Samreen Fatima's Blog

America. A system that doesn't work anymore

March 25, 2019
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Too much ink has been spilled on US-China trade war and its ramifications on both countries and its rippling effects on the world. “Rejecting the idea of globalism and embracing nationalism” American trade policy is meandering through a path that leads US to isolation and a situation which creates a void for new alliances which are not lead by US like it was after world War 2.

Why do trade deficits rise?

As counter-intuitive as it seems trade deficits are more of an internal problem rather than external. In this case It's more related to inherent American consumerism, according to a report by World Bank, US household consumption in 1970 was $666.6 billion and in 2017 $13.7 trillion. It comprises 4% of the world's population and consumes 22% of worlds goods. It's family debt in 1970 was 14% of disposable income while it was 73% of disposable income in 2017.According to a report by US Federal Reserve from saving to GDP ratio dropped from 13% to 2.6% from 1970 to 2017. 1975 is the last year US has seen a trade surplus. Attesting to the fact that US economy is a consumption led economy and implementing policies to repress consumption can lead to recession.Trade deficits can't be reduced with a rising consumption.Trump's measures are not going to shield internal markets.

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Source: informator.news

So is it just a trade war or a measure to put the mockers on China's aspirations? Here's a time line of steps initiated by Trump to restrict imports from various countries :

● September 2, 2017, Trump announces to withdraw from the U.S. Trade Agreement with South Korea.

● Trans Pacific Partnership was brought out to isolate China in the region and lessen the reliance of the countries in China, Trump withdrew from it too on January 23, 2017, promising to replace it with various bilateral agreements. Japan and the European Union announced their own trade deals in response.US withdrawal from TPP, created a gap for China to fill in the region's need for a new trade alliance.

● On January 22, 2018, huge tariffs were levied by Trump administration on imported solar panels and washing machines then on March 1, 2018, Trump announced 25 percent tariff on steel imports and a 10 percent tariff on aluminum.China is are the biggest exporter of solar panels to USA.

● On August 16, 2017, U.S began renegotiating North American Free Trade Agreement (NAFTA) with Canada and Mexico. NAFTA is the world's largest Trade Agreement. Trump had threatened to withdraw from NAFTA hitting the Mexican imports with a 35 percent tariff.It is now replaced by USMCA with new provisions, yet to be ratified by each countries legislature it can't go Into effect before 2020.

● Criticizing his predecessor, Trump announced on May 8, 2018 that he would pull out the United States from the Iran nuclear deal.

China v/s US

While trade wars don't have a winner,Trump has been emphasizing that he will make America great again by lowering its deficits and adopting the Policy of America First.

● On January 23, 2018, President Trump posed a 30% tariff on foreign Solar panels and 20% on washing machines.It should be noted that China is a world leader in Solar panel manufacturing.

● On April 3, 2018, Trump announced 25% tariffs on the Chinese goods worth $50 billion. The Chinese products consisted of electronics, aerospace, and machinery. The Trump administration has showed concerns of illegal technology transfer to China. In free markets companies must do this if they want to gain access to market. China immediately retaliated hours later. It announced 25 percent tariffs on $50 billion of U.S. exports to China.

● On April 6, 2018, Trump slapped tariffs on $100 billion worth of Chinese imports. China, in retaliation imposed tariffs on all U.S. exports to China.

● On April 10, 2018, China said that trade relations are fraying . The United States demanded that China should stop subsidizing the 10 industries prioritized in its "Made in China 2025”plan. Xi Jinping, President of China said that he would reduce tariffs on imported vehicles.

● China agreed to remove tariffs on May 15, 2018 on U.S. pork imports. In exchange, the United States said it will remove tariffs on Chinese telecom company ZTE.

● On July 6, 2018, the United States imposed 25% tariffs on $34 billion worth of Chinese goods, in the same vein China also levied tariffs on U.S. products. Again, on July 10, on orders from U.S. President Donald Trump, the U.S. Trade Representative (USTR) Office published a list of $200 billion in Chinese products that could be subject to another 10% tariff.

