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US-China
The Tariff War: 'Stick of Hegemony' vs Vital Interests

  Harini Madhusudhan

This is still a game of Chicken.  Neither the US nor China would want to lose face by just folding in this trade dispute, leaving the stakes high for this risk.

Project Assiciate, NIAS

It has been a month since the first set of tariffs was imposed. On 6 July 2018, both countries imposed 25 percent tariffs valuing to  USD 34 billion, on each others’ imports.

What is the impact of these tariffs in the past month? What are the challenges faced by China? Where is the ‘Trade War’ headed towards?

July 2018 Statistics
China’s exports to the US fell 2.5 percent month on month by USD 41.5 billion while its imports fell 1.5 percent month to month by USD 13.4 billion, according to figures released by General Administration on Customs. China’s trade surplus fell about 3 percent from the June 2018. The July trade figures “are the first hint that the tariffs are going to bite, but it is not the full effect yet,” said Iris Pang, Hong Kong based Greater China economist at ING wholesale banking to a newspaper. Naturally, one month data is not sufficient, statistics from August, September and October will be able to better indicate the effects of the first round of tariffs.

The tariffs could have a bigger impact on the trade surplus in the coming months; one reason is because many of the export products that posted monthly declines in July were not in the first list of goods to be sanctions. Some exporters also are known to have front-loaded their shipments of toys and clothing ahead of Christmas season to avoid the impact of tariffs that were yet to be implemented.  

Impact on China
The timing of the imposition of the tariffs on Chinese products comes at a time when China was itself trying to reduce its domestic reliance on American soybeans by lowering trade barriers. The biggest impact was on the soybean market, China has traditionally imported huge quantities of Soybeans from the US. However, in July the imports fell by 8 percent month on month.  China imports 60 percent of global soybean produced. It bought 32.9 million tonnes from the US in 2017, accounting to 34 percent of the total purchases, according to a report by Reuters.  

If China manages to cut its soybean imports by 10 million tonnes, and an additional 25 percent tariff on US soybeans will definitely have a large impact. This is because; there has already been a backlash among American farmers. The Department of Agriculture in the last week of July rolled out $12 billion in emergency aid to farmers hurt by its trade policies. The plan included direct payments to farmers, trade promotion abroad and government buyouts of surplus agricultural goods. Is China prepared for such spill over effects? Supply chain management will be crucial for China to be able to deal with the immediate effects. The US may seem like it holds a superior position in the tariff game but China may be more equipped to deal with the long term effects.

So, where is the tariff war headed towards?
US Bank Morgan Stanley argued on 3 August 2018, “China runs an aggregate debt-to-GDP of 256 percent suggesting balance sheet de-risking should be its priority,” which would ordinarily mean tighter monetary policy. But due to trade dispute, China has been seeking to free up its credit. Their view is that, “with debt already high, limiting its fiscal scope, China’s macro policy options seem to be running into limits should it follow US’ demands.” So there is no point in Beijing retracting at this point.

But this is still a game of Chicken.  Neither the US nor China would want to lose face by just folding in this trade dispute, leaving the stakes high for this risk. There is however, Washington’s accusation of IPR conflicts and the claim of unfair trade practices by China. No one seems to be talking about this. The Chinese feel that their projection of “China 2025” plan is being attacked by the US. In the next few weeks, we will see the Summer Summit of the CCP and this summit will be crucial for the decisions that will be made by China on how it wants to tackle with the tariffs.

US has published a new list of Chinese products that would face 25 percent duties from 23 August and to this, the Customs Tariff Commission of the State Council announced a list of US products that would be subject to additional tariffs of four different rates- 25 percent, 20 percent, 10 percent and 5 percent of agricultural, metal and chemical goods, against US decision on raising tariffs to be imposed on US $ 200 billion of Chinese goods.

If both parties were to further increase their import duties, China might be successful in gaining the support of all those nations that are against the US steel and aluminium tariff, shifting the power in the hands the combined team of China versus the US. This can be seen in how the Chinese have slowly started to make deals with the European Union and China’s confident statement saying, “We will survive the trade-war.”

However, neither of them can get away with the negative impacts of the tariffs; soybean has already seen a rise in prices in just one month. To conclude, in a trade war, there are no winners; there are different levels of financial loss and gain.

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