Sino-US Trade Tension — Global Cold War

Mandatory Credit: Photo by MARK SCHIEFELBEIN/POOL/EPA-EFE/REX (10104491d) Aides gesture as United States Trade Representative Robert Lighthizer (L), Chinese Vice Premier and lead trade negotiator Liu He (2-R) and United States Secretary of the Treasury Steven Mnuchin (2-L) line up for a photo before the opening session of trade negotiations at the Diaoyutai State Guesthouse in Beijing, China, 14 February 2019. China and USA trade talks in Beijing - 14 Feb 2019

The trade and tariff war between the United States and China is getting ten with the passage of every day so rapidly that now economic and political observers have started making predictions about the future horrifying nature of this war. According to some, trade war may be converted into global cold war with disastrous outcomes for the whole world’s economy.

The grim impacts of this war on global oil, gold, stocks and other markets have shattered the observations and economic analysis of world top agencies and economists about the future global outlook. This is why, world’s top rating agencies and financial institutions are forced to revise and cut their forecasts about the global economic outlook and growth.

Both the parties have held a number of rounds of trade talks but have failed to come some agreement. The velocity of impacts of this issue is so high that global stocks and oil markets often jump on the optimism about the success of any round of trade talks between both the countries. These markets also used to reciprocate negatively the on the news of failure of those talks and lost the traders and investors confidence. Almost every sector of economy of almost every country in the world is paying heavy price of this war between world’s top economies.

Even according to a research conducted by the Federal Reserve Bank of New York the newest round of US tariffs on Chinese imports will cost the typical American household $1,148 annually. Washington this month hiked existing tariffs on $ 200 billion in Chinese goods to 25% from 10%, prompting Beijing to retaliate with its own levies on US imports, as talks to end a 10-month trade war between the world’s two largest economies stalled.

The research report estimated that as tariffs grow larger importers have more of an incentive to switch to goods from more expensive countries. That could end up reducing the revenue the US is able to collect from its tariffs on Chinese goods.

From hefty US taxes on steel and aluminium imports to the crisis with Chinese tech giant Huawei, here is a brief backgrounder of the trade war between the US and China. In March last year US President Donald Trump, who campaigned under the slogan America First, announces tariffs of 25 percent on steel imports and 10 percent on aluminium from a number of countries in a bid to slash the gaping US trade deficit.

The deficit reached $566 billion (507 billion euros) in 2017, of which $375 billion was with China, the world’s biggest producer of steel and aluminium. Same Month, on the eve of the application of the tariffs, Trump suspends them for several countries, but not China. Beijing responds with a list of 128 US products, including pork and fruit, on which it says it will impose customs duties of 15-25 percent if negotiations with Washington fail.

In April last year Washington issued a list of $50 billion in Chinese imports set to be targeted by US tariffs including electronics, aircraft parts and medicine as a response to alleged theft of US intellectual property. Beijing responds with plans to hit imports of the same value, including soya, cars and aircraft.

Then in May last year, the two countries announced a draft deal under which Beijing agrees to reduce its trade surplus significantly. In the following weeks China makes several conciliatory gestures, reducing customs duties on imports of cars, clothing, household goods, cosmetics and fish, lifting restrictions and offering to buy nearly $70 billion of extra US goods.
In July last year, the United States nonetheless goes ahead and implements duties of 25 percent on about $34 billion in Chinese machinery, electronics and high-tech equipment. Beijing in turn imposes tariffs of equal size and scope, including on farm produce, cars and marine products.

In August the United States imposes tariffs on another $16 billion of Chinese goods, a day after negotiations resume. China applies 25 percent tariffs on $16 billion of US goods, including Harley-Davidson motorcycles, bourbon and orange juice. On September 24 Washington slaps 10 percent taxes on $200 billion of Chinese imports. Beijing puts customs duties on $60 billion of US goods.
In December US and Chinese Presidents Trump and Xi Jinping agreed a ceasefire to the trade war. Washington suspends for three months a tariff increase from 10 to 25 percent due to begin January 1 on $200 billion of Chinese goods. China agrees to purchase a “very substantial” amount of US products and also suspends extra tariffs added to US-made cars and auto parts for three months starting on January 1. It allows imports of American rice.

On May 10 this year Washington pulled the plug on the truce, increasing punitive duties on $200 billion in Chinese imports, raising them to 25 percent from 10 percent following two days of talks in Washington. On May 13, Beijing announces it will raise tariffs on $60 billion in US exports from June 1.

On May 15, Trump opened a new front in the war, signing an order barring US companies from using foreign telecoms equipment deemed a security risk a move that appears aimed at Chinese giant Huawei. The US Commerce Department also announces an effective ban on US companies selling or transferring US technology to Huawei.

