Trade Wars: The Road To Ruin

When goods do not cross borders, soldiers will

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Global Order has for centuries been dominated by trade which India and China dominated for nearly 1700 years; generating enormous wealth and treasures which allured expeditions from European countries. These vast trade opportunities were primarily responsible for The East India Company to setup shop in India by trading with local merchants for spices, cotton and other rich minerals etc. East India’s Company’s conquest of India in the guise of trade using unequal trade terms also laid the seeds of Opium Wars with China later. Through Opium Wars, British Empire imposed unequal trade conditions on Chinese empire in opening up ports, extraterritorial rights; similar to India and Africa to plunder their natural resources draining the wealthy empires while running trade surpluses. These exploitative colonial trade practices after World War 2 were replaced by multilateral global trade institutions in the form of GATT and WTO, a few decades later which formed the basis of a rule-based order leading to a massive expansion of trade in the form of Globalization.

The election of US President Donald Trump in November 2016 and BREXIT in June 2016 marked the reversal of the decades-long Globalization trend. The term ‘Free Trade’ has now virtually become a cuss word and led to the rise of protectionism and trade policies which have set the ball of inversion of global trade rolling.

As the USA goes back to an ‘America First’ policy; retreating from the very rule-based order it built after World War 2, the world again stands at the cusp of a trade war which could have a serious impact on the global economy.

President Trump led by the protectionists in his trade team like Peter Navarro has long complained of the US running large trade deficit with China, European Union, Japan and even India in certain aspects. America’s trade deficit with China touched an all-time high of $375 billion in 2017 making it the most uneven trade relationship between the two largest economies of the world. The US primarily imports consumer electronics, clothing, and machinery (many of them made by American companies in China at a lower cost of production) and exports $130 billion of goods to China; the majority being agricultural products, aircrafts and electrical machinery.

Apart from running a huge Trade Deficit with China, the US also runs Trade Deficits with Japan worth $69 billion comprising mainly imports like consumer electronics and automobiles. After China and Japan, US’s third largest trade deficit is with Germany at $65 billion comprising of automobiles, industrial machinery and medicines. In addition to Japan and Germany, the US also runs trade deficits with its neighbours like Canada and Mexico i.e. $17 billion and $71 billion respectively. Canada and Mexico are also a part of NAFTA (North American Free Trade Agreement) which President Trump has made clear he would like renegotiated or scrapped much like the TPP. Similarly, America also runs Trade Deficit with South Korea and India worth $23 billion as per figures of 2017.

Consumer products and automobiles are the primary drivers of trade deficit of United States; in fact, in 2017, US imported $602 billion of consumer products like generic drugs, televisions, clothing, and household items while exporting only $198 billion of similar goods. Similar is the story in automobiles, wherein 2017 America imported $359 billion worth of automobiles and parts while exporting only $158 billion of the same. America is, however, a net exporter of Services (includes IPR, Travel & Transport, Computers & IT Services, financial and insurance services), exporting $778 billion in services and importing only $534 billion leading a trade surplus of $244 billion which offsets the deficit in goods that has multiplied many times over in the last few decades of Globalization.

The New Global Order Book

The large US trade deficits have meant higher debts to keep them running. This hurt the competitiveness of US manufacturers resulting in the rapid deindustrialization of United States over the last few decades with US corporates shifting to China and other territories to produce goods at lower costs and then exporting them to US consumers. The resultant rapid rise in US debt and spiking unemployment levels was the core theme of the Trump campaign with his crusade against Free Trade decrying its supporters as globalists. Ironically, the same modus operandi was employed by British Empire when it took raw materials from India and other colonies and sent back finished goods virtually breaking the back of the local economies of its colonies with lopsided trade terms. President Trump has thus taken corrective action on the ballooning US Trade Deficits by imposing Tariffs on all countries (barring few) on goods like steel (25%), aluminium (10%), washing machines and solar panels (20-30%).

