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by Jehangir Khattak
The US-China trade war has been raging for over a year now with scant chances of a quick resolution. It started on March 1st, 2018 when President Donald Trump announced tariffs on all steel and aluminum imports, including those from China. The two sides have slapped tariffs on each other’s products, exceeding $360 billion.
According to the office of US Trade Representative, US goods and services trade with China totaled $737.1 billion in 2018. Exports from the US were $179.3 billion; while the imports were $557.9 billion, showing a massive $378.6 billion deficit.
Economic interdependence between the two strategic rivals has, over the years, grown so deep that a trade divorce is impossible. Political and economic compulsions on both sides leave them little room to continue bleeding each other’s economies for too long.
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Experts warn that failure to ease the tensions will bring the already slowing world economy to a crawl. It has started impacting the global supply chain, slowing down production in the industrialized West and forcing many multinationals to consider relocating out of China.
The Trump administration believes it can win the mutually bruising war of tariffs because it is and will use the massive $378.6 billion trade deficit as a whip to pressurize Beijing and win the trade concessions. This may be partly true since China posted the weakest economic growth in 28 years in 2018 – even though trade war is not the sole reason for it.
The US risks losing big in a protracted dual as well. The US Chamber of Commerce, Washington’s most powerful business group, is urging Trump to end the war as it could potentially cost the US economy $1 trillion over the next decade.
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The US policy in the current standoff seems hasty and reactionary, lacking much strategic thinking in the rapid expansion of tariff regime for Chinese imports. It antagonizes its allies by imposing, tariffs on their products with an unprecedented frequency..
The Chinese, on the other hand, seem more calibrated, strategic and long-term in their approach.
Richard Nixon once said: “The
Chinese use two brush strokes to write the word crisis. One brush stroke stands
for danger; the other for opportunity. In a crisis, be aware of the danger –
but recognize the opportunity.”
Instead of blanket tariffs, Beijing is picking products that have long term
consequences for US agriculture and industry. It is cutting tariffs for other
countries on items that it imports from the US. As a result,Chinese consumers
are paying approximately 14% less to purchase the same products that are
imported from the US. Even if the current trade dispute is resolved, the US products
may continue to face stiff competition.
This is evident through the example of American lobsters, which have been exported from Maine to China for years and has helped bring millions of people out of poverty. Since the trade war started, Maine’s lobster exports to China are down by 70% while exports from Canada, Maine’s rival in the lobster market, doubled because Beijing reduced tariffs for Canada.
Implications for South Asia
The trade war poses challenges and offers opportunities to the Asian economies, especially China’s neighbors. It is forcing many Chinese companies to relocate to escape US trade tariffs, increasing foreign direct investment in several Asian countries. The United Nations Conference on Trade and Development (UNCTAD) has reported a significant increase in investments in South and Southeast Asia. So far, the biggest winners are Vietnam, Thailand, Malaysia and Indonesia which have received significant-to-record increases in foreign direct investments.
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Vietnam saw a 69.1% increase in Foreign Direct Investment (FDI) in the first six months of 2019, reaching $16.74 billion. The bulk of these investments came from China. In South Asia, Bangladesh is predicted to gain significantly. Its garment industry is witnessing a spike in orders from the US customers. The Asian Development Bank’s Chief Economist Yasuyuki Sawada expects the “trade war to generate additional $400 million exports for Bangladesh.” Dhaka is also trying to woo Chinese investment, touting its abundant, skilled and cheap labor besides its investor-friendly policies.
India, which recently imposed tariffs on certain imports from the US in response to Trump administration’s termination of its special trading status, is positioning itself to take advantage of the situation. A study by commerce ministry has identified 350 products that India can export to both the US and China. India had a $24 billion trade surplus with the US in 2018 and a record $63.04 billion deficit with China. It wants to use the situation to narrow down its trade deficit with the latter.
Pakistan seems to be lagging behind in seizing the opportunity which can reduce its trade deficit with China. So far the government’s policy is ambiguous. It hasn’t revealed its plans or identified products that it can push for exports to China.
Investment in low-tech and labor intensive industries, that China is phasing out and shifting overseas, has been another area Pakistan has failed to attract. Many Chinese are moving to Vietnam, Cambodia or Thailand to escape US tariffs. Relatively fewer are relocating to Pakistan. One reason is that nearly all the early harvest projects under CPEC were in the fields of energy or infrastructure. The progress on establishing the special economic zones has also been very slow. The window of opportunity is still open but may not remain for long, unless Islamabad acts fast to plug its policy and infrastructural weaknesses.
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Like Bangladesh, Islamabad can push its garments, hosiery and other exports to the US as well. All of that, however, requires more homework, diplomacy and marketing. Pakistan does not have much time to fill up the gaps in supply chain to the US where Chinese products are losing competitive advantage due to higher tariffs. It has to act fast before its regional rivals capitalize on the tensions between the world’s two largest economies.
