Opinion | Seven likely outcomes of the US-China trade war

With the collapse of trade talks on 10 May, the US might soon charge a steep 25% import duty on almost all products from China, though a 25% tariff on $325 billion of mostly consumer goods is yet to be imposed. The escalated tensions will affect more trade than just US imports of $540 billion from China. There are seven likely outcomes of this move.

1. Tariffs will not bring manufacturing back to the US. Higher hourly wages rule out traditional manufacturing in the US. Just 30 years ago, the US argued for the outsourcing of factory production to the cheapest location, and free flow of goods by lowering tariffs. Now it wants to go back. Leadership in technologies such as 3D printing or robotics may have helped the US, but China leads in most high-tech industries.

2. Big US firms will become vulnerable. China has already imposed tariffs on US imports worth $110 billion now. As China’s total imports from the US are just $120 billion, its scope for punitive tariffs is limited. So, it may stop imports of certain products such as soybeans altogether from the US. China may also act difficult with American firms located in China or for whom China is the largest trading partner. Boeing just got an order for the supply of 7,500 passenger planes from China. General Motors sells more cars in China than in the US. It’s the same with Starbucks, Apple, Nike, Tesla, Intel, Caterpillar and many others.

3. Global value chains (GVCs) will get restructured. Machinery, electronics, and computer equipment account for 60% of US imports from China. These are made via GVCs that share production across a dozen or so countries. Less demand from the US would mean China buying fewer components and sub-assembly units from Japan, South Korea, Vietnam and Thailand. This will shrink trade and weaken the GVC model. India, with sizeable domestic consumption, may gain from this shift with appropriate incentives.

4. Labour-intensive production could shift out of China. The US imports large quantities of consumer goods like textiles, furniture and toys from China. The 25% tariff imposed by the US and rising wages in China will make the latter less competitive in these sectors. A substantial part of production may shift to countries like Vietnam, Cambodia, Thailand, Bangladesh or India. Most of the investment in these new plants may come from China.

5. The US heat on the EU, Japan and India will have its impact. Washington is worried about losing the EU and Japan markets since it has no free trade agreements with them. To bring them to the deal table, the US threatened both the EU and Japan with the imposition of a 25% tariff on automobiles. This was in addition to the 25% tariff imposed last year on steel and aluminium on the two. Trump also threatened the EU with tariffs worth $11 billion over an old dispute about an aircraft subsidy.

The threats worked. German and Japanese car makers knew that if the tariffs materialized, many would have to shift production to the US. So, the EU has proposed a quick trade deal with the US. Japan, annoyed over the US withdrawal from the Trans-Pacific Partnership in late 2017, was initially reluctant to strike a bilateral deal, but gave in over security concerns related to North Korea and China. The next six months would be worth a watch. If Japan signs a deal with the US that comes with the caveat of a no trade deal with China, will Japan say goodbye to the Regional Comprehensive Economic Partnership?

Trump has repeatedly called India a tariff king. The US has withdrawn the trade benefits for India under its Generalized System of Preferences, imposed tariffs on steel and aluminium and filed several cases against India at the World Trade Organization (WTO). India tactically chose not to retaliate so far. But this may not be enough. Washington may force India to the deal table. India should do its numbers before that.

6. A weakened WTO: The US steel and aluminium measures in March 2018 on frivolous grounds of national security was a violation of the WTO spirit. Canada, Japan or India could never understand how their steel had suddenly become a security threat for the US. The US has no interest in pursuing the WTO’s agreed Doha agenda. It is instead pushing for plurilateral deals on matters like e-commerce which are of interest to a few large firms. Also, by not allowing the appointment of an Appellate Body judges, it is strangulating the WTO’s dispute panel.

7. There will be increased resentment against US privileges. Unlike other countries, the US does not have to earn foreign exchange to pay for imports. The dollar’s status as the world’s reserve currency allows it to pay its import bills by just printing dollars. Supply of the currency enables the US to buy any firm or property anywhere or finance massive wars. This is the root cause of unbridled imports or the trade war. Next, take the Society for Worldwide Interbank Financial Telecommunication (SWIFT). This is a global system for secure financial transactions open to all countries, but the US threatens to exclude unfriendly countries from its use. Naturally, the EU and others are working on creating alternatives to SWIFT.

Year one of the trade war widened the US trade deficit by over $80 billion. Tensions may harm both the US and China and reshape trade flows. This may be unsettling for most countries, but will also spell a trade opportunity for India.

These are the author’s personal views