All Financial Wisdom
Trade War: How China Will Defend its Economy Against US Protectionism
Recently, we learned how Donald Trump was embarking on a protectionist adventure when he announced the imposition of new tariffs of 25% on imports of steel and 10% on those of aluminum that especially affected China.
The practice of imposing import restrictions based on “national security” has seriously damaged the multilateral trading system led by the World Trade Organization (WTO) and has seriously interfered with the normal order of international trade, which is why many members of the WTO have opposed it.
China Responds: Trade war
The United States is desperately reliant against China for its trade deficit. In 2016, the United States imported $463 billion dollars from China, while only exporting $116 billion dollars to China, generating a trade deficit of $347 billion dollars.
However, despite the protectionist policies, the US trade deficit reached the figure of $566 billion dollars in 2017, 12% more than the previous year – the largest trade deficit in the last seven years.
What these numbers do not show are US goods that were shipped to China for assembly and then returned to the United States – intermediate goods – are considered Chinese imports, even though the pieces were actually manufactured in the United States. According to Oxford Economics and US China Business, if the value of these goods were subtracted from Chinese exports, the deficit would be reduced by half.
However, every action has its reaction. The fact that the United States imposed tariffs has led to a strategic move by China, focused on a protectionist response that would affect US exports to China of about $3 billion dollars.
On the one hand, a total of 120 taxes involving $977 billion dollars in exports from the United States to China, including fresh fruits, nuts and nut products, wines, modified ethanol, American ginseng and seamless steel tubes… are now subject to a 15% tariff.
On the other hand, a total of 8 taxes involving $1.9 billion dollars of US exports to China, including pork and pork products, recycled aluminum and other products, with a proposed tariff of 25%.
With this movement in China, there have been stock market declines in the main indices that are currently experiencing negative returns so far this year. In the case of the Ibex 35, it has recently hit a new low over the last 52 weeks, falling below 9,400 points and has lost more than 6% since January.Limited impact of protectionist measures on China (for now)
Despite all the commotion, it should be noted that China depends less on exports to boost its economic growth than a decade ago. The trade balance has contributed much less to the growth of its GDP in recent times (0.1 percentage points on average in 2015-2016) than 10 years ago (3.4 percentage points on average in 2005-2007). China’s trade balance peaked at around 7.4% of GDP in 2007 and fell sharply to around 3.5% in 2017.
The sector-specific tariffs announced to date – that is, for solar panels, washing machines, steel and aluminum – will not significantly affect China’s exports due to the limited exposure of these sectors to the US market.
However, the negative impact on both Chinese economic growth and specific industries would be greater, in the event that the United States significantly expanded tariffs and other significant and far-reaching protectionist measures.
Sectors with large direct exposure to the US market include cork and wood products, furniture, office machines, household appliances, electrical equipment, road vehicles, telecommunications equipment, electrical machinery, clothing of clothing and footwear, animal oils and fats.
The United States receives between 15% and 35% of China’s total exports for each of these sectors. In addition, telecommunications equipment, office machines and electrical machinery accounted for more than a third of total Chinese exports to the United States in 2017.
The effect of restrictive trade policies for specific sectors could be magnified through the impact on national supply chains, especially now that China directly produces a much larger proportion of components for these industries, rather than importing them, as in the past.
And what about Europe?
The European Commission has been considering retaliatory tariffs on various imports from the United States, from motorcycle brands such as Harley Davidson to food products such as orange juice and peanut butter, in the hope that this will put pressure on the Trump administration.
The fact is that retaliatory tariffs are extremely dangerous, since they run the risk of provoking a broader trade war. And, contrary to Trump’s misinformed claims, trade wars are not good for anyone, as they destroy the process of division of labor.
Beyond this general risk of commercial warfare mentioned, there are reasons why the European Commission, in particular, would find that retaliatory tariffs are counterproductive.
To begin with, they could raise suspicions that the Commission is motivated, at least in part, by the desire to harvest more customs revenues for itself, as protection against a financial crisis triggered by Brexit.
However, there are certain protectionist European measures against the United States. For example, it taxes imports of automobiles with 10%, compared to the tariff of 2.5% that the United States applies to imports of cars from the EU.
While this asymmetry arose because the United States has received greater protection of intellectual property through the so-called TRIPS Agreement, the fact is that tariffs undermine the interests of consumers and, therefore, are unjustifiable. This cannot continue.