This research hypothesizes that the ongoing trade war between America and other countries would be responsible for a significant decline in U.S. export activity and subsequent reduction in domestic GDP growth. The hypothesis emerges from an understanding of global supply chains and the impact of international trade opportunities on the growth of local industries. It also takes into mind, the possible effect of the influx of inputs with better pricing or superior technology in comparison to the available alternatives in the domestic market.
Before presenting an analysis of the potential impact of the trade war, and showing differences in trade activity and volume between the United States and the Global economy, the following six scholarly articles help to present the situation, provide qualitative and quantitative data, and give relevant illustrative points for the final paper. This preliminary analysis intends to justify the need to research and present the final paper to test the hypothesis.
The United States president Donald Trump prefers bilateral trade agreements to another international trade arrangement that offer free market access. Thus, since he assumed power, the U.S. has been reviewing its trading policies with several countries and regions in a bid to influence the balance of trade in its favor.
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The American foreign trade policy is now focusing more on the renegotiation of select agreements and enforcement concerns with chances for a hard-line approach taken by the Trump administration becoming an outlier in the way other countries trade with the United States. In South East Asia, the new administration in the United States is looking at enforcement focusing first on China and later pushing on to the region.
The nature of global supply chains ensures that most countries including the United States have a considerable stake in China’s manufacturing industry. The U.S. is relying on its anti-dumping/countervailing duty (AD/CVD) measures as a way to ensure countries are not avoiding their tax burden and denying the U.S. its fiscal income from tariffs.
The President, according to section 338 of the Tariff Act of 1930 has the power to impose severe penalties on a country after determining that it is discriminating against American products. This legal provision under U.S. law sets the stage for President Trump to use his power to fight Chinese and other Asian countries’ perceived unfairness in a trade with the United States.
The problem with direct enforcement of the ban or tariffs to retaliate the perceived discrimination is the potential of the affected countries to seek redress at the World Trade Organization. They can also opt to reciprocate by targeting U.S. based products for tariffs thus triggering a trade war. The implications of such outcomes remain unknown, but predictable based on historical experiences in dealing with the US multilateral and bilateral agreements.
Much of current US trade policy towards Southeast Asia is a manifestation of the current president’s campaign rhetoric about the disastrous multilateral trade agreements of his predecessors. The president did not tone the rhetoric after winning the elections, and it appeared as part of his management style to force trading partners into the negotiation table for new bilateral deals with the United States. Some underlying economic drivers might strengthen the U.S. choice of protectionist policies.
For instance, a strong dollar will enhance the trade deficits and call for increased tariffs. Recent developments already show proposals to have a 35% or 45% tariff charge on Chinese imports. Other changes that are likely to occur include a blanket tax to cover all imports fitting a particular category with the aim of protecting local U.S. industries. A major challenge to these policies is that they go against some international rules policed by the WTO.
While a trade war is imminent, the actual path to the war remains unknown, and that causes uncertainty. Countries may adopt a wait and see approach to find out whether the U.S. current foreign trade rhetoric and protectionist measures are going to pay off. If it does not turn out as a bluff, then the expected trade imbalances arising in favor of the United States will trigger repercussions. The U.S. will also lose its number one position of opening global markets, and it will become a hindrance to the liberalization of global trade due to its border taxes and renegotiated trade agreements. The biggest limiting factor to the current U.S. trade rhetoric is that it might not pass through Congress in its current format, and many of the harsh positions might not become part of the new trade policy.
The U.S. exports to China amount to over $24.1 billion with much of the exports being agricultural and agro-related products. The U.S. enjoys a $13.6 billion trade surplus. Therefore, from the onset of the trade wars, the two countries are highly dependent on each other. The stakeholders in both countries nervously watch the moves of the opponent because they understand the implication for their industries. In the U.S., retaliation from China might cause massive losses for the U.S agricultural industry. One of the most vulnerable products is soybeans that accounts for 66% of exports to China in the agricultural category.
China managed to shift its imports from the U.S., which gives it a little advantage when negotiating for tariffs with Americans. The following graph illustrates the changes in imports as measured by value for China, but it relates to Chicken only. Other than shifting its import volume to other countries that compete with the U.S., China also opted to retaliate when facing tough tariff conditions from the U.S.
Other than shifting the import sources, China also retaliated in the past when the U.S. imposed specific tariffs targeting Chinese products. According to the illustration below, the targeting of solar panels and washing machines from China led to the retaliation targeting of sorghum. The U.S. target had a trade value of $1.6 billion while the Chinese retaliation trade value was $0.84 billion. The other notable parameters are that the U.S exports for Sorghum accounted for 82% of the Chinese imports for the same product.
Both countries appear to seek the most potent action or retaliation tactic to affect their trade intentions. The next figure shows sorghum trade between the two countries in the context of global trade. It is possible to see Chinese importation from the rest of the world was significantly higher than its imports from the U.S. The retaliation so far shows that China will be going to target products that are substitutable, and both countries will be seeking to inflict economic cost using political interests.
The latest trade was between the U.S. and China started in the first quarter of 2018 after the U.S. president proposal to impost $50 billion tariffs on Chinese imports. The rationale of the move is to ensure there is a balance of trade. Nevertheless, this approach negates the fact that companies operating on a global scale have complex value chains that include import and export activities in more than one commodity. Therefore, reactions to the trade war by firms in both China and the United States can differ and exhibit variations to the expected norms. For instance, a company in the United States with production facilities in China may not like the new tariffs on imports as they cause a slowdown of its business in the domestic market.
