Trade war: Consequences on nations

At the end of my column last week, I said, “The trade war has started.”

With US metal tariffs taking effect in July, some steel exporting countries are already set with their equivalent direct retaliation against the US.

Canada, which is the biggest exporter of steel and aluminum to the US, will impose between 10 to 25 percent tariffs on a range of US exports covering metals, farm goods, and other products amounting to $16 billion.

Europe immediately drew up a list of US goods subject to trade tariff retaliation when the US tariffs were announced. Included in the list is whiskey, blue jeans, motorcycles, and steel. The EU estimates that the metal tariffs would cost the EU around $3.27 billion

China is willing to negotiate on a broad basis to improve trade relations. Recently in early discussions with a US trade mission, China promised to raise purchases of goods from the US by a substantial amount, covering around $70 billion.

The Trump administration this week, however, announced a tariff of 25 percent on a new list Chinese exports to the US totaling $50 billion.

This elicited an immediate response from the Chinese government which said it would impose equivalent retaliation on a range of imports from the US. China said the previous agreements it offered were no longer valid.

Three fronts of the trade war. The US trade war would be fought essentially on three fronts: (1) China. (2) Europe. And (3) NAFTA (North America Free Trade Agreement).

China. The big front of the trade war for the US is China. The rise of China’s economic prowess was based on the rapid expansion of its foreign trade, with exports leading the way.

The domestic base of that growth has been a highly export oriented industrial economy propelled by an extensive growth of foreign direct investments coming from different countries and employing an almost endless stream of inexpensive labor over the decades.

The US has a very large trade deficit with China. In 2017, the US exported to China $129.9 billion and imported $505.5 billion. The trade deficit of $375.6 billion is 2.9 times US exports of that year!

In the context of this trade, the steel tariffs are really insignificant compared to the massive magnitude of the trade between the two. China was only a relatively small supplier of steel.

Trade tensions with China is over a broad range of goods.

The US desire to improve its trade performance with China has been a project of many years of successive American administrations. Current efforts to change that relationship drastically is one of the plans of the Trump presidency.

Europe. As a bloc of 28 nations, the European Union is the biggest trading partner of the US. The overall volume of trade in goods and services between the two countries is over a trillion US dollars.

The volume of trade in steel with Europe is relatively small. A broadening of trade conflict could arise only if the European response elicits a US response that further involves other goods. The US threatens action with respect to German car imports to the US, in which case a serious escalation could result.

NAFTA. Canada and Mexico are the partners of the US in NAFTA. The recent economic growth of both Canada and Mexico have been highly stimulated by the free trade agreement.

The US has lost industries both to Mexico and Canada as a consequence of the free trade among the three countries. 

The metal tariffs have jolted both Canada and Mexico as they are two countries that export steel in high quantities to the US. The tariff retaliations that they undertake damage in part the nature of the free trade arrangement involving the three partner nations.

The disruption in the steel tariffs could either threaten seriously the agreement’s future. On the other hand, they might make both Canada and Mexico accommodate some changes that the US desires in NAFTA to improve the terms for the US.

The bystander nations, including the Phl. Trade wars could further escalate into trade conflicts of larger scope. Or they could end up in agreement if, or when, the parties decide in their interests to compromise.

Countries that are not involved directly could be brought into the orbit of events through the economic tie-ups or trading linkages that they have with those in conflict. In this way, it is easy for trade wars to infect other countries. Thus, they widen the impact on others that are not involved.

For instance, when the Trump government imposed the increase in steel and aluminum tariffs, retaliatory measures that inflict broader damage to the American economy were alluded to by the countries hit by the tariffs. The targeting of agricultural products and special products (like jeans and motorcycles) in these retaliatory measures send a strong message that no industry is safe from harm in a trade war.

Retaliations that inflict proportional damage are not confined to limited sectors of the economy, but could involve a wider set of sectors.

In the case of China, the initial response to the steel tariffs, because they were not significantly hurtful to them, was to invite negotiation. But when, as happened this week, the US decided to impose on China a new set of punitive tariffs on $50 billion of goods, the response was swift.

China indicated a list of goods that are designed to inflict economic hurt to a wide range from agriculture to industrial machinery and other imports.

The danger of these moves to non-participant countries is that they could be engulfed in the delicate supplier chains that are now part of the global trading and production system.

This interdependence could affect not only the warring parties whose trading patterns are disrupted, but also those countries that are integrated in the world trading system.

The Philippines today is very much integrated in the world’s trading system. It has many enterprises producing goods for other products that are exported to other countries.

Like all countries caught up in the linkages of the world economy, when disruption happens, serious consequences could be experienced by them even when they are only bystanders.

My email is: [email protected]. Visit this site for more information, feedback and commentary: http://econ.upd.edu.ph/gpsicat/