All of you by now have heard of the US-China trade war. It’s been in the news for almost a year. Is it just a retaliatory tariff war that is going on? Is it just that Trump is too obsessed with the trade deficit that USA has with China as he has been known to look at almost all relationships that the USA has through the angle of tariffs and trade deficit? The list includes USA’s neighbours- Canada and Mexico and lately even India.
But what is it that makes the US-China case different?
It is because of the multiple layers associated with it. The Policy Times through this article attempts at unravelling these layers one by one.
Starting off, as said earlier, this has to be more than just a tariff war. There have been many tariff wars before, but this is something like no other. Almost no solution was found even after Xi Jinping and Trump met in person after the start of the trade war.
The US does have a large trade deficit with China and the trend has been so over the years.
Link to chart- https://www.statista.com/chart/17281/us-trade-balance/
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The reasons cited for this are– China blocking access to the US companies through rules like compulsory joint ventures with Chinese companies and transfer of technology which US companies are not willing to do due to fear of Intellectual Property Rights (IPR) misuse for which China is said to have been notorious. And then US products are not very cheap and so cannot compete with China’s domestic goods. China has become a global manufacturing hub and produces almost everything it needs with hardly any need for imports. There are also so many cheaper sources for imports compared to the USA. According to figures from the website of the Office of the United States Trade Representative, US goods exports were only $120 billion while import of goods from China was a mammoth $539.5 billion in 2018.
Now, why does the USA import so much of Chinese goods? It is because the USA is a high consumption economy and China produces goods at the cheapest price. Even the US brands manufacture in China.
This situation may not change too much in spite of the trade war as long as China has the cost advantage. China is well poised to maintain that because no other country can compete with China at the ‘scale’ in which produces goods. And then there is past precedence of devaluing the currency to bolster exports.
So now that it is clear that it is not merely a trade war lets come to the real stuff- the geopolitics and geo-economics that can change the international political economy forever.
Today China is the biggest threat to the US. This is because no other country has the capacity to challenge the US grip on world power. China today has the largest forex reserves with around $3 trillion and the highest number of US treasury bonds around $1 trillion.
What is alarming the US is the way in which China has been challenging the established world order, whether it is in the South China Sea or in the Indo-Pacific. The US is doing special patrols of the South China Sea to ensure that it is free for navigation and quite often there is an incident with a Chinese navy ship or plane coming too close to it and proclaiming the area to be Chinese national waters.
China today has a presence all over Asia and even a lot Europe through the Belt and Road Initiative (BRI). It has an immense advantage over the US here. It has access to the world’s largest markets through physical connectivity. Every day trains full of goods are being dispatched from China to Berlin, London etc. Even close western allies are like Greece and Italy are part of the BRI now which definitely means that the US is losing its grip on Europe. In spite of ominous warnings of Chinese debt trap strategy, many countries are going with the BRI.
The US can’t invade China and devastate it like Iraq and so the only way out is to hit at the economy of China. On the same lines, in an article for the Sunday Guardian Live titled “US-China conflict opens door to Sino-Indian border settlement”, Madhav Nalapat writes “Far from anticipating a speedy end to the trade war formally launched last year by US President Donald Trump against China, the leadership of the Chinese Communist Party (CCP) is preparing for a prolonged struggle. The CCP considers the hostile measures serially introduced by Trump as an effort by the United States to slow down and if possible snuff out economic growth in China in order to create chaos that would generate Arab Spring or Colour Revolution conditions.”
Neither the US industry nor the public, in general, seem to be enthused by the trade war. People are worried that the tariffs would eventually have to be borne by American companies who would pass it on to the consumers. Increasing costs could also have a negative impact on investment in business and job creation. Experts also say that Trump has opened up too many fronts at the same time- China, Iran and North Korea and what’s worse is that he hasn’t been able to take US allies into confidence who are getting increasingly alienated.
There is reduced faith in the Western-led institutions like the World Bank, especially in countries like Greece after the economic fiasco. But then there is also the saying that money can buy anything or open doors like no other. We do not know if it’s the second case.
