Opinion | The politics behind Trump’s trade battle with China
4 min read . Updated: 19 May 2019, 09:56 PM ISTThe only plausible explanation for Trump's tariff war is the political gains he might make
The recent breakdown in China-US trade negotiations signals a troubling phenomenon in a complex geo-economic environment. Hyper-nationalistic sentiments in political behaviour and policy action are increasingly endangering the use of sound economic reasoning, while eroding faith in carefully drawn out diplomatic negotiation processes.
At a time when a trade deal seemed plausible between the Chinese and US trade officials, US President Donald Trump ordered a last-minute increase in tariffs on Chinese imports, accusing China of reneging on its previous commitments. On a closer look, the politicization of trade negotiations stumps economic logic. It further crowds out any expected economic benefits from high tariffs and brings on repercussions for both the US and Chinese economies.
There is no empirical evidence yet that presents a strong economic case for US manufacturers to benefit from a rise in tariffs on Chinese imports. In fact, the very opposite of this is seen to be true. Most Chinese imports are inelastic in demand within the US and are increasingly pressurizing American producers using Chinese inputs to pass any increase in costs on to consumers.
If Trump imposes a 25% tariff on product “X" imported from China (say, initially marked with a tariff of 10%), this 15% increase in the tariff bill will be borne either by the American seller himself or the American consumer if the seller raises the market price to pay for it. At a time when middle-income and lower-middle income groups are suffering long spells of wage-stagnation and low real income growth, a spiralling inflationary push harms both American producers and consumers.
It is worth noting that most Chinese imports into the US (including consumer goods like washing machines, mobile phones, hair dryers, etc.) cannot be produced at the same price and scale in the country. Raw materials required for these products also need to be produced at a lower cost—similar to the selling price of Chinese exporters—and cannot be otherwise sourced easily, unless the existing supply chain of manufacturing products into the US from China can be shifted to another country which provides the same raw material at a similar or lower price. With no country to replace Chinese traded goods, the bottom line for now remains this: A hike in tariffs on Chinese goods would only lower profits for US companies and result in higher prices for consumers.
What about the effect of Trump’s tariff strikes on the Chinese economy?
The Chinese economy stands to lose much more if we closely analyse its macroeconomic position. The Chinese government has already been pumping more money into its economy to boost consumption demand and aggregate production for higher growth. So far, the results have been underwhelming and a trade war only worsens this.
In a credit-fuelled economic system (that helped China grow at 9-10% annually in the 1990s and early 2000s), China’s economy, in the last decade or so, has failed to generate the same level of domestic demand, shifting the source of growth to export volumes.
So, with the US being one of its largest consumers, Beijing is likely to go all the way to make some kind of a trade deal with the Trump administration to ensure its economy stays “competitive enough". Chinese trade negotiators have invited US officials to Beijing for the next round of negotiations.
Being competitive is crucial for China, especially when it is financing a foreign investment plan of over $1 trillion through the Belt and Road Initiative. In its foreign policy, too, China relies heavily on making massive economic investments (in construction, infrastructure, etc.), particularly in emerging countries or those where the investment climate is weak. This trend may well be forcefully altered by a New Cold War with the US.
In other words, while Trump’s tariff strike on China hurts both countries, and fails to pass any test of a sound economic policy, the only plausible explanation of his tough stance on China is how the entire scenario may serve to benefit Trump politically—as part of his electoral rhetoric that’s popular among his voter base—ahead of the 2020 presidential race.
There is a silver lining for emerging markets like India, Bangladesh, Indonesia and Vietnam. They have an opportunity to significantly boost exports and leverage that growth, both regionally and within other proximate geographical areas.
India’s export performance since 2013 has been sub-par and has significant potential to improve. However, countries like South Korea, Vietnam and Bangladesh have gained significantly from higher export revenue.
The trade tensions offer them an opportunity to boost aggregate production levels by aiming for a Regional Export Advantage policy framework that would break down the comparative advantages enjoyed by Chinese and US businesses over time.
In today’s economic landscape, where trade networks determine a given nation’s economic and political strength, it is imperative for emerging economies to make the best possible use of economic uncertainties. The real question is: To what extent can political arrangements within emerging countries allow room for economic opportunities to be maximized, as against being subsumed by rising protectionism that is otherwise gripping economic partnerships?
Deepanshu Mohan is associate professor of economics at O.P. Jindal Global University