Macroscope
by

iPhone production ban among tactics China may deploy in new trade war with the US

One economist warns of looming ‘a symmetric trade war’ if the next US Administration imposes punitive trade tariffs on China made goods

PUBLISHED : Tuesday, 27 September, 2016, 10:54am
UPDATED : Tuesday, 27 September, 2016, 10:44pm

“We will work harder to build an open world economy, reject protectionism, promote global trade and investment,” said the G20 communique issued in Hangzhou on September 5. But actions speak louder than words and the political risk is that the next US President rows back on those G20 pledges.

The nature of trade policies adopted by the next US President, whether it is Donald Trump or Hillary Clinton, will be critical. Asia, and in particular China and Hong Kong, would arguably have much to lose if Washington moved away from support for open trade.

But the United States shouldn’t think it gets off scot free if it erects trade barriers. Any response-in-kind from China would undoubtedly hit the US economy.

World trade is already facing headwinds. “According to the preliminary data, the volume of world trade fell 1.1 per cent in July 2016 from the preceding month,”the CPB Netherlands Bureau for Economic Policy Analysis said last week, with the decline “deeper in emerging economies than it was in advanced economies”.

The situation is epitomised by stresses in the container shipping industry where shipowners have taken on debt to finance the construction of new and ever-larger vessels in expectation of higher volumes of global trade that are not materialising

Indeed “international trade is in the doldrums for the fifth straight year”, said last week’s 2016 Trade Development Report from the United Nations Conference on Trade and Development.

Perhaps the situation is epitomised by stresses in the container shipping industry where shipowners have taken on debt to finance the construction of new and ever-larger vessels in expectation of higher volumes of global trade that are not materialising.

Seen in that light, perhaps the collapse of South Korea’s Hanjin Shipping should be seen as a reflection of a wider malaise.

And this is the arguably already-fragile situation when major economies are at least nominally pledged to Hangzhou’s “open world economy”.

Unfortunately, neither Clinton nor Trump necessarily buy into the status quo on international trade, let alone exhibit any intention to deregulate it further.

Clinton’s trade policy was summarised as “no new agreements and tougher enforcement of existing ones,” by Marcus Noland, Director of Studies at the US Peterson Institute for International Economics (PIIE), on September 19.

Notably, Clinton opposes the Trans-Pacific Partnership, the trade agreement including the United States and eleven other Pacific Rim nations but to which China is not a signatory.

Additionally “Clinton supports creating a chief trade prosecutor office, somebody who will keep an eagle eye on whether partner countries are implementing their parts of these deals as well as concern about currency manipulation with respect to other countries including China,” Noland said.

And then there’s Trump.

The Republican US Presidential candidate has previously mentioned imposing 45 per cent tariffs on all imports from China into the United States.

Trump has also mooted “re-examining and perhaps abrogating existing free trade agreements”, Noland said, “not only [the North America Free Trade Association] NAFTA involving Canada and Mexico, but [Trump has] focused a lot on the KORUS agreement with South Korea, which [Trump] describes as a job killer”.

And according to Noland’s PIIE colleague Gary Hufbauer, “the [US] President has the initiative. He can withdraw from trade agreements; NAFTA, the trade agreement with Korea, even the World Trade Organization”.

Existing US statutes, Hufbauer said, allow the US “President to stop all forms of commerce…This could be finance. It could be patent licensing, and of course, it could be trade, imports and exports.”

That’s not to say any US President would adopt such a draconian approach.

Indeed any US President would have to consider the prospect of retaliation particularly in light of the fact that China, through its “One Belt, One Road” policy, is already seeking to diversify and cement its economic relationships with Asia and Europe.

But in the event that a new US Administration did impose tariffs on China or other barriers to trade, one scenario the PIIE has modelled is what it calls an “asymmetric trade war”.

In the PIIE’s scenario China could choose not to buy US aircraft, desist from buying American business services, put an embargo on imports of US soybeans, or “simply shut down iPhone production in China”.

“Chinese value added on iPhone is only about 4 per cent,” said the PIIE concluding that shutting down production in China “wouldn’t cost the Chinese a lot … But it would cost the United States a lot. iPhone prices would go skyrocketing”.

Any barriers to trade on China would not therefore necessarily come at zero cost to the US economy.

With international trade already in the doldrums, it surely makes sense for policymakers to stick to pledges made in Hangzhou and hang back from erecting barriers to trade.

business-article-page