Not-so-friendly Nationalism: The Great War on Trade
The “Skirmish Era” of antagonistic policies and strained interactions as described by David Willard, Founder & CEO of 52 Capital Partners, in “The Grand Test: America’s Skirmish Era with China” seems to have extended to the third decade of the 21st century, and it seems highly unlikely that Pax Magna (The Grand Peace) could be achieved between the two economic superpowers any time soon.
The U.S.-China rift is leading the world to yet another cold war. The elastic nature of trade relations between the two economies has been stretched to the maximum on all frontiers, and trade restrictions induced by raised tariffs is taking a toll on both the economies. Trade wars between the nations have led to the shrinkage of the global economic output and has resulted in the contraction of American manufacturing activity and increased unemployment in the country.
When did the rift emerge and what did it expand to?
According to the U.S. Trade Representative Peter Navarro, the annual loss to the economy, resulting from the theft of intellectual property, ranges between $225 billion and $600 billion.
An investigation was conducted by the United States Trade Representative in August 2017 which accused China of resorting to unfair trade practices. On the very day of the finding, U.S. President Donald Trump announced tariffs amounting to $60 billion of imports and later, the authorities subjected about $50 billion worth Chinese goods to a 25% tariff.
Ultimately, on February 14, 2020, a new Phase One deal between U.S. and China led to tariff cuts on imports from both the economies. However, the US tariffs on Chinese imports remain at an unprecedented level of 19.3% and stand six times higher to levels present before the beginning of the trade war in 2018.
How could the nationalistic policies actually backfire?
Currently, China tops the U.S. chart as the largest supplier of goods to the economy. Among these imports, consumer electronics, industrial supplies, furniture, and electrical equipment constitute a major portion of the total import value. Such goods also aid local industries towards the production of various supplies and products native to the U.S. The tariffs have led to a hike in the prices of materials and parts, resulting in a downturn in the U.S. manufacturing output for almost 7 months (3.3% annualised drop). The announced tariffs would lower the U.S. long-term GDP forecast by 0.23%, wages by 0.15 percent, and employment by 179,800 full-time equivalent jobs.
Kathy Bostjancic, Chief U.S. Financial Economist for Oxford Economics, has estimated that tariffs could cost the average American household an additional $650 per year. A long running dispute between the two nations could lead to higher inflation, to slower job growth and ultimately, to lower consumer spending which is the biggest driver of the U.S. economy.
Businesses’ responses and reactions to the trade war
The antagonistic trade policies and a hike in tariffs have hit the U.S. small businesses in a major way. They may actually lower the market outlook for the nation and may result in the closure of businesses that are dependent on China for their raw material requirements and other inputs. According to a recent survey by online business-for-sale marketplace BizBuySell, China tariffs have increased the cost of doing business for more than one third, or 37%, of small businesses across the U.S. Out of 1700 businesses surveyed, 64% agreed to raising prices of their products and 65% are considering alternative supplier partnerships outside China. Trend Nation, a firm, based in Las Vegas, with a manufacturing base in China, has witnessed a hike in its tariff bill from $800,000 to $1.6 million.
Chart representing the impact of U.S.-China Trade war on various sectors (Source: Peterson Institute for International Economics, S&P Global Ratings Economics calculations)
The trade war is forcing small businesses out of China in the search for alternative manufacturing and supply partnerships. “Our great American companies are hereby ordered to immediately start looking for an alternative to China, including bringing our companies HOME and making your products in the USA,” President Trump tweeted on August 23, 2019.
Bain & Company conducted a survey of 200 business executives wherein 42% of the respondents’ firms expected to outsource materials from countries other than China. ControlTek, a small electronics manufacturing company based in Vancouver, Washington, “is shifting supply chains out of China where possible, and redesigning products to avoid Chinese components” to mitigate the effects of the trade war. GoPro, maker of mobile cameras, and Universal Electronics, maker of sensors and remote controls, are shifting some functions to Mexico. Aten International, a Taiwanese computer equipment firm, is bringing operations back to Taiwan and Hasbro, world’s leading toy maker, is moving operations to the United States, Mexico, Vietnam and India. Countries like Malaysia, Thailand, India and Vietnam have been the major beneficiaries of supply chain shifts. Nintendo, Sharp, and Kyocera, for example, have all recently announced plans to shift some production from China to Vietnam.
