We live in the era of globalisation. Planes enabled us to travel the globe, micro-chips and the internet have allowed us to communicate easily, and sophisticated trade routes DISH our products that don’t even grow in our own country. These things have not come out of thin air. People have felt the urge discover the world and trade exotic products forever. As early as in the thirteenth century, many merchants developed thousands of kilometres of trade routes between Europe and Asia. The seas were conquered, and importing products on large scales took off.
It is hard to imagine a world without the variety of food, cosmetics, technology and other products that we have at our disposal now. This extensive choice has only been made possible by multilateral trade on a global level. Total world trade accounts for more than $15,000bn on a yearly basis, slightly less than the GDP of all countries in the European Union combined. The sudden escalation of the trade conflict between the United States and China is a big blow for global trade. Even though it does not instantly mean the end of globalisation nor does it threaten our cosmopolitan lifestyle; it is a manifestation of the ever more emerging protectionist beliefs in the developed countries.
There has been a lot written about the tit-for-tat tariff impositions of the US and China. Fears for a potential trade war, interfering with global trade flows, are surfacing continuously and people are concerned that the tariffs will damage the already tense relationship between the two world players. Will it come down to a real trade war that sets financial markets to chaos, imposing strict restrictions and forcing countries to rely on domestic markets again?
We can trace the roots of this trade conflict back to president Trump’s election campaign. One of his main campaign promises was to bring back jobs to the United States and save the American people from losing their jobs to low wage countries. Moreover, he called the North American Free Trade Agreement (NAFTA) a disaster and promised to pull out of the Trans-Pacific Partnership (TPP), which he did quickly after he took office. Another key point of his campaign was his pledge to reduce the major trade deficit that the United States currently has. In 2017, the total trade deficit amounted $566 bn., of which the biggest chunk can be accounted for by the import of consumer goods and automobiles.
The main reason that Trump chose China as his target for the tariffs is that the trade deficit with China ($375 bn) contributes to about 66% of the total deficit. In Trump’s eyes, imposing tariffs will reduce this deficit, which in turn will benefit the United States. On another note, Trump believes that China is responsible for acts of intellectual property theft, thus in his eyes justifying the tariffs.
Many people argue that it is unfavourable to have a trade deficit for a long period of time, since it essentially means that since a country imports more goods and services than it exports, a country borrows money from trade partners, increasing the total debt of a country. From this point of view, Trump’s intentions may sound very reasonable and justified. Many economists, however, argue that the trade surplus or deficit will gradually disappear automatically in the long run. Nobel laureate Milton Friedman stated: ‘’ Trade deficits are not that harmful, as the currency will always come back to the country in some form or another, such as via foreign investment’’. Whether or not this is the case for the United States is ambiguous, because the US dollar is used throughout the world so extensively that it does not always find its way back to the American mainland.
Over the past decades, the United States has imposed import tariffs and other trade restrictions on many products or countries. Some of those served as part of sanctions to countries such as Iran, whereas others were imposed on grounds of unfair competition or to protect domestic industries. Many of these trade restrictions were only of short duration, as targeted countries were threatening with retaliation. In 2002, for example, President George W. Bush ended import tariffs on steel only shortly after European trade partners threatened with retaliation.
This time, president Donald Trump does not show any fear of China’s retaliation. Even though the Chinese government stated that it would continue to the “bitter end”, Trump has not shown any sign of weakness yet. Last week, Beijing reacted to Trump by setting 25 percent tariffs on more than 100 products, accounting for about $50bn in imports related to China’s alleged intellectual property theft. This has not caused Trump to back down and remove the tariffs. Last weekend, Trump ordered his administration to draft a plan to impose another $100bn in tariffs, as a reaction to China’s “unfair retaliation”. On April 8th, he expressed his optimism in a tweet suggesting that “China will take down its Trade Barriers because it is the right thing to do.”
Will the World Trade Organisation (WTO) play a role in this rising conflict? The WTO deals with many cases of tariff impositions, as its main goal is to facilitate trade and to ensure that nations act according to the agreements that are at the heart of the WTO. It acts as an independent arbitrator in cases of a trade conflict and has the power to punish nations if they do not abide by the agreements. China has already addressed the issue at the WTO and questioned the legality of the US tariffs. From the other side, however, the United States has launched a separate case against China over Beijing’s intellectual property practises. The WTO is known for its slow decision-making process and therefore a quick settlement is not expected.
Only time can tell what will happen next. Trump seems determined to let China pay, and China has stated to do whatever it takes. With international trade at stake, these two attitudes make the conflict a highly inflammable cocktail, with severe potential consequences.
Written by Joppe de Bruin