US-China trade war will be settled
CROSSROADS (Toward Philippine Economic and Social Progress) - Gerardo P. Sicat (The Philippine Star) - November 7, 2018 - 12:00am

The trade war between the US and China has been escalating step-by-step since the beginning of this year. The trade war also causes greater risk and uncertainty to world commerce and development.

As the stakes in this war rise, the point is likely to be reached when the search for a solution and a give-and-take between the warring sides become possible. The alternative is greater harm to all the stakeholders.

A deal is possible, sooner than later. With that in mind, it is possible to predict that the US-China trade war days are numbered. The time for an agreement should be within the framework of the Trump term of office. In general, the two countries are likely to seek settlement of outstanding issues by next year.

The Trump administration has used protective tariffs aimed at Chinese exports in an ever-expanding degree of product coverage. In turn, China has responded tit-for-tat, aiming at reduction of purchases of bulk needs from US suppliers and also directing tariff measures against targeted US products.

The alternative is an outcome such as one predicted by the WTO (World Trade Organization) that the growth of world trade could be cut by 17 percent, thus also shaving off by 1.7 percent the growth of world GDP.

Of course, how the trade war plays out depends on the major players themselves, the US and China. It takes two to tango. A prolonged trade war increases the pain for both parties. At some point, reason prevails and makes way for settlement.

An example is that of the NAFTA (North American Free Trade Agreement) trade issues which were settled quickly. With China, of course, the negotiations will be much harder and costly for the US, and vice-versa.

All quiet on the NAFTA and European fronts. The Trump administration relied on bilateral negotiations to settle the NAFTA issue. At first, the Trump administration dealt bilaterally with the weaker member, Mexico.

Having exacted acceptable terms from Mexico, the US government then turned around and presented the bilateral deal with the third partner of NAFTA. Canada was forced into a take-it-or-leave-it agreement, or be excluded, thus breaking NAFTA. After minor revisions to work out bilateral issues between the US and Canada and some face-saving, especially for Canada, the NAFTA final agreement was sealed.

In the same fashion, the European front – essentially the trade issues with Europe –is on hold for the moment. A diplomatic approach by the president of the European Union to the US president to hold further discussions for much later postponed the issue in the meantime.

The US-China trade war: principal trade problem of the Trump presidency. The US and China are, for now, still engaged in intransigent posturing. They are still raising the stakes, both in rhetoric as well as in reliance in their own resources and inventiveness.

The Trump administration is seeking to use the tactic of unilateral protectionist tariffs against China to extract concessions. To reduce the large imbalance in trade with China, the US wants China to enable US companies to expand their access to the Chinese market, ensure US intellectual property protection, to address concerns on technology transfer and to seek more market reforms in China.

In particular, the US complains of improper acquisition of intellectual property through theft and forced technology transfers and unequal treatment of US companies relative to Chinese firms.

The issues are much more complex and the stakes are large for each economy. The measures imposed by each country inflict harm on their own domestic interests – that is, on themselves.

The tariffs imposed on Chinese imports range from 10 to 25 percent. But the same measures are hurting American producers as well, and inevitably, consumers. Also, there are political costs to be weighed. The tariffs are likely to be costly to the Trump presidency at home.

Then, imagine the costs on the Chinese side. Think, however, on the benefits to each party if they agree to make peace.

China might also want to sustain its large access to the US market for the longer run. There is likelihood for both countries to find a means toward advancing continuing trade relations. Hence, they could seek a likely modus vivendi that enables them to work out some stability in their trading arrangements, while leaving some intractable issues for later solutions.

It is difficult to know exactly where the two nations can come to feasible agreements in terms of existing issues. Somehow, one or the other parties in the trade war would seek some form of negotiation, with readiness to find the route toward agreement.

The state of play on the tariff trade war between the US and China is that (as of October) $250 billion worth of Chinese goods are subject to tariffs ranging from 10 to 25 percent. The initial trade tariffs were announced by the US government in June affecting $50 billion of Chinese goods.

As soon as Chinese retaliation to these tariffs were announced, the Trump government put in place tariffs (in September) on $200 billion worth of Chinese imports, to which the Chinese also further made a corresponding retaliation. Chinese tariff retaliations on US goods take effect simultaneously with the US impositions.

The US government has announced that the government would consider covering another $200 billion should retaliation be further made.

For its part, China has retaliated with measures of its own on imports from the US, at every stage the Trump government imposed tariff actions. They are less comprehensive than those executed by the US, but they have taken a bite off against specific US industries and exports to China. The counter-measures from China attempt to inflict maximum pain against industries that are located in important American states.

In the initial round of tariff warfare, the Trump administration undertook budgetary counter-measures to subsidize states that suffered large trade loss of markets as a result of China’s reduced trade purchases. However, it would not be possible to sustain such measures as the cost of the tariff warfare broadens across the economy. Those burdens will be borne by producers and consumers.

My email is: gpsicat@gmail.com. Visit this site for more information, and commentary: http://econ.upd.edu.ph/gpsicat/

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