U.S-CHINA TRADE WAR

Why Donald Trump Is Subjugating Multilateralism With Trade Muscle-Flexing

Surya Gangadharan New Delhi 14 May 2019

Global markets lost more than a trillion dollars in stock values overnight, a clear sign, if any more was needed, that Donald Trump and his trade spat with China is punishment for the rest of the world. The loss was notional; nevertheless, it cast a long shadow over the ministerial deliberations of the World Trade Organisation (WTO) in New Delhi. With 16 developing countries (including Turkey, China and Egypt) and six least-developed countries present, it was clear that in this trade war between giants, less developed and smaller nations with little bargaining power would lose out.

The deliberations may have even pondered the unthinkable: that Trump may have no interest in coming to a settlement with China! He keeps raking it up domestically, rousing his constituencies by pointing the finger at China’s unfair trade practices and how tough he is with them. It’s an argument which probably sells well in America’s “rust belt”, the north-east which used to be a major manufacturing hub until environmental concerns took over and saw their gradual demise.

It works even better in an election season and, on balance, there seems little doubt that the trade war is hurting China badly, for the simple reason that it exports more to the U.S. that it imports. China announced a 17 per cent growth in its trade surplus with the U.S. last year, amounting to more than $323 billion. Trump is convinced that China has taken advantage of the WTO to grow at the expense of the U.S. and he’s determined to end that.

“China wants to resolve the dispute and is ready to make some concessions to meet U.S. demands,” says Rajat Kathuria of New Delhi-based Indian Council for Research on International Economic Relations (ICRIER) “but Trump is demanding that China dismantle its state enterprises, which he says are heavily subsidised and therefore have an unfair trading advantage. He wants the Chinese economy to be more transparent but this cuts at the heart of the Chinese political system, so that is something they will be loathe to do.”

 

The inaugural session of the WTO ministerial meeting in New Delhi on Monday.

Trump has stepped up his assault on the multilateral trading regime. A key component of this regime is the dispute settlement mechanism of the WTO, which Trump is sabotaging by blocking judicial appointments to its appellate body. The body must have seven judges but by December may end up with only one, rendering it toothless. In effect, the element of trust so critical to world trade is being destroyed.

The U.S. president wants to ensure that all trade issues are negotiated or determined bilaterally. This gives the United States the upper hand since it is an economic gorilla and can dictate terms. It also helps that the U.S. economy is doing well with unemployment at record low levels. Of course, this is a business cycle and at some point the trade war will hit home, retail prices could go up, China may retaliate as it has with tariffs on $60 billion on U.S. goods; it could even stop the export of rare earths critical to the tech industry.

China is pushing hard on negotiations for the Regional Comprehensive Economic Partnership (RCEP) in the hope that with the U.S. market shutting down its huge exportable surplus could be diverted to other markets in Asia. China is offering sops to Asian exporters, liberalising its import tariff regime to offset criticism that its markets are not friendly to foreign products.

India can derive some limited advantage from the openings provided by the trade war but this may amount to no more than “a few billion dollars”, the point being that Indian industry lacks the technological sophistication and manufacturing scale to tackle world markets.

Looking ahead, there could be more stiff headwinds for China. “China’s weakness is that it has limited soft power,” says Kathuria, adding that “it is an economic giant no doubt but politically it needs to build trust, including among Anglo-Saxon economies. That is the case worldwide and is proving to be a huge obstacle to its growth and expansion.”

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