For a year, President Donald Trump has promoted global division and trade friction, while China has defended global trade and cooperation. It is time to defend the open, global economy, Dan Steinbock writes in an essay for finews.first.
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If President Xi Jinping’s speech was highly anticipated in the Boao Forum, it was even more eagerly waited in Washington and Wall Street, as trade tensions have begun to penalize U.S. markets. In his keynote speech, Xi urged countries to «stay committed to openness, connectivity and mutual benefits, build an open global economy, and reinforce cooperation within the G-20, APEC and other multilateral frameworks». The ultimate goal is to make economic globalization «more open, inclusive, balanced and beneficial to all.»
Xi presented plans to further open up the Chinese economy, including lower import tariffs for autos and other products, enforcement of the legal intellectual property of foreign firms, and improving the investment environment for international companies. It was a balancing act that highlighted China’s goal to safeguard open global economy, even amid Donald Trump’s trade wars.
«Donald Trump said he was considering an additional $100 billion in tariffs against China»
In early March, President Trump introduced a global tariff of 24 percent on steel imports, while launching a 10 percent duty on all aluminum entering the U.S. On March 22, Trump directed his administration to make a case against Chinese technology licensing in the WTO, launched a slate of tariffs at $50 billion on Chinese products and proposed to step up restrictions on Chinese investment in key U.S. technologies. That’s when China, in response to U.S. steel and aluminum tariffs, imposed tariffs on $3 billion worth of U.S. goods.
On April 2, China imposed tariffs of up to 25 percent on 128 U.S. products, in response to steel and aluminum tariffs. The next day, the U.S. proposed tariffs on $50 billion worth of Chinese electronics. Afterwards, China launched $50 billion in tariffs on more U.S. products, including soybeans, cars and chemicals. And on April 5, Trump said he was considering an additional $100 billion in tariffs against China.
«Over a year ago at Davos, President Xi Jinping stressed the need for global cooperation»
With substantial geopolitical leeway, Trump is also playing targeted countries against each other. That’s why he has granted «initial exemptions» to U.S. NAFTA partners, Mexico and Canada, and «temporary exemptions» to the EU, South Korea and others on steel and aluminum tariffs.
Over a year ago at Davos, President Xi Jinping stressed the need for global cooperation to sustain global recovery. In a trade war, he said, «no one will emerge as a winner». In the White House, that wisdom got lost in translation. Now the only question is how costly that policy mistake will prove.
President Trump may be in for a cruel awakening. For now, the economic impact on Chinese companies and banks is still limited. The U.S. accounts for only 15 percent of China's goods exports, and China's domestic activity - not net exports anymore - now fuels its economic growth. U.S. economy will carry a substantial burden, however.
«In fact China is the largest customer for America’s farm surplus»
Second, Trump’s unilateral tariffs will soon begin to hit hard the constituencies that were vital for his triumph in 2016 and who remain critical to Republicans in the fall mid-term elections. These farmers and blue-collar voters gave Trump a mandate to negotiate better terms with U.S. trade partners, but not a carte blanche, and certainly not a license for a trade war.
China is the largest customer for America’s farm surplus at over $20 billion per year. Since U.S. farm groups have greatly benefited from the reduction of trade barriers over time, there is an unease across the U.S. heartland that Trump's tariffs could upend decades of progress. Even worse, if trade friction worsens with NAFTA and EU partners, U.S. farmers would take hits from all directions.
Third, as U.S. sovereign debt now exceeds $20.7 trillion (107 percent of GDP) and Trump’s infrastructure initiative is fueled by record-high leverage, trade war is undermining America’s critical revenue sources.
Fourth, Trump’s trade war is escalating at a time when even rising interest rates can no longer ensure a strong dollar, and petroyuan is on the ascend. Moreover, with $1.2 trillion of U.S. debt, China remains the largest foreign holder of U.S. Treasuries. And it also has $3.1 trillion of foreign exchange reserves.
«In finance, global cross-border capital flows have declined by a 65 percent since 2007»
Fifth, if Trump proceeds in the trade war path, he would undermine U.S. ties with its NAFTA partners, alienate EU allies while undercutting U.S. alliances with the rest of its trade and security partners in Asia. Over time, that would undermine not just trade, but investment and finance with America’s biggest economic partners in North America, Western Europe and East Asia.
Sixth, global growth prospects are not immune to the trade war. Before Trump’s tariffs, global investment flows remained well behind their peak a decade ago. World export volumes reached a plateau already in early 2015. In finance, global cross-border capital flows have declined by a 65 percent since 2007.
«In that path, there is a historical precedent»
For now, the damage of the Trump tariffs is still reparable and reversible. However, the net effect of further escalation would result in critical erosion in global investment, trade, and finance. That has potential to derail the fragile global economic recovery and disrupt international supply chains. In that case, four decades of bilateral confidence-building could be undermined in four weeks and mistrust would soon spread to U.S. relations with its partners in Americas, Western Europe and East Asia.
In that path, there is a historical precedent. After the U.S. economy drifted into the Great Depression in the 1930s, Washington enacted the Smoot-Hawley Tariff Act, which led the way to tit-for-tat retaliation, and ultimately paved the way to much worse. Trump’s unilateral tariff war is on the wrong side of history.
Dan Steinbock is the founder of the Difference Group and has served as the research director at the India, China, and America Institute (U.S.) and as a visiting fellow at the Shanghai Institutes for International Studies (China) and the EU Centre (Singapore). A shorter version was published by China Daily on April 10, 2018
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