Washington had previously stated concerns over an alleged spying threat from Huawei, a rapidly expanding leader in 5G technology. On May 19, US internet giant Google, whose Android mobile operating system powers most of the world’s smartphones, says it is beginning to cut ties with Huawei. On May faced with concerns from users and US companies, US officials issue a 90-day reprieve on the ban on dealing with Huawei, saying breathing space is needed to avoid huge disruption.

In a recent spat, President Donald Trump raised tariffs from 10% to 25% on Chinese imports in List 3 of Section 301 of the Trade Expansion Act of 1962. That list includes many construction materials including metals and finished goods like floor and wall panels. The picture shifted again on Friday when Trump ordered tariffs lifted on steel and aluminum coming from Mexico and Canada under Section 232, reducing the overall cost burden of tariffs on development.

But Chinese goods are a major part of many construction projects and typically are less expensive than domestic or other North American materials. The new tariffs would impact $200B worth of goods, and Trump has said he might add tariffs on another $300B of Chinese imports, which would mean essentially all Chinese products, were under a 25% tariff.

Bisnow asked two dozen commercial real estate experts around the U.S. if (and how) the increased tariffs on Chinese goods could impact CRE. Their responses varied from those who see the increase as insurmountable for construction budgets to those who see the tariffs as actively beneficial for the industry. Some experts aren’t worried but said they will become so if the trade war drags on. Here are their responses, in their own words.

In this scenario, though a hot war between the world’s two major powers still seems far-fetched, a cold war is becoming more likely; as the US blames China for the current tensions. Since joining the World Trade Organization in 2001, China has reaped the benefits of the global trading and investment system, while failing to meet its obligations and free riding on its rules. According to the US, China has gained an unfair advantage through intellectual property theft, forced technology transfers, subsidies for domestic firms and other instruments of state capitalism.

For their part, the Chinese suspect that the US’s real goal is to prevent them from rising any further or projecting legitimate power and influence abroad. In their view, it is only reasonable that the world’s second-largest economy (by GDP) would seek to expand its presence on the world stage. And leaders would argue that their regime has improved the material welfare of 1.4 billion Chinese far more than the west’s gridlocked political systems ever could.

Regardless of which side has the stronger argument, the escalation of economic, trade, technological, and geopolitical tensions may have been inevitable. What started as a trade war now threatens to escalate into a permanent state of mutual animosity. This is reflected in the Trump administration’s national security strategy, which deems China a strategic competitor that should be contained on all fronts.

Accordingly, the US is sharply restricting Chinese foreign direct investment in sensitive sectors, and pursuing other actions to ensure western dominance in strategic industries such as artificial intelligence and 5G. It is pressuring partners and allies not to participate in the Belt and Road Initiative, China’s massive programme to build infrastructure projects across the Eurasian landmass. And it is increasing US Navy patrols in the East and South China Seas, where China has grown more aggressive in asserting its dubious territorial claims.

The global consequences of a Sino-American cold war would be even more severe than those of the Cold War between the US and the Soviet Union. Whereas the Soviet Union was a declining power with a failing economic model, China will soon become the world’s largest economy, and will continue to grow from there. Moreover, the US and the Soviet Union traded very little with each other, whereas China is fully integrated in the global trading and investment system, and deeply intertwined with the US, in particular.

A full-scale cold war thus could trigger a new stage of de-globalization, or at least a division of the global economy into two incompatible economic blocs. In either scenario, trade in goods, services, capital, labour, technology and data would be severely restricted, and the digital realm would become a fragmental, wherein western and Chinese nodes would not connect to one another. Now that the US has imposed sanctions on ZTE and Huawei, China will be scrambling to ensure that its tech giants can source essential inputs domestically, or at least from friendly trade partners that are not dependent on the US.

In this Balkanized world, China and the US will both expect all other countries to pick a side, while most governments will try to thread the needle of maintaining good economic ties with both. After all, many US allies now do more business (in terms of trade and investment) with China than they do with America. Yet in a future economy where China and the US separately control access to crucial technologies such as AI and 5G, the middle ground will most likely become uninhabitable. Everyone will have to choose, and the world may well enter a long process of de-globalization.

Whatever happens, the Sino-American relationship will be the key geopolitical issue of this century. Some degree of rivalry is inevitable. But, ideally, both sides would manage it constructively, allowing for cooperation on some issues and healthy competition on others. In effect, China and the US would create a new international order, based on the recognition that the (inevitably) rising new power should be granted a role in shaping global rules and institutions.

If the relationship is mismanaged with the US trying to derail China’s development and contain its rise, and China aggressively projecting its power in Asia and around the world a full-scale cold war will ensue, and a hot one (or a series of proxy wars) cannot be ruled out.

