Strategic Forecast 2020

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CWA # 220, 25 February 2020
Strategic Forecast 2020
The US-China Trade Dispute: Towards further disruptions in 2020

  Harini Madhusudan

CWA Brief, February 2020

Multiple rounds of negotiations between the US and China were observed in the past year, many of which came very close to a deal but have seen only a 'phase-one deal,'  with a significant slow down in the economies, and this impact is reflecting on the global economic slowdown. What is the future of the trade conflict between the US and China?

Background

The real issue in the United States is the growing debate between the free trade and the populist wing in the government with the US President Donald Trump representing the populist wing. These factions exist within both the democrat and the republican parties. The ‘trade-war,’ seem to be in the interests of the populist wing and they would want to keep it the same (Kwan, 2019). This divide will be visible during the presidential campaigns in 2020. 

Coupled with the free trade and populist groups argument, is the ‘Balance of Trade’ argument. The growing trade deficit between the US and China, and the US claim of unfair trade practices leading to the ‘Trade War,’ has been constant arguments escalating the dispute. A trade war can be defined as an economic conflict resulting from extreme protectionist policies in which nations create tariffs or raise them and impose other forms of trade barriers against each other (Yao, 2018). This would be seen with retaliation and counter-measures from the other party. Increased protectionism from both the countries could their output compositions to move towards their autarky position.

Trade surpluses are an indication of domestic inequalities; domestic savings surplus. China has strong control over its domestic purchasing power as compared to the US despite its low purchasing power. The US on the other hand, has unused and not invested cash and the overall spending outpaced the production in the country, leading to a decline in the American savings. Wage suppression in countries like Japan, China and Germany has led to inflows from the rest of the world to the US (Stienbock,2019). This surplus has not added to the domestic investments and individual savings and the imbalance are strongly reflected in the attitudes of those in support of ‘trade war.’

Multiple rounds of negotiations between the two countries were observed in the past year, many of which came very close to a deal but failed. Contrasting views by the two were observed about the promises on buying agricultural products, the data of how much tariff is imposed on what products and, the issue with Huawei Technology. There was visible difference between the negotiators as seen in the statements after meetings. 

As per data in November 2019, the US have imposed tariffs on US$550 billion worth of Chinese products and as a counter, China has imposed tariffs on US$185 billion worth of US goods. On 13 December 2019, negotiators from the side of the US and China announced that they reached a phase-one trade deal but provided very little detail on what exactly will be part of the agreement. US Trade Representative Robert Lighthizer is said to have brought a print-out of an 86-page agreement to the briefing with reporters as a “show-and-tell" (UNCTAD, 2019) 

The US automobile industry has seen increased tariffs by China up to 40 per cent. They were seen suspending additional tariffs by 25 per cent as goodwill. Luxury cars were among the most affected, Tesla saw the largest impact.  

Technology, chip makers and electronics manufacturers that depend on China for sales, for example NVIDIA Corp, Micron Technology and Intel Corp are seen especially vulnerable. Semiconductor suppliers were at a greater risk with only the Apple Inc. Corporation able to escape the tariffs on their China-assembled phones so far. This is likely to change if the dispute extends further. Simultaneously there was also the episode with Huawei technologies and the overplay of the Intellectual Property argument. Since China is a major technology parts provider, the probability of them taking any measures in the technology domain would cripple industries (UNCTAD, 2019).

China is an important agriculture produce market for the US. The US exports soybeans to China and this took a hit in 2019 due to the tariff disputes. Other products exported in large amounts include cotton, hides and skins, pork products, and coarse grains. Through the negotiation process, China had promised to buy more agricultural products. China began by increasing its purchase of soybeans. 

In the negotiation, the options that were very plausible in 2019 but were consciously not done were the ban on the export of rare earths to the US industries, dumping of US Treasury bonds, and weakening Yuan. 

Major Trends in 2019

Truce and Negotiations 

The US-China trade dispute was the highlight of the two G20 summits that were held in Buenos Aires, December 2018 and in Osaka, June 2019. Trump and Xi agreed to a truce and announced that further tariffs would not be imposed in the end of the summit in 2018. These negotiations by March 2019 had failed, along with the accusations on Huawei and the arrest in Canada, they were back announcing tariffs. The Osaka Summit again saw an agreement between Trump and Xi to restart the negotiations.

