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A growing face-off

  • Published at 12:03 am June 30th, 2019
US and Chinese presidents
A lot rides on their decisions REUTERS

The US-China trade war is escalating international tensions

The US-China trade war has been escalating in recent weeks, with both countries announcing new tariffs on each other’s goods.

This ball game started on July 6, 2018, with both countries announcing tariffs at 10% on products valued at $34 billion being traded between the two countries. On August 23, 2018, another $16bn of products came within this paradigm.

Subsequently, there was a steep rise on September 17, 2018, with the US announcing that a 10% tariff would apply on $200bn of Chinese products. China took a similar measure on September 24, 2018, with regard to US products entering China valued at $60bn.

Afterwards, some degree of hope was raised with both countries agreeing to enter into negotiations on this issue. This led to a temporary pause with regard to the imposition of new tariff between December 2018 and March 2019.

On May 10, 2019, the friction escalated once again with the US announcing that tariffs on $200bn of Chinese products would now be at 25%. China retaliated with the application of tariffs on US products worth $60bn at a rate of 25%.

These measures with both countries announcing new tariffs on each other’s goods have helped generate further misunderstanding and apprehension.

US President Donald Trump launched his trade war last year in a bid to reduce the US trade deficit with China and also force Beijing to undertake economic reforms.

He has also used these measures seeking to dominate global industries which are not only using unfair state subsidies but also acquiring American technology through forced transfers without respect for intellectual rights.

Trump has said repeatedly that China will pay these taxes, even though his economic adviser Larry Kudlow has recently admitted that US importers, not Chinese firms, pay the tariffs in the form of taxes to the US government.

These additional costs are then simply passed on to US consumers in the form of higher prices. Trade flows to the US appear to have slipped 9% in the first quarter of 2019, suggesting that the trade war is starting to bite. 

This evolving situation has led many to question as to why US firms do not substitute purchasing Chinese products from other sources when Chinese manufacturers do not reduce their price.

Strategic analysts have subsequently held that such a measure is not as easy as many think. They have observed that it takes a long time for productivity and value chains to be reoriented and that all comes at an extra cost.

American negotiators have, in June, alleged that their Chinese counterparts have reneged on their previous commitments. However, China has retorted by saying that the US should bear “sole and entire responsibility” for the setback in negotiations.

In the meantime, the situation has exacerbated due to the US moving to blacklist Chinese tech titan Huawei over national security concerns.

The Chinese Vice Commerce Minister Wang Shouwen has pointed out that the US has overestimated the trade deficit between the two countries, and China should not be blamed for job losses in the US manufacturing sector.

In the meantime, trade fears between these two economic giants have cast a long shadow on the global stock exchanges. This has raised fears of a global economic downturn and added pressure on policy-makers to roll out more stimuli.

It is being pointed out by economists that imposition of higher trade tariffs is bound to take its toll on global commerce and further dent business and consumer sentiment. This would lead to job losses and delays in investment decisions.

They are looking forward to Donald Trump and Xi Jinping addressing this factor. It is being underlined that the current geopolitical matrix is in trouble as it will have to resolve the impact that is bound to rise from several contentious issues -- Brexit, US-Iran dispute, and that of China and the US.

Some economists are predicting that its complicated facets are bound to lead to a renewed race to the bottom on interest rates if trade tensions fail to ease.

In Britain, the Brexit stockpiling boom of early 2019 has given way in May to the steepest downturn in British manufacturing in almost three years as new orders have dried up, boding ill for economic growth in the second quarter.

In a similar vein, evidence has emerged that the Eurozone economy is also under pressure and will likely be of concern to policy-makers at the European Central Bank.

Central banks in Australia and India have also expressed their concern regarding the trade impasse. JP Morgan has also indicated that they now expect the US Federal Reserve to cut rates twice in this year. This needs to be considered as a major change from its previous forecast that rates would stay on hold until the end of 2020.

Both China and the US might claim that their economy is not being affected because of this exercise. However, they both need to step back from the precipice, take a fresh look as to where they are presently located.

They also should understand that the osmotic effect of their controversial exercise is affecting socio-economic interests all over the world. This can only create instability, not promise of a better future for the majority of the world’s population.

This growing face-off between the world’s two largest economies is also increasing anxiety among smaller Asian states. The detracting aspects were clearly evident during the recently concluded Shangri-La Dialogue in Singapore. 

Muhammad Zamir, a former ambassador, is an analyst specialized in foreign affairs, right to information, and good governance. He can be reached at [email protected]