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Trump's tariff war – Madness in method
"Today, following seven weeks of public notice, hearings, and extensive opportunities for comment, I directed the United States Trade Representative (USTR) to proceed with placing additional tariffs on roughly $200 billion of imports from China. The tariffs will take effect on September 24, 2018, and be set at a level of 10% until the end of the year. On January 1, the tariffs will rise to 25%."

Thus begins the statement issued by US President Donald Trump on September 17, 2018, announcing new tariffs on Chinese goods. With the latest tariffs, an addition to the trade penalties imposed by the US government earlier this year, roughly half of the products that China sells to the US each year face Trump's taxes.  

Calling the shots  

The Trump administration is of the view that China is engaged in numerous "unfair policies and practices" relating to US technology and intellectual property — for instance, forcing US companies to transfer technology to Chinese counterparts — which, the US administration fears, constitutes a grave threat to the long-term health and prosperity of the US economy.  

Urging the recalcitrant China to change its lopsided trade policies and give fair and reciprocal treatment to American companies, Trump threatened to inflict more economic pain on China if the latter resorted to any retaliatory action — "Further, if China takes retaliatory action against our farmers or other industries, we will immediately pursue phase three, which is tariffs on approximately $267 billion of additional imports" — thus floating the idea of imposing a third round of tariffs on Chinese imports and setting the stage for a protracted US-China trade war.  

While Trump claims that the tariffs have put the US in a very strong bargaining position vis-à-vis China and is bent upon going the whole hog in his bid to make China see reason, which he believes will ensure "a lot of money coming into the coffers of the US," not many in American business community share his enthusiasm.  

Caught in the crossfire 

Though many American businesses endorse Trump's view on China's unfair trade practices, they consider the method that Trump has chosen to set it right both ill-informed and ill-conceived. Earlier, bowing to pressure from American businesses that stood to lose due to Trump's tariffs on Chinese products, the Trump administration removed more than 300 products such as health and safety devices, children's playpens, and smartwatches from the original July 2018 tariff list comprising thousands of Chinese products that would be subject to trade penalties. Smartwatches, for instance, were removed following a direct plea from Apple Inc., which said that it relies heavily on production in China and that it would be hit especially hard by the duties.  

Expectedly, Trump's new round of tariffs drew immediate and widespread condemnation from the American business and industry groups, which view such duties as counterproductive. The US Chamber of Commerce criticized Trump's recent round of tariffs, saying that Trump's statement makes it clear that the administration did not heed the numerous warnings from American consumers and businesses. Jay Timmons, President and CEO, National Association of Manufacturers (NAM), said in a statement that imposing tariffs risked undoing the results that manufacturers have achieved in the past year because of tax and regulatory reforms. 

"The new tariffs are bad news for the retail sector," commented Neil Saunders, Managing Director at GlobalData Retail, a consulting firm. He said companies will be forced to either raise prices on goods or absorb the hit to their profit margins. He predicted that some retailers will try to shift their production out of China; however, such quick change of supply chains can be costly and pose a new set of challenges. 

Battle of wills 

China — which earlier increased tariffs, in retaliation to Trump's first-round salvo, by up to 25% on 128 US products such as pork and wine and announced potential tariffs on 106 US goods, including soybeans (China is the largest market for American soybeans, accounting for 65% of US soybean exports) and chemical, agricultural and transport goods — has come up with a more measured response to Trump's second round of tariffs.  

Promising to hit back against the latest US tariffs on its goods, China's Ministry of Commerce in a statement said, "In order to safeguard our legitimate rights and interests and the global free trade order, China will have to adopt countermeasures at the same time." However, it did not elaborate as to what the countermeasures would be. 

Knight in shining armour  

Is Trump right about America's growing trade deficit with China? In other words, does the US buy more from China, compared with how much it sells to China? The answer is: the US does have a massive trade deficit with China, which, in 2007, stood at $375.2 billion , lending credence to Trump's charge against China on trade protectionism.  

According to the report "The Year in Trade 2017," published by the United States International Trade Commission (USITC), China remained the US's largest single country trading partner based on two-way merchandise trade, accounting for 16.4% of total US merchandise trade. Significantly, the US merchandise trade deficit with China remained higher than the US trade deficit with any other trading partner in 2017, amounting to $375.2 billion. While the US does enjoy a services trade surplus with China — which increased by $600 million in 2017 to $38.2 billion as a result of growing US exports — it is inconsequential for Trump compared with the yawning merchandise trade deficit which has been hovering around $350 billion yearly. 

It is this trade deficit that Trump is unhappy about. On March 7, 2018, Trump tweeted in his characteristic insouciant style, "From Bush 1 to present, our Country has lost more than 55,000factories, 6,000,000 manufacturing jobs and accumulated trade deficits of more than $12 tn. Last year we had a trade deficit of almost $800 billion. Bad Policies & Leadership. Must WIN again!" 

While, as Trump pointed out in another tweet earlier (March 2, 2018), the US "is losing many billions of dollars on trade with virtually every country it does business with," it is the huge trade deficit with China that has got him all worked up. And Trump's solution? To initiate a trade war using tariff as a weapon. In Trump's view, imposition of tariffs on imported goods is bound to force the countries that "get cute" to see reason and come to the negotiating table. 

A double-edged sword  

However, with the US and China showing no intention to backpedal from their stated positions, there is a growing apprehension that the simmering trade tensions between the world's two largest economies might accelerate into an actual war, for history suggests that a full-blown trade war inevitably leads to an armed conflict between the nations involved. As Jack Ma, China's richest man, who cofounded and chairs the Alibaba Group, put it in his speech at the World Economic Forum in Davos in January 2018, "The world needs trade. If the trade stops, the wars start," echoing what Frédéric Bastiat, a French economist, said earlier: "When goods do not cross frontiers, armies will."  

Of course, there is ample evidence in history that trade wars trigger heightened tensions between nations, leading to jingoism and hatred, and consequently to economic, geopolitical, and social crises, and finally to full-scale actual wars.  

While such apprehensions seem misplaced and may not hold water in the changed profoundly multilateral world order, the fact remains that the US's charges against China on intellectual property rights breaches and trade protectionism are highly valid and need to be addressed by China's administration sooner rather than later. For, a prolonged tit-for-tat trade war between the two largest economies of the world is bound to affect not only the industries, manufacturers, businesses, workers, and consumers of both nations, but also those of the other nations in this progressively interdependent world. 

On the other hand, Trump's irreverent and aggressive approach may force the Chinese government to harden its stance and explore options to hit the US where it hurts most, leading to a full-blown trade war, as the Asian giant would not like to risk looking weak given its ambitious global agenda. 

And Trump's assertion that "trade wars are good and easy to win," made unsurprisingly in a tweet, certainly runs against chronicled history and conventional wisdom, both of which suggest that no one wins a trade war, especially in today's globalized economy. The common consensus, though, is: there is more madness in Trump's method. 

Editorial NOTE: This article is categorized under Opinion Section. The views expressed in this article are solely those of the author and do not necessarily represent the views of merinews.com. In case you have a opposing view, please click here to share the same in the comments section.
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