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USA-CHINA TRADE WAR — MORE DUE TO POLITICS THAN COMMERCE

In the last few decades, China has been recording progress in multiple directions, particularly in industrial growth, technology advancement and military warfare capability, that clearly indicates that China can potentially emerge as super power in the world, possibly even out growing USA in the course of time.

In addition to it’s efforts to emerge as economic and industrial super power, China has unmistakingly revealed territorial expansion ambition. China has border disputes with neighbouring and nearby countries. China occupied Tibet forcefully a few decades back. It has made claim on Indian territory in north eastern India and has made claim on Indian province Arunachal Pradesh. It has dispute with Philippines and other countries with regard to South China Sea and conflict with Japan with regard to Senkaku island.

China’s OBOR plans are clearly aimed at becoming the dominant world power. Already, a number of nearby countries like Pakistan, Sri Lanka and others are facing debt trap in their relation to China, enabling China to dictate terms to them.

Such facts can not be missed by any discerning observer, while viewing China’s fast changing status in the global sphere.

US wants to checkmate China

China’s aggressive political and economic strategies have certainly caused anxiety in many countries, making them wonder as to whether China with such far reaching ambitions could destabilize the existing order in the world.

Of course, China’s super power ambition has caused much consternation to USA, which has been the unchallenged super power in the world for the last several decades.

Obviously, USA wants to safeguard it’s position in the world leadership and it appears to have decided that it should cut China to it’s size to protect it’s interests. US wants to weaken China’s economic power by launching trade war and in the process, US aims to hit China at its vulnerable spot and halt Chinese march towards super power status.

On July 6, 2018, USA government imposed 25% duties on US$34 billion in Chinese imports, the first time the US has implemented tariffs directly on China after threatening to do so for months. The first round of tariffs covered Chinese products ranging from farming ploughs to machine tools and communication satellites.

China accused USA of unilateral violation of global trading rules and retaliated with duties on the same value of US goods, including products such as soybeans and cars.

But , US argues a that its measures is well-deserved retaliation for China’s unfair trade practices. US says that it has no choice but to move forward on the new tariffs after China failed to respond to it’s concerns over unfair trade practices and what it calls as China’s abuse of American intellectual property.

US government is not technically wrong :

Every country is entitled to protect it’s trade and economic interests and so is USA.

For it’s stand against China, US government does have both domestic and international support, as large section of world opinion is that China has unfairly garned the World Trade Organisation since joining it 17 years ago.- getting access to global markets, capital and technology, while restricting other’s access to China through currency manipulation or coerced transfers of intellectual property and discriminatory industrial policies. China’s tariff and non tariff barriers have made it very difficult for several countries to balance trade with China.

India has cautioned China at the World Trade Organization that its $63 billion trade deficit with China was unsustainable and mere lip service to bridge the gap was not enough.India demanded that China needed to make serious efforts to lower trade barriers for rice, meat, pharmaceuticals and IT products from India to make a difference to the trade imbalance.

During the last several years, US has been importing hundreds of billions of dollars worth of goods from China, much more than US exports to China, as indicated by the following figures.

 Year

       U S export to China

    Export from China to US

                  2012

         $120 biliion

           $ 440 billion

                  2013

         $125billion

          $ 450 billiom

                  2014

        $160 billiom

          $490 billion

                  2015

        $165 billion

          $ 500 billion

                  2016

        $170billion

          $ 480billion

                  2017

        $195 billion

          $ 510billion

Note: Data are for goods and services

Source: US Department of Commerce

US President Donald Trump has now warned China that he would further add $200 billion worth of items to the possible tariff list..

If the proposed tariffs by USA would go into effect , then the duties implemented by the US administration aimed squarely at China will cover nearly half of all U.S. imports from the China.

While the tariffs already implemented will only cost China about 0.1 to 0.2 percentage point of economic growth, the potential escalation of tariff by US may deepen the impact to 0.3 to 0.5 percentage point.

Can China retaliate against USA in the long run ?

China has shown little sign of backing down so far.

While it is expected that China may retaliate in certain areas against US export to China and against US business interests in China, it will unlikely do so aggressively or explicitly and it may not inflict the same amount of damage on US companies, which will invite additional retaliation from the US.

