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Who Will Win The Trade War?

Who Will Win The Trade War?

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Sumera B. Reshi    Trade

 “No one is in the position to dictate to the Chinese people what should and should not be done.” These were the words of President Xi Jinping which resonated with an audience of party leaders, military officers and entrepreneurs on December 17. Xi in his speech reiterated that China will stick to its agenda despite pressure from the US and others.

Everyone expected a potential policy announcement from Xi’s speech, however, he didn’t offer any new idea to boost the economy or mitigate the US concerns. Xi, rather restated the need for the Communist Party to exercise leadership and control over all aspects of the country’s development. He was firm in saying,  “We will resolutely reform what should or can be changed, but will never reform what can’t be changed.” Analysts argue that Xi’s speech reaffirmed China’s pursuit of “indigenous innovation” in core technologies”.

Xi’s tone and steadfastness of speech indicated that Xi is following the footsteps of previous leaders. Since China got independence in 1948, it has followed its own policy and has ignored the advice of its neighbors. Mao Zedong rejected the advice of Soviet leaders in both his strategy for winning the revolution and in his desire to pursue his Great Leap Forward industrialization campaign. Deng refused to entertain Mikhail Gorbachev’s ideas for pursuing political reform together with economic opening and rejected 1990s “shock therapy” as socialist systems were dismantled rapidly across the world.

“There is no textbook of golden rules to follow for reform and development in China, a country with over 5,000 years of civilization and more than 1.3 billion people,” Xi said.

Xi has been applauded for his ideas, especially his Belt and Road Initiative but the recent trade tariffs imposed by President Trump has emerged as a major challenge for President Xi. He has to come out of the current trade war impasse to prove he can think beyond CPEC and BRI. Therefore, at the recent G20 meeting in Buenos Aires, the US – China announced that they have reached to a temporary truce.

And as usual President Trump followed his pressure tactics like it did to browbeat South Korea, Japan and EU to forge new bilateral trade agreements, but he forgot this time he is tackling with mighty China.  Yukon Huang, senior fellow at the Carnegie Endowment wrote in an article “Who can break the US – China impasse”? “Trumps strategy of short-term threats of additional punitive tariffs is not a sustainable solution. The US–China impasse comes from much deeper differences in perceptions.”

According to Huang, Trump is obsessed on the USs’ bilateral trade deficit with China and the US business community is worried about China’s ‘unfair’ foreign investment practices. The US is also apprehensive over China’s intentions to become a major technological power which could possibly threaten US global dominance. He argues that all these things make it difficult to break the current impasse.

Undoubtedly the year 2018 astonished all with the change in major US policies in South Asia et al. Nonetheless, this December brought a bag of surprises, especially in the US – China relations. On December 1st,  President Xi and Trump announced that they have a ‘highly successful negotiation’, rather the meeting was both amazing and productive with unlimited possibilities for both the US and China.

The meeting, according to both leaders produced a truce based on two elements: China will increase its purchase of the US farm produce, energy and some industrial goods. In exchange the US  will delay an escalation in tariffs, from 10 per cent – 25 per cent  on $200 billion of goods for 90 days, to allow more time for negotiations. Both sides have agreed to begin discussions on how to resolve other issues, including intellectual property protection, non-tariff trade barriers and cyber theft.

The chief market analyst at Market.com, Neil Wilson that the trade war could spark a pre-Christmas demonstration during December. As per Wilson, some are fearful that there was no official word from China in relation to auto tariffs and that the two sides are saying different things about the meeting.

Market experts warned that the trade deal may have only bought some time for more fighting over the deeply decisive trade and policy differences. Also, they believe China’s economy would continue to cool because of weakening domestic demand. However, Chinese state media welcomed the trade war truce, but is also warned that there was no ‘magic wand’ that would allow the grumbles to disappear immediately.

Whatever be the case, the tit-for-tat policy of Donald Trump can have dramatic repercussions on both the US and China. Further, this trade escalation can affect third world countries, especially those more economically linked to the US and China. It has been observed that President Trump often claims he is not really a crazed protectionist or a champion of what he describes as ‘fair trade’. “What if China stopped its intellectual property piracy, its forced technology transfer, its restrictions on the US access to its own markets and its currency manipulation, we could have trade peace in our time. If Europe would only end its discrimination against the US vehicle imports, we would all be able to get along famously. Likewise, Mexico, Canada and any other country that has felt the lash of Trump’s anger on trade, but such promises are as worthless as a degree from Trump University, said Willard Mitt Romney, the US politician and ex-governor of Massachusetts.

