Trade war gets real

What the world hoped would never happen at all has been finally put in place. As of Friday, July 6, US Customs officials began collecting an additional 25 percent in tariffs on Chinese imports worth at least $34 billion. These imports range from farming plows to semiconductors and airplane parts. On top of that, President Trump also announced that he intends to add $15 billion worth of goods in two weeks and that the total could eventually reach hundreds of billions worth of imports to balance the growing trade gap between the two countries.

Not content with that, he further said that he would propose restrictions on new Chinese investments in the United States.

Citing Section 30 of the US Trade Act of 1974 giving him authority to enforce trade agreements, resolve trade disputes and open foreign markets to US products and service, Trump said that this was the first of many trade actions he intends to take to promote America’s national interest as he ramped up criticism of China’s theft of “US intellectual property” worth hundreds of billions of dollars.

As expected, the Chinese did not take things sitting down. Immediately after the announcement, the Chinese Foreign Ministry advised it was imposing tariffs worth $12 billion and counting on US imports—soya bean, pork and other farm products. The Chinese commerce ministry also advised that it has proposed a list of 128 USD products as potential targets for retaliation and intends to pursue legal action against America at the World Trade Organization.

Even as US and Chinese officials scrambled to limit the fallout from this exchange while finding ways to patch things up at the earliest possible opportunity, China’s Ambassador to the United States, Cui Tiankai, was quoted as having said that “China does not want a trade war but we are not afraid of it.”

No doubt that defiant stand can only exacerbate things at this point but there is no question that left unattended it could very well be carried over to the highest levels of China’s government. Which would be a real headache not only for both countries but for the whole world.

The betting, of course, is that President Trump is simply trying to shore up his electoral base in the run- up to the US midterm elections this November with this highly provocative, protectionist initiative. He promised during the US presidential campaign that he will redraw the line, especially on trade and security, as far as America’s relations with the world is concerned. He has said time and again that he is guided solely by his own studied view of what the “US national interest” entails. That means he will not leave any stone unturned to ensure that America remains the world’s only super power in all aspects and against all odds and interest including those of its traditional allies.

Which is scary and risky, of course, as it can. As shown not only with this initial exchange but in previous occasions, any form of trading war has very negative consequences which can envelop the entire global trading system. As Cornell University professor Eswar Prasad advised in an article contributed to the Washington Post, a trade war wounds all combatants. Prasad said:

“...It rattles business and consumer confidence, restrains exports, and hurts growth. Many US businesses rely on low trade barriers to create international supply chains that reduce costs and increase efficiency. These could come apart amid the new tariffs. The last time the United States imposed sweeping tariffs, in the 1930s, the effect was to prolong and worsen the Great Depression. Winning a trade war by destroying both imports and exports would be a Pyrrhic victory.”

Prasad’s fears have gained traction with other studies conducted by economists across the globe and political spectrum. A trade war will not benefit the combatants and, based on experience, will shrink global growth. Even the proposition of the more protectionist wing of Trump’s economic team—that this temporary tariff imposition will ultimately revive the US manufacturing sector and grow jobs in the process is at best iffy.

As Ellen Zentner, Morgan Stanley’s chief US economist noted “Decades-long shrinkage in US manufacturing has not only reduced the size of the manufacturing sector to 10 percent of total private sector jobs, but years of sluggish demand for US manufactured goods also led to a mass exodus of workers and loss of skill set... thus even if companies begin to create jobs stateside, they may not be able to find the right workers to staff them, at least, in the near term. The policies could boost US GDP growth slightly in the short run ... this would come primarily from a reduction in the trade deficit..”

In fact, the Morgan Stanley report concluded that “..when it comes to the lasting effects of a protectionist trade stance, the outlook is less than optimistic as ...beyond a one-year horizon, the longer term impact on the US GDP are negative in all scenarios starting with that of 5 percent, 20 percent and 45 percent tariffs over a 50 year horizon..”

As for economies on the margins the Philippines included, the negative impact can bring trouble and we are not yet counting the latest economic figures. There is no question that this brewing trade war will impact on our own growth prospects: Higher inflation and with it the prices of goods and services, slowing investments and job creation. As this incipient tarrification exchange between America and the rest of the world, i.e., China, European Union and Canada, among others, deepens, it also has the potential of restricting entry of our workers to existing and potential host countries, a prospect which will definitely impact negatively on our situation. We should prepare and put coping measures in place as soon as practicable. 

Topics: US Customs , Donald Trump , Morgan Stanley , Chinese Foreign Ministry
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