Global trade faced a new scenario recently with threats of trade wars rising in the leading economies and major economic blocs of the world. At the point of this writing, the US is preparing for a new round of tariffs on USD 200 billion worth of Chinese products. The waves of US tariffs are carefully calibrated, first hitting raw materials, commodities, and primary products from China, thus insulating US consumers from any impact. US consumers have a penchant for affordable daily products from China. The US is careful in protecting its consumers’ interests while ensuring there are no major disruptions to the lives of its citizens in the first round.
The second round of trade tariffs comes after the 25 percent tax on USD 34 billion in Chinese imports. The second wave is far more comprehensive and includes finished products sought after by the average US consumer. The second round includes goods as specific as dog leashes and other consumer products that have made life easier for middle-class American consumers in managing their household expenses. In releasing the second round, the US is making a statement that it is willing to endure some pain to its consumption habits, choices, and lifestyles while hitting China where it hurts. The strategy is perhaps to get Beijing to the negotiating table to buy more US products to address the trade deficit.
In the first wave of US tariffs, China responded with its own set of tariffs worth the same amount. China targeted products that has an impact on US trade like soybeans and American cars/vehicles. The soybean industry is particularly vulnerable to Chinese moves. Another industry traditionally vulnerable to Chinese pressure is aircraft manufacturing. China is a major customer of US aircraft manufacturers such as Boeing. The only other real alternative to American commercial airliners would be the European Airbuses. The soybean and commercial airliner industries are nervous about the impact of Chinese retaliation on their businesses. American companies operating in China are also nervous about their vulnerabilities to Chinese countermeasures to US trade tariffs.
US businesses based in China are worried about the consequences of this trade conflict, particularly in terms of licensing approvals and other forms of administrative delays brought about by the bilateral trade tensions. These are the so-called traditional non-tariff barriers that can be equally devastating in their effect on slowing down business operations in China. There are other non-tariff weapons in Beijing’s arsenal as well that are equally feared. In the past, consumer boycotts have taken place in the context of political tensions with other countries. This could hurt US businesses already operating in China.
But there would be the risk that this strategy can backfire on Chinese businesses. Some experts are making the argument that the trade tensions may also hit Chinese partners who are working with American companies. For example, Shanghai Disneyland is majority owned by a Chinese company while an American company is a minority shareholder. So, boycotts against Disneyland could end up hurting the Chinese company more than its minority American counterpart.
In this sense, world trade and economic exchanges have become so intricately intertwined that it is now very difficult to unravel the trade bindings that tie the two countries and the rest of the world together. It is no longer a simple matter of identifying the national origin of a product — any single finished product now has multiple national origins, with its component parts coming from all over the world. The potential for both parties to be equally hurt remains a clear and present danger.
Tesla is now reportedly allowed to operate in China without being compelled to be part of a joint venture — perhaps setting an example for other such ventures to follow.
In the long run, American intellectual property rights, patents and technologies are at stake. China’s “Made in 2025” worries the US as Beijing seeks to develop world leaders in sunrise industries like robotics, computer hardware, autonomous vehicles, etc. This initiative has been put in place since 2015 and the international media has cast it as one of the primary policy initiatives of the Xi administration which has removed term limits on the presidency and vice presidency. In other words, it appears that there is policy continuity in China with the longevity of its top political leaders, unlike the constitutional term limits imposed on the top leaderships in liberal democracies.
If Beijing slaps tariffs on all goods from the US, it may also damage this plan as many components and parts for China’s products are still sourced from the US as they cannot be found in other places. But, Beijing is unlikely to veer away from its national blueprint in producing advanced technological products due to pressure from the sanctions. The Chinese political system makes it less flexible for the top leadership to back down from any major initiative once it has been announced to the public. This may reflect a lack of strength in the domestic leadership in the face of foreign pressure.
The tit-for-tat retaliation therefore creates another uncertainty. Markets are unsure of the road ahead. Stock markets around the world are being spooked by the tit-for-tat that has taken place between the world’s two largest economies. The markets are equally spooked by the fact that they are unsure of how Beijing will respond even as the Trump administration makes clear their measures to deal with the trade deficit. The Chinese system is said to be less transparent than the US political system where the mass media can fish around Washington DC for opinions, lobbying activities, and open competitive political exchanges. The uncertainty of Beijing’s responses can lead to false expectations, rumors, and speculation.
Beijing’s leadership in the past has seldom, if at all, backed down from major policy initiatives as it enjoys the ability to ramp and push through policy initiatives with robust state power and centralized state directions. The ability to push through initiatives with little or no resistance increases fears in the West that China may whittle down technological advantages hitherto enjoyed by the US. Remaining calm and collected thus far, China’s approach has been one of wariness, and appears to be following the procedural path of taking the case to the World Trade Organization. This is somewhat in line with its image now of the world’s lone major defender of free trade after the US turned to its America First policy while Europe is coping with populist movements including but not only restricted to Brexit.
The ongoing trade war is now labelled as the “largest trade war in history.” Both sides have left windows of opportunity to carry out talks to reach some form of compromise or re-adjustments. Tesla is now reportedly allowed to operate in China without being compelled to be part of a joint venture — perhaps setting an example for other such ventures to follow. It may be possible that more compromises or concessions may follow, but some are fearing that it is too little and too late. Others are hopeful that the trade war can result in readjustments and recalibration of major challenges, and having a trade war is better than having a real war at any point of time. The two countries need to resolve this to prevent the war from spilling over into services — that is a whole new battlefield that can do significant damage to both countries.