Trump’s Trade Offensive: A Method in Madness!

A global trade war is in the offing! On April 3, America announced a list of 1,300 Chinese products—worth around $46 bn constituting 9% of total exports of China to the US in 2017— imposing 25% tariff on them. The next day, China released its own list of about 106 American products including its key exports such as soybeans, cars and aircraft—worth around $50 bn amounting to 38% total US exports in 2017—for subjecting them to punitive tariffs. 

Now, the obvious question is: will this game of tit-for-tat lead to a trade war? The answer is perhaps, ‘No’, for these are only lists and are, for the being, no more than mere threats. Which is why it is hoped that they will come to the negotiating table and back down, at least that is what the global stock and currency markets, which are relatively calm to the ongoing rhetoric, seem to believe.

To appreciate the possibility of this outcome, let us first take a look at the real underlying reason for the US threat of tariffs. When the US first imposed tariffs on the imports of steel and aluminium, ostensibly in the interest of national security, the real target appears to be China. For, tariffs being levied under the pretext of national security, US can exempt imports from NATO countries as also Japan and Korea from the said tariff, of course, after bargaining for a reduction in tariffs on US products that exceed US tariffs. And that leaves China exposed to the tariffs, but America avoiding the risk of a broader trade war, for certain, with its allies.  Though the US authorities didn’t say in so many words, that is the scenario to which the whole game plan of introducing tariffs with a phase-in period subtly points. 

That said, we must next examine why target China? The answer is: It has been promising for years to reduce its excess steel capacity and thereby cut down the export of steel to the US at subsidized price. But it did little in this direction, perhaps, under its domestic compulsions. So, introduction of new tariffs is expected to offer a counter to the administration to address its domestic pressure and thereby enable China to speed up the process of reducing its surplus production of subsidized steel. A fond hope!

Secondly, US has a justified reason to clamp tariffs: China is often found stealing technology developed by the US firms. It is complained that China, by deploying the excellent cyber skills of its People’s Liberation Army, is hacking US companies’ sites and stealing technology. China, of course, denied this all along until the erstwhile Obama administration presented clear evidence about the said practices to President Xi Jinping in 2013. This appeared to have given some relief, for President Xi said to have agreed to stop such cyber theft. 

And there is, of course, circumstantial evidence of this indeed happening: China has now invented a new method of getting the latest technology of US companies transferred to it: today it insists that US firms wanting to do business in China have to transfer their technology to their local business partners as a pre-condition for entering their market. And no US Company could ignore a rising market such as China with a population of around 1.3 billion people and an economy which is now as large as that of the US. The result is: voluntary transfer of technology by US companies! Over it, China is also often found to delay the entry of the products of these firms into its market so as to afford time for the local companies to make use of the so transferred technology to boost their own market share, a double whammy for US companies! This, Americans consider as unfair, while China, perhaps, looks at it as the only way to grow economically. And, there are no known formal means to get this behaviour of China corrected quickly. “Hence, the present tariffs”, aver one section of analysts.  But one cannot be certain if such unilateral trade sanctions will ever deliver the desired!       

That said, we must also take into consideration the credibility of the tariff impositions by the US. Interestingly, economists like Lawrence Summers commented that Trump’s trade offensive lacks credibility to deliver results, for: one, the real reason behind the current trade imbalances with China is not America keeping its market open on the most favorable nation terms to Chinese exports, but the rise of emerging economies as major participants in the global economy; two, China’s global surpluses are today far below the targets for which the US has earlier negotiated, and in any case trade bluster is not the right way to create pressure on China to behave; three, Trump’s taking up the cause of American companies—protecting them from transfer of their technology to Chinese firms—that moved their production to China for producing goods for the Chinese market sounds ironical, for in a different context US administration is condemning outsourcing; and four, American disregard for the WTO and the global system has indeed turned away many countries including its own allies from it, and therefore, China may not find it difficult to export to other countries while American producers, particularly, mid-west farmers have to face the brunt of China’s punitive tariffs.

Another section of analysts believe that had Trump, overcoming his aversion to multilateralism, joining hands with EU and Japan been able to pursue China with a series of joint action before the WTO, he would have acquired not only credibility but also wielded pressure on China to behave. That would have also given him handle to punish China without getting punished equally as of now. It is only the Midwest farmers growing Soyabean, incidentally his major vote base, who know where the proposed tariffs by the US and the China’s reaction to it pinch.

Summing up the whole episode, some critics, citing one of Trump’s tweets—“When you’re already $500 bn down, you can’t lose”—opine that Trump’s approach to trade reflects less of underlying economics but more of a gambling. Some even wonder if Trump knows the cost of failure in the gamble at all!

Nevertheless, they do see a method in the madness.  So, it is hoped that China, while retaliating Trump’s move with limited countermeasures might attempt to defuse America’s legitimate complaints, for that strategy alone keep its longterm interests intact. And driven by the same philosophy, China may reduce the bilateral surplus by importing liquefied natural gas from the US. In short, there would be a give and take between the two, for that is where their long-term interest lies. And a dialogue in this direction is already on.

So, let us keep our fingers crossed for the being hoping for the smooth sail of the world trade!