy Reversal Unlikely
In the view of Arthur R. Kroeber, managing director of Gavekal Dragonomics in Beijing, the American actions cannot make any major dent on the Chinese economy. At the most, it will slice out one tenth of a percentage of China’s economic growth. But if the US is hoping that China will be reversing its current trading policies, then it will be a mirage.
China is counting on the vulnerabilities in the American political system and expects an early vote face by the US to assuage its own domestic lobbies. Wang Yong, a professor of economics at Peking University points to the clout of the American agricultural sector in the Congress.
China is deliberately targeting farm products from the US, including soybean in the retaliatory tariffs “to ensure that the American domestic political system does the work.”
Trump is aware of that agenda and announced an additional $100 billion in tariffs on Chinese goods for “unfair retaliation.”
Trump also commented, “rather than remedy the misconduct, China has chosen to harm our farmers and manufacturers.”
China Sees Non-Trade Agenda
Chinese Communist party’s newspaper, People’s Daily, in a blistering attack on Trump’s tariffs called it “totally against the trend of economic globalisation.”
It also sees a non-trade agenda working against China and cited how the National Security Strategy document of Trump administration has blamed China for trying to dislodge the United States from the Indo-Pacific region. It says the outlook has marked a total shift in Washington’s approach to China and vendetta has replaced years of economic cooperation.
China Hopes to Divide US Allies
China is hoping to isolate the US and wean away many of its allies in Europe and Asia who normally side with the big brother. This time, China is expecting that it can convince the allies on the self-centred protectionism being promoted by the Trump administration.
According to China, the resolution of trade conflict can come only after the US rolls back unilateral tariffs and start using World Trade Organisation as a platform to address the grievances.
Remove China from Developing Economy List
However, Trump backer Dimon hints that even the WTO channel will not be smooth for China. He advocates reforms in WTO rules to solve the trade tangle.
Dimon wants China removed from the developing country list and treating it as a developed economy at par with the U.S. and other top economies for which the WTO rule book needs an overhaul.
Going by the claims and counterclaims, it is evident that there can be no absolute winner. The middle path is to work out a truce which may require fresh negotiations involving the US, China, WTO and other trade partners with a give and take approach.