It’s creating a new impetus for closer EU-Asia economic ties. Ironically, the primary loser will be American consumers
The modern era of multilateral trade negotiation was ushered in by the General Agreement on Tariffs and Trade (GATT) in 1947. It was based on the insight that unilateral tariff reductions, such as the repeal of the Corn Laws, are unstable.
In 1995, GATT became the WTO and almost every country now belongs to it. Tariffs are cut by negotiation and agreed rates applied to all trade partners; a dispute-settlement system authorises retaliation against miscreants.
It is a fact that the WTO has not succeeded in stopping China, which joined in 2001, from flouting the spirit, if not always the letter, of its rules by shaking down foreign investors for technologies it fancies and giving subsidy to its own industries.
There is a reasonable case for penalising China for flouting multilateral trade rules, such as through overproduction, dumping overseas and the nation’s excessive restrictions on market access. But a policy of reversing the globalisation of supply chains really does ignore the foundational economic lessons of Adam Smith about the benefits of the division of labour, and of David Ricardo on the merits of a nation recognising its comparative advantage.
The primary loser from Trump’s trade war will of course be the American consumer. The hypothetical benefits of more manufacturing jobs will be more than cancelled out by higher prices, the consumer has to pay.
As the Apple boss Tim Cook notes, there are iPhone components manufactured in the US which are exported to the China so it can be assembled.
What if China imposes tariffs on those in response to Trump’s tariffs? That will likely push up US iPhone retail prices even if there are no direct tariffs imposed by Trump. Deliberately clog the arteries of trade and the economic damage will inevitably show up somewhere, perhaps where it’s not expected.
Europe has also hit back on steel import duties with charges on Harley Davidson motorcycles and Florida orange juice.
It is commonly known that China gives vast and opaque subsidies to its state-owned firms. The world’s consumers benefit from the artificially cheap imports that result. But trade of this sort is unsustainable, politically and economically.
The US is right to demand that China play fair. However, the US wants to eliminate its trade deficit with China, which the US mistakenly sees as a transfer of wealth. The US has broadcast its desire to force manufacturing supply-chains back to America and the administration has identified China as a strategic competitor.
The White House may argue that China’s abuse of the rules, the trade deficit and the decline of American industry are one and the same. They may not be. Even without subsidies, China, like most other emerging markets, would enjoy a substantial cost advantage over the US.
The trade deficit, meanwhile, is tied to the difference between domestic savings and investment. Tariffs might cut the bilateral deficit with China, but the US would find it nearly impossible to shrink its overall deficit without engineering a domestic recession.
The trade war has accelerated several trends that had been under way for some time. Consider the following: In 2017, exports from EU to Asia was bigger than that to the US. While Asia’s exports to the EU in 2017 were still slightly lower than that to the US, they are faster growing, making the EU increasingly more important to Asia, according to the IMF.
From a simple perspective of market size, Asia today is far more important to the EU than the US, and the EU will soon be more important to Asia than the US.
Measured by estimates of private consumer expenditure, Asia today is just about as big as the US. The big difference is, however, that private consumer expenditure in Asia is growing at twice the speed compared with the US.
Even more striking is China where private consumer expenditure has been growing at an average of 13.8 per cent a year in the last decade, over four times faster than in the US, according to the World Bank WDI database and Eurostat.
Not surprisingly, China is now the largest market for an expanding list of countries, which includes Australia, Brazil, Russia, South Africa, South Korea and Indonesia, among others. Indeed, if the current growth rates of imports in the US and China hold in the next few years, by 2021 China will surpass the US to become the largest market for imports in the world, according to the IMF. Against the backdrop of these powerful trends, Trump’s trade war is creating new impetus for the EU and Asia to speed up the opening of their markets to forge closer economic ties. This may lead to even faster growth than in the last decade in trade between the EU and Asia, accompanied by rising investment. Virtually everywhere outside of the US, a new sense of urgency is now afoot as policy-makers seek to fast track regional free trade agreements (FTAs).
Implications for India
Our exports plus imports of goods and services constitute around 42 per cent of GDP and hence any trade war will have implications for us.
Several countries are taking their own protection measures. Products exported from Europe to the Balkans enjoy preferential treatment and hence are exempt from Customs duty whereas Indian companies are required to pay 15 per cent duty, when they export their products to countries like Serbia.
Recently, Turkey imposed 21 per cent Customs duty on products from India and there is a mandatory rule of local value addition of 51 per cent in case they want to sell their products in Turkey, which force Indian companies to create capacity in a sub-optimal manner by investing significantly in the local country.
Indian textile companies face trade barriers compared to other competing countries like Bangladesh, Vietnam and Pakistan. These barriers pose an obstacle to business with our most important markets. For India, the US and EU markets absorb about 60 per cent of our output in apparel.
Market access is another challenge. More developed countries like Korea have entered into FTAs with the EU to improve market access. India needs to similarly expedite an FTA with the EU. Trade treaties like the Trans-Pacific Partnership (TPP) and bilateral FTAs are fundamentally altering global trade flows in apparel, made-ups and textiles.
As trade growth slows, the adjustment that oil importers must make to higher oil prices becomes more severe. Falling rupee exacerbate the burden of dollar-denominated debt, while exporters are forced to pass on the benefit of rupee depreciation to customers for various reasons.
In recent years, companies in emerging economies including India embarked on a dollar borrowing spree, lured by low interest rates.
For companies that earn in their domestic currencies but owe in dollars, the depreciation mean a financial squeeze. Indebted corporate borrowers may curtail investment and hiring. One economic drag reinforces another.
Unfortunately, oil prices are rising just as global financial conditions are also becoming less forgiving. Rich-world central banks, on high alert for signs of accelerating inflation, are moving towards a tighter monetary stance. Higher interest rates, particularly in the US, are also not going to help capital inflows into our country.
For more than four decades, manufacturers, including in India, have designed their global production, investment and sourcing strategies around the assumption that the movement of goods across the world’s borders would continue to grow ever freer. In the process, many have built complex, intricately linked and cost-efficient supply chains that span the globe.
The implications of trade war are enormous for any company that relies on raw materials, components and finished goods crossing international borders. Government initiatives in the form of FTAs with the EU and continuation of the present export benefits are required to sustain our exports.
The writer is President & Group CFO, TAFE. The views are personal.