After months of negotiations, US finally launched the Trade War with China on 06th July 2018 by imposing Trade Tariffs worth $34 billion on goods that form a part of ‘Made In China 2025 Industrial Policy’ including aerospace, information and communication technology, robotics, industrial machinery, new materials and automobiles etc. China immediately retaliated by imposing $34 billion worth tariffs on American agro-products like soybeans, fruits, processed meat, seafood, dairy products, cereals and grains, alcohol, tobacco, cotton and automobiles & parts. Similarly, Canada imposed tariffs worth $12.6 billion on industrial machinery and consumer products. Mexico has implemented $3 billion Tariffs on US Steel, cheese, cranberries, pork etc. The US ally, the European Union has also retaliated by imposing $3.2 billion tariffs on US exports like agro products, peanut butter, orange juice etc. India has listed tariffs worth $240 million to be implemented from 4th of August 2018 with Japan following suit on tariffs worth $409 million. The swift retaliation by China and European Union have further infuriated the Trump administration which is now threatening to escalate the Trade War by imposing $500 billion worth tariffs on China and additional tariffs on automobiles from European Union!

The escalating Trade War between US and China; and US and its allies/partners like EU, Japan and India will only compound the problems for the global economy; leading to mass disruptions in supply chains slowing the global growth. Apart from damaging global growth through retaliatory tariffs, Trump’s Trade War could also end up upending the Dollar hegemony which has Trade Deficits structurally built upon it. This is called ‘Triffin Dilemma’ where America piles on more debt or sells more assets to keep up with the expanding demand for US Dollar as the global reserve currency. Simply put, the world economies and their central banks are forced to undersell the US producers to be able to sell more to the US than buy from it to maintain a certain reserve of US $ for international monetary demands.

If the Trump administration pursues the path of Trade War; it could well end up upending the international monetary system created after the 1944 Bretton Woods Agreement in which US Dollar became the global reserve currency.

US Dollar as the reserve currency also means a higher demand for dollar-denominated assets like US Treasury Bonds which keep the interest rates low domestically while US investments yield a higher rate of return abroad which is more than the interest paid on debt. This extra money that flows in the dollar-denominated assets doesn’t create jobs but leads to subprime asset bubbles makes the US Dollar more expensive hurting American exports further and the cycle continues… Thus if the Trump administration pursues the path of Trade War; it could well end up upending the international monetary system created after the 1944 Bretton Woods Agreement in which US Dollar became the global reserve currency. Undermining US Dollar as the reserve currency would dethrone America’s status as a superpower in the long term; affecting its military might and alliances. Moreover, it would mean the end of the international order it has championed for decades post World War 2.

While the US is running Trade Deficits with many countries, the duel between America and China is the one to watch out for. US Commerce Secretary Wilbur Ross, in an August 2017 Op-ed-‘American genius is under attack from China’, clearly stated that Made in China 2025 is a strategic threat to America’s dominance in high technology areas like aerospace, robotics, artificial intelligence, electric vehicles, semi-conductors etc. He also put China in the dock for Intellectual Property theft and expropriation technology from US Corporations worth $600 billion annually. Wilbur Ross stated that China is using the Trade Surplus with the US to close the gap and even surpass America in the 4th Industrial revolution i.e. Robotics and AI that could undermine American dominance as a global power. The Trump Administration’s strategy is clearly aimed at halting Made in China 2025 and the 1st round of tariffs imposed on 06th July target these sectors clearly.

While America is now making it clear that China is its prime strategic competitor, the Chinese, on the other hand, can deploy various tools to hit back at the US. China has already targeted American agro products like soybeans, pork etc with substitutes from other countries; it can also target US Oil & Gas, coal exports with tariffs and replace them with Russian Oil/Gas or Iranian Oil. China also has the options of imposing tariffs on American services sector and tech giants like Boeing, Apple etc. If the Trade War escalates further, China can also deploy non-economic stealth weapons like unloading Dollar-denominated US assets and treasuries (that would drive up the rates ravaging the US economy); and stop Rare Earth Minerals/ Elements supplies to US Tech and Defence Depts. over which it has a monopoly.

