Welcome to the first instalment of Smartkarma’s spotlight on the global trade war. In this series, we aim to cut through the noise and deliver clarity on what matters, and why.
For this purpose, we have also drawn on Insights from Smartkarma’s network of independent Insight Providers, with the view of attaining in-depth perspectives of what’s at stake.
Each day of Donald Trump’s US Presidency brings more trade uncertainty to the global economy.
Since he was elected, Trump has spared no effort in expressing his disdain for the US trade deficit. Tariffs after tariffs, threats after threats, his single-minded crusade to take the world to task for “taking advantage” of the US on trade has made little distinction between friend and foe.
Not even close neighbours Canada and Mexico escaped his wrath, as Trump followed through with tariffs on them, and forced both parties to renegotiate NAFTA.
Elsewhere, tariffs imposed on steel and aluminium hurt metal-producing nations exporting to the US. A few of them responded by levying US goods while calling on the World Trade Organization (WTO) to conduct an official investigation.
The highest stakes, however, still reside with the tenuous state of trade relations between the US and its two largest trading partners: the European Union and China.
The Eastern Front: US-China Trade Tensions
Of the multiple ongoing skirmishes between the US and its trading partners, the US-China trade dispute is by far the most contentious. Unlike the others, this one has all the makings of a full-blown trade war.
Here’s a run-down of events so far:
1) President Trump awoke the sleeping dragon in January 2018, when he unleashed tariffs on inbound washing machines and solar panels. China’s solar sector, which dominates the global supply chain, took a direct hit.
2) Washington fired another shot in March 2018 by imposing tariffs on steel and aluminium imports, totalling an estimated US$2.8 billion. In retaliation, Beijing levied duties on US goods worth US$3 billion and filed a complaint with the World Trade Organization (WTO).
3) At the end of May, China announced it planned to cut tariffs on consumer goods in July. The announcement came just two days before US Commerce Secretary Wilbur Ross was due to visit Beijing for trade talks. Still, the categories selected covered few American goods.
4) July marked a significant escalation point in tensions. The US slapped further tariffs on US$34 billion worth of Chinese goods, triggering an equal response from China.
5) Trump also threatened to place levies on an additional US$200 billion in Chinese exports destined for the US. China filed a second complaint with the WTO in protest.
6) Another US$16 billion in tit-for-tat tariffs came into force in August.
7) Then, about a month later, Trump followed through on his earlier threat to levy US$200 billion worth of Chinese imports. He also said he was ready to impose further tariffs on US$267 billion in Chinese goods if Beijing hit back against US farmers and industries.
8) Undeterred, China retaliated by adding another $60 billion worth of US exports to its tariff list.
9) Fast-forward to early November 2018, when hopes of a truce briefly surfaced after the US President tweeted about a “long and very good conversation” he had with President Xi. The encouraging news broke less than a month before both leaders were due to meet on the sidelines of the G20 summit in Buenos Aires.
10) But the respite was short-lived. Glimmers of hope soon gave way to increasing hopelessness as protracted trade discussions between US and Chinese trade officials yielded little progress.
11) As if that wasn’t bad enough, Vice President Mike Pence all but killed any chance of a deal when he sparred openly with the Chinese President over trade at the Asia Pacific Economic Cooperation (APEC) summit, just weeks before the G20.
12) And still, there was hope. President Trump and President Xi went on to work out a 90-day truce at the G20. Both nations agreed to pause the introduction of any new tariffs during this period and take trade negotiations into a higher gear.
Only time will tell how effective Trump’s tariffs will be. At the time of this writing, tariffs appear to be a futile attempt at narrowing the trade deficit. China’s trade surplus with the US – in goods – surpassed US$40 billion in September 2018, jumping nearly 12 percent from January.
Who Has More to Lose?
China might end up the bigger loser in a drawn-out tariff war, owing to its relatively outsized trade exposure to the US.
According to Smartkarma Insight Provider Stewart Paterson, China depends more on merchandised trade for its GDP than the US. To be exact, that ratio amounts to 33 percent (China) versus less than 20 percent (US). This heavier reliance on exports ultimately makes Beijing more vulnerable in a trade war with Washington.
Increasing financial leverage in China’s economy is also compromising its ability to withstand future tariff blows.
Paterson adds that the nation’s debt-to-GDP ratio has risen from about 140 percent prior to the global financial crisis to more than 250 percent today. In other words, China now requires an incremental three dollars of debt to produce a dollar of growth in output.
For the full picture, read the Trade War Special Report: The End of Fair Trade.