● Trump has stated that US has been treated unfairly and the tariffs were essential to protect intellectual property rights of U.S. to help reduce the U.S. trade deficit with China. However some experts see it as a fair exchange of technology for cheap labor of China.

● In December 2018, Chinese Telecom giant Huawei CFO Meng Wanzhou was arrested in Canada at the request of US It is important to note that Huawei provides technologies to Iran an North Korea both countries are under sanctions from US. US accused Huawei of collusion with Chinese government and could have spying backdoor that is a national security threat to US.

Multiple trade battles concurrently :

Trump administration is determined to not waver his goal of making America great again. His take on trade-balance embroiled supposedly close allies like European Union (EU) , Canada and Mexico.

● Trump imposed 25% Import Tariff on steel and 10% on aluminum including close allies such as EU countries and Canada.The US tariffs affected more than €6 billions of export of EU only. European Commission lodged a legal challenge against these tariffs in WTO.

● Trump said that countries are treating America like a piggy bank. He also talked about the U.S. trade deficit with the E.U., which was $151.4 billion in 2017.

● The European Commission issued a statement stating , “as a longstanding partner and friend of the U.S., we will not negotiate under threat. Any future transatlantic work program has to be balanced and mutually beneficial.” During his Presidential campaign Trump had repeatedly given the Policy of America First and cancel international trade deals creating deficit for the USA.U.S. Trade deficit is of $500 billion a year and with intellectual property (IP) theft of another $300 billion in January 2018, According to Trump deficit is unacceptable and fairness and reciprocity are an open invitation to the country that seeks to do business with US. He stated that they have finally decided to abrogate the trade deals that compromised its prosperity and resulted in shipping its companies,jobs, and Nation’s wealth. China has also faced IPR violations threats from US. Various experts see it as a China's theft of Intellectual Property, where China reverse engineers a lot of products and it forces U.S. firms that want to do business there into transferring its confidential technology and trade secrets in order to have access to Chinese market.

Tariffs:Tried and tested

President Trump's policies are quite similar to the protectionist policies of 1980s.The protectionist policies in 1980 did little to diminish the deficits and ended up costing the consumers.Reagan also laid emphasis on steel,autos and the emerging semiconductor technology then. The 1980s policy also employed a number of tariffs and quotas on imports to that were stifling the US companies.

● In 1980s, US had major deficit with Japan, the restrictions on steel and auto sector did shrink the market Share of Japanese auto industry in US. Due to tariffs, the price of Japanese autos increased,and the local manufacturers couldn't meet the cost to compete with Japan, resulting in additional cost to consumer at the end.

● The tariffs can't do much to leg up US manufacturers. As the 25% tariffs adds a very high cost barrier to be competitive.

● Retaliating, China has slapped tariffs on US goods.Other close trade partners like EU,Mexico and Canada , have imposed the tariffs too.

A few facts that underscore that multipolarity is inevitable

-Trump stated bluntly that WTO has treated US very badly, and If reports are to be believed, US will withdraw from WTO too. -China has foreign reserves of more than 3 trillion usd and it passes 3 out of four IMF tests for assessing reserve adequacy.

-On 1 June 2017, Trump announced to pull out from Paris agreement, confirming the withdrawal finally on 4 August 2017 by a formal communication to UN. This withdrawal terminated the position of US in global climate governance and paving way for China to take rein.

-China's is shifting from export -reliant economy to a more domestic-consumption driven ECONOMY. According to a report by World Bank China's total exports is less than 20% of the GDP in 2017. -China has shifted its manufacturing capacities to low cost countries like Thailand and VIETNAM.

-China has made some multilateral trade agreements to meet the protectionist threat,it is seeking deeper integration with regional powers to confront the impacts of protectionism.

The commercial war,obviously has bigger goals than just fair trade deals,it's about China's aspirations and its role in the new multipolar World. We are living in an era of transitioning world, a world that is connected like a grid where each state is a node. The idea of a single hegemon seems a superannuated theory of 20th Century. Let's just leave unipolarity and colonialism where it belongs to : 20th century. The thought of perpetuity of unilateral power that commands great power and influence in Western as well as Eastern hemisphere is but a far cry from reality.

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