While China can surely hit back at the United States any such escalation will also damage Chinese exports and result in the closure of its factories with rising unemployment leading to internal social upheaval against the Communist Party of China for its disastrous trade policies. China has already started to devalue Yuan to blunt the impact of US tariffs making its exports cheaper but a protracted Trade War poses a great risk to the Chinese debt bubble which has grown disproportionately as China grew massively over the last few decades. While Chinese tariffs on US agro products are now starting to hurt US farmers which is a direct hit at Donald Trump’s Republican constituency; the $1.4 billion fine on Chinese communication giant ZTE and other tariffs by the USA is making China equally vulnerable to Trade and IPR actions. Thus, a Trade War between US and China is mutually destructive and could escalate very fast consuming the entire world economy, disrupting supply chains, prepping up inflation and affecting global growth leading to the risk of a global recession.

The Trade War could exacerbate the risk of disintegration of the European Union with the rise of European nationalists advocating the return of control of their sovereign boundaries.

President Trump’s trade salvo on Europe will also accelerate the rise of Nationalists and Populists in countries like Italy, Hungary and other Eastern European countries who detest the German hegemony of EU, dictating terms from Brussels. The Trade War could exacerbate the risk of disintegration of the European Union with the rise of European nationalists advocating the return of control of their sovereign boundaries. Historical patterns of previous trade wars give us ample insights into the same. The Canadian-American Trade Wars 1866-97 wherein the Republican protectionism abrogated the treaty with Canada leading to tariffs and retaliatory tariffs made American companies like Singer, American Tobacco and Westinghouse move plants to Canada similar to what Harley Davidson is doing in response to European trade tariffs in retaliation to US trade tariffs. Similarly after World War 1, when America retreated into the isolationist ‘America First’; US Congress passed 1930 Hawley Smoot Tariff Act imposing tariffs on European countries like France, Germany and Italy. These Trade Wars launched by the US after World War 1 not only deepened the Great Depression but even bolstered forces like Mussolini who vowed to defend Italy against the unfair American tariffs.

The Trump Administration has also sought to use the trade tariffs threat as leverage with China over North Korea or renegotiating NAFTA with Canada or Mexico to get a better trade deal. However, the results haven’t come as per American expectations so far leading to an actual spectre of Trade War. While South Korea, Japan, European Union and India could negotiate a way out with the US on trade give their antagonistic relationship with Beijing; China could hold their ground and fight fire by fire. The evolving Geo-Political complexities of trade between US and China have many consequences like China opening up its markets for Indian companies or the USA trying to make up with Russia to break the Dragon-Bear alliance; hoping to do a Nixon-Mao with Trump-Putin to swing the balance in the emerging bipolar order of US and China. Apart from changing geopolitical dynamics in Indo-Pacific to Europe, a Trade War holds the terrifying prospect of destroying the rules-based order in WTO, US dollar taking the world on a dangerous path of confrontation towards the next Great War. As a wise man once said, “When goods do not cross borders, soldiers will”.

End Notes:

  • Hong Kong: China’s Identity Question
  • U.S. Trade Deficit by Country, with Current Statistics and Issues
  • The U.S. Trade Deficit and How It Hurts the Economy
  • Trump is slapping tariffs on $50 billion worth of Chinese goods – here’s the full list of products that will get hit
  • China just slammed massive tariffs on $34 billion worth of US goods – here’s what will get hit
  • State of the Trade Wars
  • The US can eliminate its trade deficit or run the world’s dominant currency—but not both
  • Donald Trump’s “Madness”
    American genius is under attack from China
  • China using Russian strategy in trade war with America
  • Trump’s And China’s Tariffs Could Do Permanent Damage To Soybean Farmers
  • ZTE signs US agreement in principle to pay US$1.4 billion to lift sanctions and go back into business
  • Increased threat of a trade war is ramping up fears of a ‘full-blown recession’
  • Donald Trump and the 1930s playbook: liberal democracy comes unstuck
  • ‘Trade wars are good’? 3 past conflicts tell a very different story

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