Trade War From The Chinese Side

Trade War From The Chinese Side

Trade War From The Chinese Side

Despite efforts some weeks ago to reach agreement, the U.S.-Chinese trade war has intensified. Both sides have announced new tariffs on each other’s products. Beijing has called Donald Trump a “bully,” while the president has accused China of interfering with this county’s elections and, seemingly in an effort to outflank Beijing, has pressed trade deals with South Korea, Japan, and the European Union (EU). Trump shows no sign of softening. Nor do the Chinese. For the time being, domestic and geopolitical considerations prevent each from backing down.

Bleak as prospects appear at the moment, the odds nonetheless favor some sort of an accommodation, perhaps not tomorrow but in the not too distant future. On the American side, there is pressure to end this from domestic firms that rely on Chinese imports. On the Chinese side, as the following discussion will make clear, the country’s export-led, manufacturing growth model always left Beijing at a disadvantage in this dispute.

Figures on U.S.-China trade put China’s disadvantages into sharp relief. According to UN figures, the United States depends on China to buy only some 8% of all U.S. exports, whereas China depends on the United States to buy almost one-quarter of all its exports. U.S. goods and services constitute only some 7.3% of all Chinese imports, whereas Chinese products account for over 21% of all American imports.

What these figures say is that a cession of trade would hurt China’s real economy much more than it would the U.S. economy. And indeed, the Standard and Charter Bank of Hong Kong, clearly close to the situation from the Asian side, estimates that the existing 10% tariffs imposed by Trump will slow Chinese economic growth some 0.4 percentage points next year, and if Trump raises the tariffs to 25% on January 1 as planned, it will cut China’s real growth pace 0.6 percentage points, not a small disruption even an economy growing 6-6.5% a year. Meanwhile, a consensus of economists here in the States estimates that the tariffs imposed by China on U.S. products will slow this economy a mere 0.1-0.2 percentage points.

These figures also say that China will have an increasingly hard time matching the U.S. tariffs dollar-for-dollar, as Beijing has tried to do so far in this dispute. Indeed, the problem has already arisen. The recently announced 10% tariffs will fall on some $200 billion of Chinese products imported into this country. China has countered with 5-10% tariffs on $60 billion worth of American products entering that country. This latest raft of Chinese tariff making has brought the total on which China has raised duties to $110 billion, awfully close to the $150 billion total that country imports from the United States. Beijing is loath to burden the other $40 billion of U.S. imports because they consist of semiconductors and other components essential to China’s huge output of assembled electronics.

Recognizing these constraints, Beijing has already announced a turn to what spokespeople describe as “asymmetrical tariffs.” Instead of raising levies in tandem with Washington’s actions, official China now threatens to impose larger percentages on selected U.S. goods and services, obviously those China’s export-manufacturing machine depends on least. These, the implication is, will land heavily on agricultural products flowing across the Pacific. The Chinese consumer may object to a larger bill at the supermarket, or the Chinese equivalent, but from Beijing’s point of view, a rising cost of food is an easier political problem to deal with than is doing any further damage to Chinese industry. Besides, China has other food sources beyond American farming. This is a viable response, but it also points up the inescapable fact that Beijing finds itself in a difficult position in this escalating game.

While Beijing seeks alternatives to counter Washington, its economy has already begun to show signs of strain. China’s index of purchasing by industry, a key indicator of economic activity especially in manufacturing heavy China, has begun to decline. Regional figures from the country’s 29 provinces show 21 doing worse than last year. This time in 2017, that figure was 15. Small and medium-sized business reports layoffs at double-digit rates. Larger firms report less harm, with employment declines of 3-4%, but this might understate the pressure since it includes many state-owned firms. To be sure, China was slowing even before the tariff competition began, but some of these recent setbacks surely reflect the trade war. Export-oriented factories report the worst figures. According to preliminary surveys, their orders have dropped by half. Firms have already begun to shift output to Vietnam and Cambodia where they can both avoid Trump’s tariffs, and, significantly, pay lower wages than in China.

Despite all China’s problems and disadvantages in this competition, Beijing will likely hang tough, at least for a while. It’s brag to the world and its own people that it has joined the major powers of the earth simply makes it impossible to bow to U.S. demands. Nonetheless, the pressures will build making it increasingly advantageous to find some source of relief. At the same time, Trump, for all his competitive advantages in this game will face pressures of his own. Agriculture, already targeted by China, has tremendous lobbying prowess. Consumers, who have grown accustomed to inexpensive Chinese imports, will in time add their voice to pleas for relief. This country also has many industries that depend on Chinese goods. It is noteworthy that in all the White House’s bluster, it has exempted from the tariffs 300 Chinese products worth about $50 billion a year. Each is something that American business needs and cannot get elsewhere, at least not at a reasonable price point.

In coming months and quarters, as these respective pressures have their increasing effect, albeit very differently in Beijing and Washington, both parties will become increasingly eager to seek an agreement. It probably will include elements that allow both Beijing and Washington to claim a victory of sorts, but it will end this tariff war, more likely in a stretch of time measured in quarters than in years.

Sources : hellenicshippingnews

Manjula

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