Over the past few weeks, the trade war between the U.S. and China has seen a significant escalation. On August 20, the U.S. administration notified its decision to impose 15% tariffs, in two phases, on imports valued at $300 billion. The latest round of tariff increases implies that the country has imposed tariffs on almost all of its product imports from China, totalling nearly $540 billion in 2018. Pharmaceutical imports are the only major exception.
Immediately after the U.S. administration issued the notification, China announced additional tariffs on more than 5,000 products imported from the U.S. valued at $75 billion. The sensitive sectors of agriculture and forestry were targeted. Tariffs were also hiked for the first time on crude oil. On September 2, China raised the ante further by initiating a dispute in the World Trade Organization (WTO) against the U.S.’s unilateral tariff increases.
Earlier, the U.S. administration had targeted China primarily for what it perceived to be violations by the latter of intellectual property rights (IPRs) of American companies. The administration’s argument was that Beijing was forcing these companies to transfer their proprietary technologies. In fact, on this issue, the U.S. became the judge and the jury by indicting China for indulging in “forced technology transfer” and then bringing penal provisions against its imports using the provisions of the Trade Act of 1974. The provisions of this Act (like Section 301) allow the U.S. to “investigate” any country which, in its opinion, has violated IPRs of American companies. If found “guilty”, the violating countries can be sanctioned with trade retaliation. The tariff increases against Chinese products were tantamount to trade retaliation. It needs to be further mentioned here that Section 301 actions are a violation of WTO rules as disputes must be resolved by the organisation’s dispute settlement mechanism.
‘Currency manipulator’ label
However, while triggering the most recent escalation, the U.S. administration not only violated the spirit of multilateralism, it also shifted the goalposts. This time, the action was triggered when the U.S. Secretary of Treasury, Steven Mnuchin, invoked the provisions of Section 3004 of the Omnibus Trade and Competitiveness Act. This Section authorises the Treasury Secretary to examine whether the U.S.’s trade partners are manipulating the “rate of exchange for purposes of preventing effective balance of payments adjustments or gaining unfair competitive advantage in international trade”.
Earlier, Mr. Mnuchin had in August called the U.S.’s largest trade partner a “currency manipulator”, the first time Washington used the label against any country since 1994. Mr. Mnuchin’s determination was based on a report presented to the U.S. Congress last year that concluded that China’s “exchange rate practices continue to lack transparency, including its intervention in foreign exchange markets”, although it found that “direct intervention in foreign exchange markets by the People’s Bank of China” over the past several months was limited. Beijing was targeted for the “long history of facilitating an undervalued currency through protracted, large-scale intervention in the foreign exchange market,” said the Department of Treasury.
The latest action by the Trump administration raises at least two sets of issues. The first concerns its pursuit of unilateralism, an anathema in the post-War economic governance framework underlined by the principles of multilateralism. Since the coming of the Trump Administration, the U.S. has repeatedly undermined these principles. The country has challenged the framework of multilaterally agreed rules in two ways — first by not allowing WTO members to conduct negotiations so that the rules respond to the needs of the members, especially the lesser developed countries; and second, by making the dispute settlement mechanism non-functional. A critical component of the dispute settlement mechanism is the Appellate Body, which needs seven members to function effectively. But the U.S. administration has refused to allow retiring members of the Appellate Body to be replaced by new members, and this has brought the dispute settlement mechanism to the brink.
Second, nearly a year and a half after the trade war was officially announced in Washington, one question that begs an answer is: Have the American people gained anything from the exertions of the administration? Are there any signs that President Trump’s vision of ‘Making America Great Again’ is gaining further traction?
Small impact on trade deficit
We will consider the pattern of trade flows over the past year to see if tariffs were able to reduce U.S.’s dependence on China. In 2018, almost nine months of which saw the trade war playing out, the U.S.’s trade deficit vis-à-vis China reached a record high of over $419 billion, nearly 12% higher than that in the previous year and the steepest increase since 2010. In the last five months of 2018, when the tariffs were introduced by both countries, the trade deficit was $196 billion, 15% higher than that in the corresponding period in 2017. In other words, the tariffs did not reduce the deficit. In the first half of the current year, the U.S.’s trade deficit reduced by about 10% and while imports from China declined by $31 billion, exports to China also declined by $12 billion. Thus, the U.S. was not left untouched by the trade war.
There is hardly any doubt that the latest round of tariff increases would hurt the U.S. economy even more since China has targeted agriculture and crude oil, two of the most sensitive sectors. An impact on these sectors could adversely affect President Trump politically because people and companies associated with these areas are among the President’s major funders. Further, since the current round of tariffs target products like garments, toothbrushes, footwear, toys and video games, the U.S.’s consumer goods markets would be impacted quite considerably. Clearly, the administration is worried about the price increases following the imposition of tariffs on some of these goods, a reason it has postponed the tariff increases until after the Christmas purchases.
The timing of the latest escalation could not have been worse; it could bring the global economy closer to an economic slowdown, much earlier than its predicted onset in 2020.
Biswajit Dhar is professor, Centre for Economic Studies and Planning, School of Social Sciences, Jawaharlal Nehru University, New Delhi