Huawei Technology became a centrepiece in the escalating trade dispute between the US and China. It faced strong resistance in the US It became part of the broader battleground in which the popularity of the Chinese telecom giant was made to tackle a strong opposition from many foreign governments and customers. Simultaneously, concerns were raised about Huawei's links to the Chinese government.

In May 2019, the US announced entity list was announced which bans US Companies from selling without permission from the government. The United States Bureau of Industry and Security Entity List necessarily mean a list of entities that are ineligible to receive any item from the Export Administration without a license. This is specified in Supplement No. 4 to Part 744 of the Export Administration Regulations. 

The list included foreign persons- businesses, research institutions, governments and individuals – that are subject to licence requirements for export, re-export and transfer of items to the country. The entity list represents companies that the US claims, poses a national threat. The entity List is over 270-pages long and lists individuals and companies from a range of countries, largely Russia, China, Ukraine, Iran and even the UK. China’s Huawei Technologies was added to the list as the US Department of Commerce believes that “Huawei is engaged in activities that are contrary to US national security or foreign policy interests.”

Currency Manipulation

 In August 2019, the US accused China of currency manipulation. They claimed that the manipulation directly affected the US dollar with the loosely pegged value of the yuan, to the dollar. China manages its currency to control the prices of its exports. It wants to make sure its exports are reasonably priced when sold in the United States. Hence, China’s central bank has been accused of using a modified version of traditional fixed exchange rate that differs from the floating exchange rate the US and many other countries use. 

After months of signalling that it wanted its currency to be stronger than seven yuan to the dollar, China let the yuan depreciate beyond that threshold in August 2019. It further fell to an 11 year low against the dollar.

Total ban on agricultural imports 

In August 2019, China stepped away from further US farm imports stating it does not wish to rule out more tariffs after President Donald Trump ratcheted up tensions with its biggest agricultural trading partners. The Chinese government asked its state-owned enterprises to suspend purchases of US agricultural products. Chinese buyers turned to South American soybeans. The ministry also confirmed relevant Chinese firms have stopped purchasing American agricultural goods.

USTR tariff exclusions on 400 Chinese products 

It was by September 2019, it was announced that many Chinese products were freed from tariffs that the Trump administration imposed last year according to documents to be published by the Office of the US Trade Representative. The exemptions were a result of more than 1,100 exclusion requests made by companies and other entities in the US. Single-cup coffee filters, plastic straws, dog leashes, patio torches, Christmas lights and skateboards are among the products to be exempted from tariffs.

Until late November, the two parties began to consider a ‘Phase One’ deal. Mid December 2019,  the United States and China announced an agreement to the first phase of a trade deal that would see some US tariffs be reduced or repealed, once signed by the parties. The phase one of the trade deal is expected to see some US tariffs on Chinese goods be reduced or repealed. This will be in exchange for China increasing its expenditure on the US agricultural, manufactured, and energy products by at least $200 billion in the next two years. The 15 December tariffs against China will be completely rolled back as part of the deal. However, the lawyers are looking into the agreement, and are expected to be signed in January. It might be too early to expect a subsided dispute (Herb, 2019).

Forecasts for 2020

Rise in Tariffs

If the ‘phase one’ agreement by the negotiations fails, the trade dispute could worsen. The possibility of tariff imposition rising to up to 30 per cent remains and one can expect it to rise in the first half of 2020. The US-China trade dispute will be a major issue in the election campaign in the US for 2020. The divide within the American politics can be seen in the campaigns by the contesting candidates. While Joe Biden represents the voice of the free trade, Trump and Warren belongs to the populist faction. 

Mixed outcomes for dependent economies 

The distortion to global trade and direct impact on economic slowdown from the US-China trade dispute will get worse in 2020. The larger impact will be seen on the economies that are dependent on the outcome of the trade between the US and China. But the dispute is not without gainers, the windfall gains have been observed in Taiwan, Vietnam, European Union, Brazil, Mexico and few ASEAN nations. This number is bound to increase in 2020, considering how China has taken a conscious step to diversify its dependence on markets. 

Zero-Sum game continues

The ‘trade-war,’ is a game of lose-lose for both parties. For the longest time it was seen as a ‘zero-sum’ game. But the past year has seen significant slowdown in the economies. The escalation of the trade war was a calculated risk by the two nations knowing that neither of them is destined to win this ‘war.’ In addition, China might choose to wait for the 2020 Presidential election result to sign an agreement and conclude the dispute. 

