When the world’s biggest economies– the US and China are preparing for a trade tussle at the end of globalisation era, the world should keep its breath. President elect Donald Trump announced the preparation by appointing pre-WTO trade strategist Robert Lighthizer, as his chief trade negotiator, responsible for better deals aimed at reducing U.S. trade deficits.
Mr Lighthizer – a known China critic, is an oldie who disliked the WTO led trade order where the US sat in the crowd.
Deep rooted political rivalry is leading the both sides to wage a trade war. This is the danger side. One can feel the heat of the interwar period in recent years; at least on and around the South China Sea.
Alliance formation between the two will divide the world again on political lines as that was prevailed during second world war.
The conflict between the US and China can’t be avoided for Trump as the ‘Chinese eating away US job’ was his election theme. For him, trade and that also trade with China was a major election agenda that helped him to rose to Presidency.
He can’t go away from making some sort of a step.
Whatever Trump does, it will set the pattern for next type of trade engagement all across the world besides determining the future of globalisation.
The risk of a trade war is that China will use its political muscle power and newly acclaimed economic size to win friends away from the US camp. Life will be miserable for traditional allies of the US in East Asia.
There are many who is going to be injured- the US allies in East Asia – South Korea, Vietnam etc. are some of them.
Incidents one after another indicate that a showdown is undergoing between the two world powers. Soon, the rest of the world will be compelled to join as all countries are strongly depended on these two.
Already, China has instructed South Korean companies to keep away from the US missile defense programme that the US is building in South Korea against the North.
On the other side, the Obama administration blocked a Chinese acquisition bid for Aixtron, a German chip equipment manufacturer which has assets in the US.
US says that Aixtron is supplying components to the Patriot missile defence system to the US government.
“You have to adjust for basic imperatives and our national security is really critical.” Ms Penny Pritzker, the outgoing US commerce secretary, said in an interview to the Financial Times.
If Trump makes the first shot, the Chinese will retaliate. They are more politically courageous and willing to make forceful replies now a day. China knows that it has an edge over the US as their country is leading on science and technology fronts.
China may bleed more if trade war intensifies
Most analysts warn that US is going to suffer bigger than China. But trade records indicate the opposite.
The Chinese exports to the US averaged around $450 bn in the last three years including 2016, whereas US exports to China was just $110.
For the Chinese, the disengagement will torpedo a $450 bn market. They may loss a big market in the US. China sells a large array of goods to the United States that where Trump can impose heavy tariffs.
Without exports to the US, Chinese economic engine may freeze.
Both have developed deep interdependence and if this is diluted, it will create bigger loss for China than for the US.
But if the US initiates trade war, it is not necessary that employment will come back to USA as Mr Trump hope. Two hurdles are there for non-occurrence of employment surge in the US. First, in the new era of fourth industrialisation, technology takes away a lot of jobs. Secondly, there are other cheap labour, friendly states of America who may benefit from the shift of US engagement from China.
The fundamental question
The asymmetric trade relationship between the world’s top two economies is not limited to the huge trade deficit of the US. Rather, it tells an interesting story that occurred in the golden days of globalisation. The Chinese have reduced sourcing their products and components from the US gradually. They reduced US dependence and are get readied. The trade deficit just illustrates this.
China has gradually and successfully reduced its dependence on US firms to supply inputs and technical components. But the US has not done this to China.
Here comes the use of Mr Robert Lighthizer’s strategic vision, which according to Trump the US has lost in the past decades.
Can the US develop policies that will reduce its dependence on China in retaliation to restrictive policies against the US companies silently adopted by the Chinese over the golden days of globalisation?
Trump’s action should contain an answer.
China is more prepared
Trump’s option against the Chinese is are limited. The most he can do is to raise tariff against Chinese imports by between 10 to 40%. But the Chinese will retaliate according to Ms Pritzker.
Hence, instead of trade war, the best that the US can do against the Chinese is to source their products to some other countries.
This may benefit US’s friends like India, Indonesia, Vietnam etc.
Trade economists warn that the benefits also not going to be substantial as US may still continue at the same place in its trade ties with China. A rhetoric may heal US minds as the world’s political power is getting into an ‘erstwhile giant status’ in the context of the Chinese rise.
There are many who believe that Trump may limit to be ‘hard’ and may not opt for a trade war.
A trade war will benefit third parties and not either the US or China. They may recognize it earlier. Hence it will be better if Trump restricts his action to populism satisfying token measures against China.
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