Ongoing economic tensions between China and the US, world’s two largest economies have intensified. Since last year, blaming China for indulging in “illegal trade practices” Trump administration has increased tariff rates on imports from the country ($ 539 billion in 2018-19). This was done in different phases, the latest was on May 9 this year. In return, Chinese have imposed similar tariffs on the imports from US ($ 120 billion in 2018-19). In addition to this US has also restricted functioning of some of the Chinese companies such as Huawei which buys technologies from US firms such as Google on charges of spying and helping Iran. There has been attempts to resolve the issue through talks between both the countries. However, it has failed to get any results so far. It has been projected that this trade war will adversely affect the global economy which is already suffering from a long recession. However, this can have even greater impact on the future of globalisation, so-called process of economic integration of the world.
America First: Trumpian Nationalism
During his election campaign Donal Trump promised to add 25 million new jobs for American citizens and stop the flight of industries to countries such as China. He raised the concern about high trade deficit with China and promised to correct it. US had a trade deficit of more than $ 400 billion with China in 2018-19. In desperation to act on some of these electoral promises Trump has created a really complex situation for the pundits of globalisation. The thinking behind the high tariff rates is to make the Chinese products expensive and boost the domestic producers. A large number of American producers have shifted their production to China and other third world countries in last few decades. The shift helped American manufacturers in keeping their wage bills under check and keep the overall cost of production low. For example, Apple, the largest manufacturer of mobile phones gets majority of its sets produced in China. Trump thinks that high tariffs will make the production in China expensive which will incentivise companies moving their production back to the US.
Trump’s trade war has other objectives too. In the larger geostrategic game plan rising economic and military might of China is a threat to US’ global ambitions. China has shown capability of challenging hegemonic dictates of US in Africa, West Asia and Latin America. Despite US sanctions China has continued its trade with Iran too. It has collaborated with Russia on certain issues and effectively neutralised American force.
Chinese compliance to US sanctions on Iran is essential for it to have any effect. The stated objective of American sanctions is to bring the Iranian oil exports to zero. China is the largest buyer of Iranian oil. If it does not stop buying Iranian oil objective of Trump’s Iran policy can never be achieved. China has the potential to increase the volume of imports because Iran will have enough to supply at cheaper rates since no other country is ready to buy it. It was hoped that Chinese might look for exemptions from these sanctions when it sits with US during the ongoing trade negotiations. This would have opened greater possibility for manoeuvring and bargain. However, it did not go as intended.
Neo-conservative elements in the US administration want to curb the rise of China and economic slowdown would help in achieving this. Chinese economy, which is already showing the signs of slowdown will be affected further due to the trade war. As per the OECD this will be around 1.1 percent negative growth. However, it will also impact the American economy which will go down to almost 0.9 percent. Given the gap in the growth rate of both the economies the effects are, by and large, the same.
America at any Cost?
Trump administration has opted for the same protectionist policies against which, as the home of neoliberal finance capital, it had fought hard in the past.
World Trade Organisation (WTO), a successor of the General Agreement on Trade and Tariff, was modified, upgraded and was made more comprehensive in its more than three decades long history to serve the purposes of global finance capital. Successive American regimes, Ronald Reagan onwards, led from the front in the war against “protectionist” policies mostly followed by states in the third world. Under the umbrella of WTO numerous trade regimes have been imposed on most of the countries. Most of these global regimes are designed keeping the interest of the big economies in mind. The resulted ‘globalisation’ has since created a complete hegemony of international finance capital in the world economy, the unprecedented centralisation of wealth in the global north and destruction of all forms of alternative economies. The success of the WTO regime did not only dismantle various national economies but also created a TINA factor delegitimising all attempts to safeguard domestic producers. WTO has made state’s attempt to provide basic welfare means to their citizens as ‘bad economics’ which means leaving the vulnerable sections at the mercy of the market in the name of free competition. At global conferences, whenever the poorer, third world countries tried to protest their arms were twisted by the rich northern economies. These countries were silenced with the threats of isolation in an increasingly integrated global economy. Expansion of free trade regimes into hitherto newer areas was the sole motto.