But at the same time, US, China tense trade ties are proving blessing for some forgotten and less mentioned North American economies because tense US-China relations are helping the United States understand the importance of a North American trade bloc. Therefore the United States struck deals to lift tariffs on steel and aluminium imports from Canada and Mexico, the three governments said, removing a major obstacle to legislative approval of a new North American trade pact.

In this regard, President Donald Trump said the US would lift steel and aluminum tariffs on Canada and Mexico, boosting efforts to encourage lawmakers to ratify a new North American trade deal. I’m pleased to announce that we’ve just reached an agreement with Canada and Mexico and will be selling our product into those countries without the imposition of tariffs or major tariffs, Trump said at an event. Hopefully Congress will approve the USMCA quickly.

In a joint statement, Canada said it will lift retaliatory duties on US products as part of the deal, which will take effect within two days. Mexican Deputy Foreign Minister Jesus Seade, in a Twitter post, welcomed Trump’s removal of the duties. Both nations suggested it would open the way for their lawmakers to approve the new trade pact.

The move will lift the 25 percent steel and 10 percent aluminum tariffs the US placed on the two trading neighbors almost a year ago in the name of national security. The decision sparked tit-for-tat duties from Canada and Mexico on US farming goods and other products, and became an obstacle for lawmakers in all three nations to ratifying the US-Mexico-Canada Agreement.
As part of the agreement, the US will be able to re-impose the tariffs on metals imports if not enough is done to prevent any surge of metals imports beyond historical levels. The nations have also agreed to ramp up efforts to trace where the metals have come from originally, to stop the diversion of shipments from other nations to dodge tariffs.

The enforcement system will aim to advantage primary steel and aluminum producers in the three-nation trading bloc to ensure that the metal is melted, poured or smelted regionally.
US steelmakers and aluminum producers rebounded off lows on optimism that the measures will prevent excess supply from flooding their domestic markets.

An S&P gauge of 13 steelmakers pared losses to 2.4 percent in New York. The index was down as much as 3.3 percent earlier. Alcoa Corp., the largest U.S. aluminum producer, declined 1.9 percent, after sliding as much as 2.5 percent. Canadian producer Stelco Holdings Inc. climbed more than 11 percent.

The tariffs have stood in the way of getting Trump’s new North American trade deal approved by Congress, and ratified in Canada and Mexico. Republican senators, led by Finance Committee Chairman Chuck Grassley of Iowa, have emphasized the urgency of approving USMCA, and the importance of removing existing tariffs and avoiding new ones.

The “tariffs on steel and aluminum and our counter measures represented significant barriers to moving forward with the new Nafta agreement,’ Canadian Prime Minister Justin Trudeau said at a steel plant in Hamilton, Ontario, in a hastily called announcement Friday. US Vice President Mike Pence said on Twitter that he’ll meet with Trudeau in Ottawa on May 30 to discuss advancing USMCA.

US business groups and some lawmakers praised the agreement, saying it would help farmers and gather momentum at home for the passage of the USMCA. This move, coupled with the lifting of retaliatory duties, will bring immediate relief to American farmers and manufacturers, said Tom Donohue, president of the U.S. Chamber of Commerce.

This action delivers a welcome burst of momentum for the USMCA in Congress, and we urge the administration and Congress to continue their efforts to chart a path toward its approval as soon as possible. Ron Wyden, a Democratic Senator from Oregon, said the tariffs had “caused real hardship, and I am glad that we can get back to the business of growing and making things in the United States and shipping them to customers in North America and beyond In this connection Mexican deputy foreign minister for North America, Jesus Seade, said the US-China trade war was helping the case for a strong partnership between neighbours. There is a general climate, in which the United States is in a long-term difficult relationship with China and it understands that the big economy the United States has needs to be accompanied by the big North American economic region, Seade told Reuters in a phone interview.

Seade helped lead negotiations last year for the new United States Mexico Canada Agreement (USMCA) after US President Donald Trump insisted on reworking the quarter-century-old North American Free Trade Agreement (NAFTA). Seade said tariff breakthrough would help the broad agreement’s passage through US Congress.

China struck a more aggressive tone in the trade war, suggesting a resumption of talks between the world’s two largest economies would be meaningless unless Washington changed course. That capped a week in which Beijing unveiled fresh retaliatory tariffs and the US leveled a blow against one of China’s biggest and most successful companies, Huawei Technologies Co Ltd. Seade said such friction made North America look more attractive.

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About Erum Akbar 17 Articles
The author is Executive Editor of Mélange int’l Magazine and Secretary Information at Center of Pakistan and International Relations (COPAIR).