US – China Trade war – Enough of globalization?

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There is a trend that I have observed and I feel is somewhat correct. Upwards of 2014, all global elections have seen some political party who are supported by extremists (left wing or right) gaining significance. Although it is my intuition, I somehow feel inclined towards this notion.

The latest example in this is – US-China Trade War.

Let’s check out some details first.

What is a Trade war?

Owing to globalization, the world has become one big market for all the countries. This is good for the consumers, but often the local players and industries of the country have to bear the brunt of this. This leads to loss or shift of jobs to different places. Trade war is a situation where countries try to hamper each other's commerce typically by the imposition of tariffs or quota restrictions.

How did this all begin?

To understand this, we must keep this knowledge in background that, there is no other country in the world which can compete on cost efficiency and production with China. China has been the global manufacturing hub for the world for past few decades now.Enter this decade; China became the 2nd largest economic power in the world. Today, China’s economy is primarily dependent on exports.Most economists agree that China's competition crushing pricing is because ofprevalent lower standard of living in China, which allows low wages to workers; andan exchange rate that is partially fixed to the dollar.

Given such high levels of production and low demand across the globe, China has also been known to face anti-dumping duties on its products in many countries including India to protect the local business and trade and save the manufacturing sector jobs. Of the latest data available, China is more than USD 550 Billion in surplus trade, with major chunk of this portion is contributed by USA and Hong Kong.

Chinese policy, known as Made in China 2025, $300 billion program to dominate critical high-tech industries has alarmed the United States. On this pretext, as we all know, the US president whohas vowed to bring manufacturing and jobs back to his country via implementing “America First” policy, ordered an investigation on steel imports from China and other countries citing threat to national security, sometime in April 2017.Since then, there have been multiple other investigations too, on unfair trade practices, intellectual property thefts etc. Come this January 2018, US hikes import tariff rates by 30% on solar panels and washing machines. Not only China is affected, but other countries notably South Korea, Mexico is affected too.

By February 2018, tariffs to be imposed on steel and aluminum were proposed. By March 2018, the proposed tariffs were imposed. Then April 2018 saw the Chinese government swing into action and it raised tariffs on US imports. Then US government again countered by raising import tariffs on some more Chinese products.

In 2017, the US –China trade account transactions are more than USD 600 billion (including exports and imports).The net trade deficit with China was $375 billion.The trade deficit exists because U.S. exports to China were only $130 billion while imports from China were $506 billion.

What to look forward to?

Trade war fears have dragged the dollar down in global markets Gold demand has weakened with investors turning cautious.China has said that it is not afraid of a trade war with the US and reciprocated the same by increasing tariffs on billion dollars imports from the US. China has said it will also pursue legal action against the US at the WTO.Also, last weekmajor WTO members like the European Union, Japan, South Korea and Brazil have criticized US for increasing import duty on certain products. WTO chief Robert Azevedo has also warned by saying "Tit-for-tat situations tend to escalate”.

Nothing surprising here, contrary to what’s happening, China talks about significantly lowering import tariffs for vehicles, ease restrictions on foreign investment, import more goods, and bid to reduce trade imbalances. This is contrary as experts think this is aimed to defuse the situation which is escalating towards trade war.

While US is concentrating more on promoting domestic manufacturing, China is also trying to foster better relationships with other major countries, in case trade war is inevitable. The Chinese govt. has said China would open its economy further so as to provide an equal base to foreign and Chinese firms. Taking cues from this, even after so much of standoff history, China has promised India to address the trade deficit situation between the two countries.As of now India ships 16 percent of its exports to the US.China is fourth in this list with around 3.5 percent of exports.

Alternate view

Some experts are of the view that, much of this trade war talk is going to simmer down and not much will be done about it. The reason is Currency.

China is the largest lender to the U.S. government as it holds treasury bills to the tune of $1.17 trillion. That's 19 percent of the total US public debt owned by foreign countries. Japan is the second largest. Many think that this is the ace which China holds against Trump in the short term and this gives China leverage over U.S. fiscal policy. China's influence on the dollar remains substantial. Also, this trade war would make Chinese yuan more volatile to other currencies as well like Euro, Pound or even INR.

Experts are of opinion that trade warwould cost Trump his rural support, which were the major voters to bring him into power.Given the global currency dollar is, it would tank the US stock market in upwards of 30 percent. In the short term this is the fire power China has which is being used as bait by it as of now. For the distant future, this is going to impact China too as USA is the largest importer of goods in the world.

Given the current situation, this reminds me a quote from Shakespeare’s book Henry VIII:

Be advis'd;
Heat not a furnace for your foe so hot
That it do singe yourself: we may outrun,
By violent swiftness, that which we run at,
And lose by over-running.

The world might fight with each other to signify the dominance, but one should remember that what they think as a battle of supreme is nothing as we all very much present in each other’s house which we are trying to burn down.

Sincerely yours, Globalization.