The implications of Trump's Trade war

  12-Jul-2018 12:03:23

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On June 28, 2018, Julian Zelizer, a CNN political analyst, stated that Democrats have “badly underestimated Trump”. While Congress and the courts have significant power when it comes to checking legislative initiatives from the Oval Office, a president who is intent on dismantling policies — such as stripping away regulations or withdrawing from international agreements — can get a lot done if he or she is determined. The possibility for President Trump to seriously transform American policy keeps growing and the potential for a two-term presidency can no longer be dismissed.

To understand Trump’s trade policy, one should start with several simple facts. First, the US economy is roaring with the lowest unemployment rate in decades and the lowest Black and Hispanic unemployment rates in history. Second, in 2017, the US Trade Deficit in goods with the World was $810 billion, almost a trillion dollars. The US trade deficit in goods with China in 2017 was $375 billion, EU- $151 billion, Mexico - $70 billion and Canada - $17 billion. President Trump firmly believes that the US cannot follow the same trade path because the US simply cannot afford it. Recently, he stated that the United States will no longer do “stupid trade”, but smart trade and will no longer be the world’s piggy bank. One of Trump’s key promises in the election was that he would fix the trade problem. That is why President Trump tore up the Trans-Pacific Partnership and announced the renegotiation of NAFTA. President Trump keeps his campaign promises. He also probably believes that the US economy is strong enough that he can risk tough trade talks and even a trade war if necessary. But can the US economy withstand a world trade war on so many different fronts?

The escalation of the trade war from a threat to reality is expected to ripple through global supply chains, raise costs for businesses and consumers and roil global stock markets, which have been volatile in anticipation of a prolonged trade fight between the United States and almost everyone else. One of these is the German companies who fear they will get dragged into any conflict between the two economic superpowers, the USA and China.

China, this year, threatened to impose tariffs on $50bn of US imports, including soybeans, aircraft and cars. That came after the US said it would impose additional tariffs on a list of 1,330 Chinese goods, in a move it said was in retaliation for decades of state-backed intellectual property theft.

German companies fear that they could suffer considerable collateral damage from US president Donald Trump’s import tariffs because machines and cars made by their subsidiaries in China and exported to the US could end up being hit just as hard as all-Chinese products. Ulrich Ackermann, head of the foreign trade department of the VDMA, the German Machinery Association, said he had received anxious calls all week from companies worried about the possible impact of the tariffs. “Companies who manufacture in China and deliver to the US are obviously concerned,” he said. “They want to know what will happen to their business if these tariffs come into force. The chances are that they will indeed be affected.”

As an export-driven economy heavily reliant on open borders and free trade, Germany has watched the tit-for-tat conflict between Washington and Beijing with growing alarm. The fear is that the tariffs threatened by the US and Chinese governments, if imposed, will have a massively disruptive effect on the entire complex web of global value chains, harming other nations not directly involved in the trade war. According to Dennis Snower, head of the Kiel Institute for the World Economy, “The German model depends on trade being as free as possible. If you hurt trade flows, then Germany will be hurt."

One particularly vulnerable sector, in this case, is cars, a pillar of the German economy. For example, BMW and Mercedes parent, Daimler would be greatly exposed to any Chinese import tariff on US cars because they are the largest vehicle exporters from the US by value and China is their number one market. The two luxury carmakers export around 115,000 vehicles to China from the US each year, while Fiat-Chrysler, Ford and General Motors together export fewer than 30,000 vehicles, according to Evercore ISI, a research firm.

However, not all German companies with subsidiaries in China would be affected by Mr Trump’s tariffs. Trump, a maker of high-tech machine tools, said that more than 90 per cent of the machines it produces in China go to the Chinese market. Of the rest, most are destined for other Asian countries, such as Indonesia, India and Singapore.

While Washington is yet to impose new tariffs on Chinese imports, economists suggest other Asian economies would suffer even greater fallout than the target should such a move eventuate. Bloomberg economists estimate that every 10 percent drop in China’s exports would reduce the growth rate of Asian economies by an average of 1.1 percentage points, while China’s would decline by just 0.3 percentage point. BMI Research has warned that Hong Kong, Singapore, South Korea, and Taiwan would be hit the hardest in Asia and there would be a full-scale trade war break out. For Hong Kong and Singapore, merchandise trade accounted for 157 percent and 119 percent of GDP, respectively in 2017, while Taiwan and South Korea are also heavily exposed to the Chinese manufacturing sector.

Other than that, Australia would also feel the impact, with around 35 percent of its total exports going to mainland China and Hong Kong, including agriculture, energy and resources. Capital Economics’ senior U.S. economist, Michael Pearce argues that the temporary truce between Washington and Beijing “does little to address underlying trade tensions.” In a May 23 report, he noted “practical limits” on the amount of increased U.S. exports China could buy, given the difficulty of quickly ramping up U.S. agricultural or energy output due to farmland and infrastructure constraints. “…Even if shipments of U.S. agricultural goods and energy to China could be boosted, that would almost certainly come at the expense of fewer exports being sent to other countries,” Pearce said.

So does that mark the end of the free trade era? Well, probably it does.

Written By: Rolly Singh