In 2020, the uncertainty surrounding the US-China trade, and the stability in global trade would certainly remain. The declared intent of reducing trade surplus with China is being met to an extent, but the US has a trade deficit with Japan ($180 billion) and Germany ($280 billion), wonder what may be done about that?

The biggest challenge would be to address the damage that has already been caused by tariffs. It has sufficiently brought struggles for farmers and manufacturers and resulted in higher prices for consumers. Consumers in the US are bearing the heaviest brunt of the US tariffs on China, as their associated costs have largely been passed down to them and importing firms in the form of higher prices. Chinese firms have recently started absorbing part of the costs of the tariffs by reducing the prices of their exports.

Benefits from dispute 

US tariffs on China resulted in Taiwan (province of China) gaining $4.2 billion in additional exports to the US in the first half of 2019 by selling more office machinery and communication equipment. Mexico too, increased its exports to the US by $3.5 billion, specifically in the agri-food, transport equipment and electrical machinery sectors. The European Union also gained about $2.7 billion due to increased exports, mainly in the machinery sectors. Vietnam’s exports to the US increased by $2.6 billion, driven by trade in communication equipment and furniture. 

Trade diversion benefits to Korea, Canada and India were smaller but substantial, between $0.9 billion and $1.5 billion. The remaining benefits largely became an advantage of other Southeast Asian countries. The effects of trade diversion favouring African countries have been minimal. Out of the $35 billion Chinese export losses in the US market, $21 billion (or 63%) was diverted to other countries, and the remaining of $14 billion was either lost or captured by US producers. 

There are high expectations that the phase one deal could very well lead to the end of the current version of the trade dispute. But there are chances that the trade dispute may spiral into newer versions of economic confrontations. The second phase of the US-China ‘trade war’ would likely be about investment restrictions, export and import controls, and sanctions. 

References

  1. UNCTAD. (2019, 6 November). unctad.org | Trade war leaves both US and China worse off.  Retrieved 18 December, 2019. from https://unctad.org/en/pages/newsdetails.aspx?OriginalVersionID=2226
  2. Reuters. (2019, 11 October). Timeline: Key dates in the US-China trade war. Retrieved 19 December, 2019. from https://www.reuters.com/article/us-usa-trade-china timeline/timeline-key-dates-in-the-us-china-trade-war-idUSKBN1WP23B 
  3. Kwan, C. (2019, 16 December). Phase one of US-China trade deal to repeal certain tariffs: Report. Retrieved 19 December, 2019. from https://www.zdnet.com/article/phase one-of-us-china-trade-deal-to-repeal-certain-tariffs-report/
  4. Steinbock, D. (2019, 20 June). US-China trade war is pushing the world economy closer to the edge. The longer it goes on, the harder it will be to undo the damage. Retrieved 19 December, 2019. From https://www.scmp.com/comment/opinion/article/3015035/us-china-trade-war-pushing-world-economy-closer-edge-longer-it-goes
  5. Yao, A. (2018, 28 March). Trade war is not a zero-sum game, but a lose-lose for the US and China. Retrieved 25 December, 2019. from https://www.scmp.com/business/article/2139214/trade-war-not-zero-sum-game-lose-lose-us-and-china
  6. China Briefing. (2019, 16 December). The US-China Trade War: A Timeline. Retrieved 20 December, 2019. from https://www.china-briefing.com/news/the-us-china-trade-war a-timeline/
  7. Investopedia. (2019, 9 August). Why Huawei Is in the Middle of the US China Trade War. Retrieved 31 December, 2019. from https://www.investopedia.com/why-huawei-is-the-middle-of-the-u-s-china-trade-war-468752
  8. Heeb, G. B. B. (2019, 27 August). The US-China trade war has escalated dramatically in recent weeks. Here’s a timeline of everything that’s happened so far. Retrieved 19 December, 2019. from https://www.businessinsider.in/stock-market/the-us-china-trade-war-has-escalated-dramatically-in-recent-weeks-heres-a-timeline-of-everything-thats-happened-so-far-/articleshow/70850354.cms
  9. CFR, & W. Setser, B. (2019, 8 August). Is China Manipulating Its Currency? Retrieved 15 September, 2019. from https://www.cfr.org/in-brief/china-manipulating-its-currency

Harini Madhusudan is a PhD Scholar at the National Institute of Advanced Studies, Bengaluru

This essay was published at the NIAS Quarterly on Contemporary World Affairs, Vol 2, Issue 1, January-March 2020  

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