FeaturedInternationalVolume 14 Issue # 01

Odds against the US in trade war with China

The trade war between the US and China has escalated after Beijing imposed new taxes on more than 5,200 American-made products. The tit-for-tat moves will hurt people of the two superpowers but experts believe the US would have to back down in the face of the mounting political and public pressure while China can afford to ignore it.

 

US media and experts are optimistic about their success and believe China will blink first in the trade war. The US has already imposed tariffs on $34 billion of Chinese imports, which were met with retaliatory charges by the Asian nation. After President Donald Trump instructed US Trade Representative Robert Lighthizer to consider raising proposed tariffs on $200 billion in Chinese goods to 25 percent from 10 percent, the Chinese Ministry of Commerce responded with a retaliatory threat. According to CNBC, market moves suggest China — where the Shanghai index recently lurched into bear market territory, even as US bellwether indexes have kept above water — may be the first to blink in the trade war. That’s definitely true in the stock markets, because Chinese markets are heavily influenced by foreign capital flows and capital has been flowing out of China. But there are two other angles in China that matter: One is the economy and the third one is politics.

 

Some US experts think otherwise. They say Trump could be the first to bend to pressure from his political base. Pressure exists from red state farmers to US-owned firms operating in China. A third of the value added of Chinese exports is from US firms. That’s where the political pressure would come from here is from US firms who don’t want it to screw up the sales they’re making in China to Chinese consumers. They argue that Chinese President Xi Jinping doesn’t face that same sort of pressure because he doesn’t give a hoot about the poor people in China.

 

Hopes had been rising that Trump might drop his trade-war campaign after he announced a deal with European Commission President Jean-Claude Juncker that would see the US and EU cut tariffs and other barriers. There are also signs the Trump administration is trying to revive formal negotiations with Beijing. There’s some hint the Chinese may be warming to the idea, and recently there’s been some communications at the highest levels of both governments. A White House spokeswoman said the administration remains open to further talks. However, Bloomberg observed that China so far had shown little sign of backing down. At a regional security forum in Singapore, China Foreign Minister Wang Yi said free trade had been dealt a “heavy blow” and defended his country’s actions. “These measures were taken out of consideration for the interests of the Chinese people and to upholding the World Trade Organization-centered free trade regime,” he said. Finding common cause with Europe is one thing. America’s differences with China, a one-party state that has promised to open its markets gradually, run deep. The conflict with China is taking on a “cyclical” pattern with roughly two weeks of escalation followed by two weeks of relative calm. The two sides effectively have equal leverage over one another. No one has a real incentive to blink first. That suggests this is going to be a more protracted conflict. The question is what other tools the two countries may use, once they have no more goods upon which to impose tariffs. The US imported $506 billion in goods from China last year, and Trump has threatened to slap duties on effectively all imports from the Asian nation. China imported $130 billion in goods from the US in 2017, according to US figures.

 

China is letting its currency fall to offset losses from the trade war, though the decline is partly due to weak economic fundamentals. The People’s Bank of China stepped in to support the yuan after the currency slid to the lowest in more than a year last week. In the meantime, signs of the trade war are creeping into the economic data. US manufacturers are considering expanding outside the country to avoid the widening trade conflict, according to the Institute for Supply Management’s July survey. The sentiment may weigh on business investment, which contributed last quarter to the fastest pace of growth in four years. The Trump administration may be overestimating its ability to pressure Beijing into changing its economic behaviour. China’s one-party system gives President Xi Jinping several advantages in a trade war, such as the ability to control the nation’s media, experts say.

 

When President Donald Trump first threatened to slap tariffs on Chinese goods in March to punish Beijing for stealing American intellectual property, trade experts warned the two nations risked slipping into a downward spiral of tit-for-tat trade actions. The global economy now appears to be living that reality, with the trade war settling into a regular rhythm of counterblows. Poor Americans have already started feeling the fallout of the trade war. Total employment in manufacturing has fallen by 25 percent since 2001, putting about 4.5 million workers out of a job and free trade is being blamed for the decline. Off-shoring and “bad” trade deals are cited as evidence that trade no longer serves America’s interests. The Trump administration’s solution is tariffs. In recent months, entry barriers have been set up, first to protect solar panels and washing machines in January and then steel and aluminum in March. Although he’s fighting the trade battles with many partners, including Canada and Europe, most of Trump’s attention is directed toward China. Foreign imports of steel and aluminum became more expensive overnight – to the tune of 25 and 10 percent, respectively. Higher prices drive down consumption of foreign goods while bolstering demand for domestic equivalents. US consumers now have to pay more for everyday goods. Trump’s tariffs on Chinese imports go far beyond steel and aluminum and affect a wide variety of basic products, from consumer electronics to shoes and apparel.

 

Experts say both sides think they are winning the war, but US President Donald Trump stands on weaker ground and he will be more under pressure from the public than his Chinese counterpart, who can weather the pressure with the help of the state-controlled media. They say the US will have to surrender to China under the will of its people for being a democracy while China would win the trade war for being an authoritarian state.

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