In today’s scenario, China’s dependence on trade with US is much more than the US dependence on trade with China.

What may be the game plan of China ?

One retaliatory tactic that China could deploy would be a bigger push and specific strategies to attract foreign investment from Europe and not from the U.S. China would liberalise it’s policies towards European and other countries but not towards US companies.

At a time when the U.S. government is looking to block China’s move into advanced technologies, European companies can come to the rescue of China to some extent , if China would woo the European countries by friendly gestures with attractive incentives.

Europe could be a valuable ally to China in its rapidly escalating trade fight with the U.S.,

For example, German based multi national company BASF has recently agreed to spend as much as $10 billion on a giant plant – in Guangdong province in China.

This recent announcement was the centre piece of a series of proposed partnerships between Chinese companies and important players in German industry including BMW AG, Siemens AG and Volkswagen AG , collaborating in various areas such as electric vehicles, gas turbines and cloud computing.

The proposed project of BASF in China will be 100 percent owned by the German company, which would have been impossible without the gradual loosening of China’s foreign investment restrictions in recent years.

Such developments point to more such changes taking place in the near future, reflecting the compulsive conditions faced by China, in the wake of trade war forced on it by USA. The changing and proactive policies of China towards Europe will allow European businesses in sectors such as fuel retailing, utilities, aerospace, finance and car manufacturing to break into China’s large market.

China is already one of the biggest markets for businesses such as Airbus SE, Volkswagen and Unilever NV and they would like to be an active player in China, if possible.

A critical view of US action

Section of American businesses and economists have called the trade war initiated by US President to be unwise and has warned that it could derail the strongest global upswing in years.

The retail industry leaders association in US, a lobbying group, said that US businesses and consumers will lose from the administration’s trade battle with China.

So far, tariffs imposed by USA and China against each other are expected to have only a modest impact on growth and inflation. But duties on more than US$200 billion on Chinese imports by USA may push the trade war into territory ,where it begins to bite significantly into the world trade and growth.

Critics say that US trade actions have not taken into consideration the complexity of modern trade in terms of its decentralized organization across locations. The trade conflict may undermine growth and shake up corporate supply chain globally.

Where will this trade war lead to ?

Any war, whether it is military war or trade war, will have to end at one time or the other. The question is which side will blink first.

China has built huge capacity in a short period for various products and services and in infrastructure facilities , much more than it’s immediate requirement hoping to capture global market. In the case of some products, China’s capacity build up is much more than the total world demand not only at present but also in the next one decade. Already, China is suffering from under utilization of capacity in various sector and activities. More under utilization of capacity will cause serious setback to Chinese economy.

China desperately needs export market and it can not give up it’s export market at any cost.

In the case of US, large US based companies which include number of multi national companies have pumped enormous investment in building large capacity in China in recent years to capture Chinese market. Multi national companies like DowDupont have also setup several advanced research facilities in China.

Investment made by US companies in China will be jeopardized in the case of Chinese government taking action to disturb and create impediments for such US investment in China. Of course, China may not go to such extent to create serious problems for US based companies in China, since in such case, China will be as much loser as USA in the case of investment already made in China by US companies .

While China will continue to look for alternate options in the wake of the present trade war, China is bound to bow down to US trade pressure and seek “ peace in the trade front”, sooner or later and perhaps sooner than later. This would inevitably happen, in view of the vulnerable situation faced by China. In such circumstance, the US is bound to extract its pound of flesh from China and succeed in curtailing China’s growth plans to some extent

It remains to be seen as to what extent European countries would back US in its trade war with China. Inspite of the fact that US President Donald Trump has been blowing hot and cold in relation with several European countries, Europe will not allow any serious breach in its relation with USA, which European countries cannot afford.

In all probability, US President Trump will succeed in his efforts to cut China to its size to a large extent and achieve his political objective.

(Author N. S. Venkataraman is a trustee with the “Nandini Voice for the Deprived,” a not-for-profit organization that aims to highlight the problems of downtrodden and deprived people and support their cause. To promote probity and ethical values in private and public life and to deliberate on socio-economic issues in a dispassionate and objective manner.)

Published Date: Sunday, July 15th, 2018 | 09:46 PM

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