When evaluating the impact of the trade war, it is important to look at the impact in both upstream and downstream industries. So far, the America tariff onslaught included an investigation on whether U.S. importation of steel from China hurt the country’s economic interests. In August 2017, reports by U.S. trade authorities noted a potential loss of $225 to $600 billion annually because of intellectual property theft. The “America First” policy began to take effect on January 2018 with imposed tariffs on solar panels and washing machines. In March 2018, more tariffs appeared for steel and aluminum including 25% on steel imports and 10% on aluminum imports for the sake of national security.
According to the U.S. approach on tariffs, the large trade deficit between U.S. and China is the main reason, and the other concern was the forced joint ventures by China on U.S. technology-intensive firms. The tariffs also meant to protect local businesses. China responded swiftly with a list of 128 products that it would charge 15% to 25% import tariffs in case of negotiations failed and it ended up affecting the threat. After that, the U.S. went on to announce additional tariffs for Chinese products worth $34 billion and additional ones that amounted to $200 billion.
The global trading system enriches the lives of billions of people because of the complex functioning of the global value chains. The friction between the U.S. and its trading partners will likely destroy the global system. It will affect the pillars of the system, which include the confidence of governments that their partners are going to respect the rules. The immediate effect will be on individual markets and the specific affected products by the tariff wars. The friction arose because the U.S. tried to bully China into submission.
The trade policies of the U.S. under President Donald Trump appear flawed according to conventional comments by economists and trade experts internationally. They appear to mimic excessive control over a system that relies on mutual trust and free markets. The Chinese political and economic conditions also aggravate the problem because unlike the U.S., the Chinese economic system is not an open free market one. The U.S. is on the offensive because of exchange rate manipulation, cyber theft, and failure to protect intellectual properties. It sees the future of the continued violations as a threat to its security.
China sees itself as a developing economy justified to block foreign companies from parts of its economy and to use trading strategies that are not market-based. China represents a special case in the U.S. tariff wars with the global economy because of the volume of trade between the two countries, and the implication of changes in Chinese trade impact on the global economy. The Chinese economy is large and competitive, and it is moving its focus to industrial competitiveness similar to developed economies like the United States.
The U.S. can proceed with its tariffs amid regulations by WTO because the international body is laden with bureaucracies and limited enforcement capabilities. The Trump administration relied on the General Agreement on Tariffs and Trade (GATT) that allows countries to decide measures to take and whether there is justification for those measures. In this case, the WTO and other international bodies might find it difficult to resolve the trade dispute. China retaliated after the U.S. imposed tariffs on its products including steel and aluminum.
However, other countries including Korea, Chinese Taiwan, and the EU relied on consultations before evaluating options for retaliation. Thus, it appears that the U.S. and China dispute undermined the intentions of WTO rules on trade disputes. The U.S. imposed tariffs and then presented the matter to the WTO. There are additional areas not covered by the WTO such as foreign investments. Overall, it appears as though Trump’s administration is seeking to force a negotiated agreement and flexing its tariff muscles with great abandon to the WTO rules is a working solution that comes at a great price to the global economic and trade system.
Economists argue that trade imbalances are a threat to the world’s economic stability and may be contributing factors that led to the 2008 global recession. A high U.S. import tariff will be catastrophic to the international trade starting with a cut of Chinese exports to the U.S. by 73%. Meanwhile, the Chinese economy will also see half of its international trade sectors experience a trade volume decline of more than 90%. The dispute in trade tariffs between the two countries will crash international trade and lead to a slump in global output and social welfare.
The quantitative effects of the trade war will trigger an upheaval in the global financial markets. China exports machine and electronics to the U.S, and they account for 44.45% of the value of exports from the country in 2016. They accounted for 23.13% of imports for the United States in 2016. Meanwhile, since the 2008 global recession, the Chinese economy continues to diversify its imports and exports to reduce reliance on the United States leading to a drop in the total exports to the United States.
When using 2011 as the base year, the evaluation of countries that are members of the WTO and imposed tariffs on each other, a theoretical model revealed a median of 3% for all tariffs with notable sectors with higher than 3% being agriculture (3.4%), food (8.07%), and textiles (8.77%). On the other hand, The U.S. threatened to impose a tariff rate of up to 45% on specific products from China. The implication of the move would be an indirect effect on the value of the Yuan.
It would imply that the Yuan would appreciate by 45% for the affected commodities, making a move to fit into possible retaliation against the perceived manipulation of the Chinese currency. If the U.S. imposed a 45% tariffs across the world unilaterally, it would cause an increase in production in the U.S. to meet demand, but it would have little effect on the production of China since the latter can rely on its growing domestic market and the other countries to maintain its “world factory” role. Nevertheless, the increase in Chinese imports and exports to the rest of the world in light of the U.S. isolation tariffs may shift trade balance and the overall equilibrium of the world market.
References
- Freund, C. (2017). Trump’s Confrontational Trade Policy. Intereconmics, 63-64.
- Guo, M., Lu, L., Sheng, L., & Yu, M. (2017). The Day After Tomorrow: Evaluating the Burden of Trump’s Trade War. Asian Economic Papers, 101-120.
- Huang, Y., Lin, C., Liu, S., & Tang, H. (2018, August 7). Trade Linkages and Firm Value: Evidence from the 2018 US-China ‘Trade War’. SSRN: https://ssrn.com/abstract=3227972 or http://dx.doi.org/10.2139/ssrn.3227972 .
- Lawrence, R. Z. (2018). Can the Trading System Survive US–China Trade Friction? China & World Economy, 62-82.
- Li, M., Zhang, W., & Har, C. (2018, March). What Can We Learn about US-China Trade Disputes from China’s Past Trade Retaliations? Food and Agricultural Policy Research Institute (FAPRI). Ames, Iowa: Iowa State Univeristy.
- Loman, W. (2017). The Trump administration’s trade policy and the implications for southeast Asia. Contemporary Southeast Aisa: A Journal of International and Strategic Affairs, 36-41.