However, Donald Trump administration finds the trade regimes ‘unfair’ and against the interest of the United States. It is more than a U-turn. Trump has reportedly called free trade regimes catastrophic and disastrous. He wants to renegotiate world trade regimes due to the necessities of domestic economy. Trade war with China is just one example. During his election campaign he also blamed North Atlantic Free Trade Agreement (NAFTA). Mexico’s too has suffered similar allegations though no such harsh measures as China. Trump has also imposed additional tariffs on goods coming from India in March this year.
Despite all these steps indicating a common disillusionment from free trade regimes in American administration, it treats Chinese case more vehemently. It alleges Chinese for adopting “unfair means” to maintain a positive trade balance in their favour. Trump administration believes that Chinese have taken undue advantage of the liberal trade under WTO regimes adopted by the previous administrations. Though the specifics of those “unfair means” are never given in detail, Trump administration has alleged Chinese of violating international intellectual property rights regimes and forced technology transfers. Trump’s reluctance to use the existing Dispute Settlement Mechanisms available within the WTO for any ‘unfair’ practice shows complete lack of faith in any global regime. Donald Trump administration has even threatened to withdraw from WTO altogether. In fact, this confirms the general trends adopted by the current American regime.
Since 2017 the US foreign policy has shown extreme unilateral trend. It has withdrawn or has stopped cooperating with most of the international organisations and more often refused to adhere to established treaty norms. Paris climate negotiations, Joint Comprehensive Plan of Action (Iran Nuclear Deal), Nuclear Arms Control Treaty with Russia, recognising Israel’s claim over Jerusalem and Golan Heights are some of the important examples in which Trump administration has gone unilateral with complete disregard for set norms; some of these norms are established by the American themselves. This month its police entered Venezuelan embassy without permission violating long established and globally respected diplomatic immunities. All these are symptoms of a larger problem. Trump’s nationalism has no space for any regard for international norms. The interest of the country, defined in a narrow neoconservative term is non-negotiable. Rest of the world has to either surrender to it unconditionally or be ready for repercussions.
Chinese government has denied all allegations put by Trump administration. It has quoted WTO and other international regimes in support of the legality of its trade with the US. Chinese have, in return, blamed the US administration for violating the international treaties and imposing illegal tariffs.
China has also retaliated to the US tariff hike in a similar manner. Last year Chinese chose to strategically target imports from the Republican ruled states. This was a strategy to make Trump’s support base see the problems with his policies. In May China has imposed tariff on another $60 billion of imports from US. Chinese are looking to expand their trade in Africa and other parts of the world. It is building Belt and Road initiatives in which most of the countries in Asia and Eurasia will have direct trade routes to China. This will help in the longer term. However, Chinese have to develop short terms measures to counter the effect of the trade war.
China was a late comer in WTO. It joined it only in 2001 and since then used the free trade for its advantage. Because of cheap labour and pro-market policies it was able to attract massive investment in the country. This is the key to the success of export based production in China. Trump’s policies are the biggest challenge it is facing.
What Lies Ahead?
In December last year both the countries agreed to halt new tariffs and talk on all the relevant issues. Talks started in January this year. So far nothing has come out of these negotiations.
The world economy, already under crisis for a decade now, would suffer more if the current trade war between world’s two largest economies continues. The Chinese economy has witnessed slower growth rates recently. Though it still had a higher growth rate than most of other large economies, and has helped the world economy from falling into bigger crisis if growth slows in China now chances of global economy’s recovery will diminish further.
The ongoing trade war also puts a question mark on the neoliberal trade regimes. In all probability, the US cannot continue the present trade war without harming and delegitimising the principles of ‘free trade’ and ‘integrated world economy.’ However, its domestic economy needs Trumpian remedy. It is an inevitable contradiction of neoliberalism.
The author is Assistant Professor at TISS, Hyderabad