It is believed that in this newly created trade war – deal, the primary loser will be the US consumer. As per the analysts, the hypothetical benefits of more manufacturing jobs will be more than cancelled out by higher prices in the shopping malls. Since Apple assemble its iPhones in China before importing them to the US, thus the Trump administration has exempted consumer electronics such as smartphones because companies like Apple lobbied for tariff exemption. 

All the iPhone components are manufactured in the US, but are exported to the China for assembling. But what if China imposes tariff on those in response to Trumps’ tariffs? Tim Cook, Apple’s top brass said that if China imposes tariff on assembling of iPhones, the situation will likely push up US iPhone retail prices even if there are no direct tariffs imposed by Trump. It will be like deliberately clogging the arteries of trade and then the economic damage will inevitably show up somewhere, where?  No one knows.

Without at least doubt, the US decision to impose tariffs on $200 billion Chinese imports marked a serious escalation in its hostilities with China over trade. Economists, nevertheless, believe that protective methods will have only limited impact on global growth – as long as the bilateral conflicts doesn’t turn into an all-out multilateral trade war.  Economists also believe that the US – China trade war will probably affect the vast majority of the goods traded between the two countries, it makes up a reasonable proportion of global trade. Despite all the threats  the US has made so far, only around 5 per cent of global imports would be affected.

However, John McCann of MEC Aerial Work Platform has different views. He says, “tariffs will cause layoffs, lives will be devastated, the hope and optimism that comes from meaning work will be gone.” Moreover, in an interview with CNBC, JP Morgan, CEO, Jamie Dimon argued that “there could be further indirect consequences of trade war beyond immediate price increases, as economic confidence and investor planning could be shaken”.  But to save Trump administration from criticism, Commerce Secretary, Wilbur Ross said that “price increase from the nascent trade war would go unnoticed by most Americans”.

At a New York City press conference, President Trump said that “a lot of money is coming into our coffers. And it has had no impact on our – absolutely, by the way – no impact on our economy which I said it wouldn’t”.

With so much of the hullabaloo about trade tariffs, Trump tried to pester China. However, China said it has no choice but to retaliate against new US trade tariffs. Chinese Foreign Ministry spokesman, Geng Shuang said the US steps have brought ‘new uncertainty’ to talks between the two countries. In response to the US, China imposed tariffs on about $60 billion of the US exports to China, representing about 85 – 95 per cent of the total goods export trade from the US to that country.

In a reply to the Wall Street Journal, Trump tweeted, “We are under no pressure to make a deal with China, they are under pressure to make a deal with us”. James Zimmerman, former chairman of the American Chamber of Commerce in China said, “the change of tone effectively ties Chinese President Xi Jinping’s hands. Getting the Chinese to the bargaining table should be all about face-saving — not a chest-thumping exercise,” Zimmerman added.

Executive Chairman, Alibaba Group, Jack Ma warned that the trade war between the US and China is going to last longer and have a bigger impact than most people think. The dispute could last 20 years and persist beyond the presidency of Donald Trump, as the world’s two strongest economic powers battle for global supremacy.

“China needs to strengthen its economy to deal with the conflict and shift trade relations from the US to regions like Southeast Asia and Africa said Jack Ma during a speech at the company’s investor day conference in Hangzhou.

In the event of a prolonged trade war between the US, the world’s largest economy, and China, the second-largest, would ripple through the rest of the globe. Tariffs could translate into less trade, which could hinder growth in smaller nations.

The US dollar has already begun to rise in value as trade tensions have mounted. This has insulated the United States from higher prices. But the higher-valued dollar has also diminished the value of currencies of emerging markets – which has weighed heavily on their economies. In the meantime, the value of the Chinese yuan has dropped relative to the dollar, making it easier for Beijing to withstand the US tariffs.

Trump has so many plans besides trade war with China. He wants to replace the North American Free Trade Agreement, which includes the US, Mexico and Canada, with a new agreement that would shift more auto production to the US. The administration has already reached a deal with Mexico that excluded Canada. However, talks with Canada in a North American trade bloc have been ongoing.

Moreover, critics say that Trump has wasted an opportunity to build a united front against China by fighting with America’s friends. Not only the US, Europe, Japan and other rich countries have a grudge towards Chinese trade practices but the US is single handedly trying to beat China is a trade war. This is just a start and future is difficult to predict. The subtle trade war between two major economies will have a lasting effect on the US-China and on the countries in close proximity to these giants. Time will tell how world is going to change.

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