Yet another challenge is the growing efforts to internationalize the Yuan on par with the dollar and the growth of crypto currencies after the global financial crisis. The ‘US weaponization of the dollar’ which is best understood through its control on international trade through ‘sanctions’ may not be able to sustain for long. If US allies like Japan and South Korea which hold most of their reserves in dollars were to be antagonized too much, they could reduce their dollar holdings, thus weakening it. All of this coupled together could sound the death knell for the dollar.
Again there is also a fear in the US minds, that China might beat them in the race to AI supremacy and then they would not be the ones leading the world in the Fourth Industrial Revolution. And after the exposure of possible IPR theft and spying for the Chinese government in the Huawei case, the US doesn’t want to take any risks. President Putin of Russia has already reinforced that belief by saying that those are going to lead in AI are going to lead the world.
Related Article:US-China trade war and impact on the world economy
Can India take advantage of the trade war?
There are some bright spots here for India. India can substitute both the Chinese exports to the USA and US exports to China. A recent news item in the Economic Times, quoting a report from the Ministry of Commerce says that India can boost the exports of around 300 products.
US manufacturers are set to move out of China- due to rising manufacturing costs, tariffs and also the threat of IPR theft. India can seize the opportunity by making better IPR laws and improving the ease of doing business. India already has the advantages of being a large market and a demographic dividend. The biggest competitors to India here are the CMLV countries- Cambodia, Myanmar, Laos and Vietnam.
This would lead to huge employment generation as manufacturing is labour intensive and it would also correct India’s anomaly of large GDP contribution by service sector without providing much employment. It would reduce the disguised unemployment in agriculture.
Small beginnings have been made like Holitech, a supplier of Xiaomi inaugurating its components manufacturing plant recently but the focus must always be on getting the Research and Development (R&D) being transferred to India as that would be the real gain.
A weaker China can help settle the boundary dispute that has been troubling the two countries since long.
Why is the trade war worrisome for the world?
It means that multilateral institutions like the World Trade Organization (WTO) are failing. What is stunning is that even as the trade war is playing out, the WTO seems to be nowhere in the picture.
Again, on the lines of the Generalized System of Preferences (GSP) withdrawal from India, if developed countries start withdrawing benefits to developing countries, then these countries would lose much. Suppose Trump starts targeting Bangladesh the way he has been targeting India by saying ‘Tariff King’, then the whole Bangladesh garment industry- a lifeline of millions, would be hit.
Related Article: Bangladesh prospering in all angles
Increased protectionism would lead to de-globalization and all the benefits that were associated with it. It is not as if globalization did not have any negatives but then all the positives would be lost too.
One of the reasons for the process of colonization was that European countries couldn’t sell their goods in each other’s countries due to trade barriers. So they set out to find markets elsewhere and then progressed to having captive markets. Something similar is under the making through China’s debt trap strategy. Who knows what is going to happen- they say that history repeats itself and there are enough examples to prove this- the fall of the huge Mauryan Empire was followed by smaller kingdoms and then again there was a huge empire during the time of the Guptas.
What to expect in the future?
There is no better time than the coming few years for India to grab the opportunities being afforded to it. The government at the centre has got a historic mandate and USA is looking forward to Indian help to counter China. It has gone to the extent of renaming the Asia- Pacific as the Indo- Pacific and has energized the Quad arrangement with India, Australia and Japan.
But China may just be down and not out because it already has access to high-quality AI technology, skilled workforce etc. whether it is through innovation or IP theft or reverse-engineering. India has to step up its game in AI in order to be even considered as a player in the changing world order.
A good domestic economic growth in a slowing world– even China has slowed down after decades of double-digit growth; would propel India from the status of an emerging power to being ‘one of the powers.’
India’s prosperity is key to make the 21st century as the Asian Century. Chinese economic power alone is not enough for that.
In the near future, the major worry is whether the G-20 summit will be productive or not. G-20 was set up for the sake of maintaining global financial stability during the 2008 Recession. This year the G-20 meets again in a situation where global trade has been hit by instability caused due to the trade war. Going by the way things are at present, it seems Indians are more interested in the bilaterals- i.e. the Modi-Trump and Trump-Xi meetings, than the G20 itself!
Rajesh Saravanan is a student at Hindu College, University of Delhi. He has a keen interest in foreign policy and aspires to be a diplomat. He is doing his internship with The Policy Times and occasionally blogs at Indian Zest.