“China was the factory of the world,” said Song Zhiping, the Communist Party chief at the China National Building Materials Group, a state-owned giant. “Things are changing. That’s why Chinese companies are going out of China.”
However, the relocation decision may not be the best since those countries may become the next target of the US administration’s protectionist policies. “Companies don't know where they should relocate," says Barbara Weisel, managing director at Rock Creek Global Advisors and former assistant U.S. trade representative for Southeast Asia. "They don't know which country will be the next target. That leads businesses to slow investments, slow decisions." As per Alex Feldman, CEO of the US-ASEAN Business Council, entire countries or regions could develop a reputation as bad places to do business if a country's infrastructure is overwhelmed and companies end up having a bad experience with, say, airports being overcrowded or manufacturers backing out of contracts. Eric Miller, a global fellow at the Wilson Center, said "If someone becomes well known as 'the new China' the White House may take action against them."
“Companies don’t know where they should relocate... They don’t know which country will be the next target.”
Has the trade war actually lowered the US trade deficit?
Some economists mention that the volume of trade deficit between US and China has been an exaggeration because of the practice adopted by United States Trade Data to measure the entire value of a good as coming from a country it was assembled in. While China is a global centre for assembling various goods, many components are produced in other countries. The component manufacturing companies and employees receive a share of final profits, but the US trade statistics record the entire value as being generated in China.
Chart representing impact on total trade deficit of the U.S. (Source: The Hindu Business Line)
The primary reason for targeting China has also been postulated as a measure to safeguard the national security threat posed by China, owing to its intellectual property (IP) theft practices and a growing dominance in the world market.
Moreover, net reduction in imports from China has not led to a necessary increase in domestic production and has merely made consumers shift their purchases to other countries. The trade war with China has led to a simultaneous increase in trade deficit with countries like Mexico, Taiwan, and Malaysia. Also, trans-shipment has been on the rise as Chinese vendors have been shipping goods from Vietnam to avoid the increase in tariffs. This has led to an increased trade deficit with Vietnam.
What lies ahead for Americans amidst the possibility of changing administration?
The aggressive trade policies have resulted in a situation which might hamper the already-fragile global economic recovery. Even though the current administration’s policies have been too direct and have been able to pressurize the Chinese economy, a different approach needs to be undertaken to liberalize the Chinese borders. Apart from the Republicans and in particular Donald Trump, it has also been the motive of the U.S. Congress to press for reforms against the increasing trade deficit with China. Even though a change in administration might have an incentive towards adoption of different approaches in dealing with China, it would have to act under the common exterior stance of Congress against China. And, while the nationalistic stance of the new administration, under the leadership of Joe Biden, is well-presumed to be similar to that of the present administration, Biden’s progressive ideology could stand to distinguish the democratic government’s actions against China from that of Trump’s antagonistic measures.
Joe Biden stands firm in his opinion against China’s trade-related malpractices but analysts predict that his inclusive outlook might call for multilateral actions and affirm ties with the US allies in the urge to reduce trade inequality with China, in sharp contrast to Trump’s aggressive unilateral measures. “The most effective way to meet that challenge is to build a united front of U.S. allies and partners to confront China’s abusive behaviors and human rights violations, even as we seek to cooperate with Beijing on issues where our interests converge, such as climate change, nonproliferation, and global health security,” wrote Biden in an essay for Foreign Affairs. Therefore, we can only expect rising tensions between U.S. and China, the “Skirmish Era” to continue in the mid-term and witness the small businesses, corporates, and consumers receive their share of hits from the resultant trade war.
“Americans are getting stronger. Twenty years ago, it took two people to carry ten dollars’ worth of groceries. Today, a five-year-old can do it.”
Thumbnail Credits: IndustryWeek