Last week saw what some experts might call the beginnings of a trade war as the U.S. announced fresh tariffs on goods amounting to $50 billion worth imports from China, pledged there’s more action coming and said it would also consider restrictions on investments from China. This came on the back of higher tariffs on steel and aluminum imports into the U.S., a portion of which also come from China.
China’s response to the steel and aluminum tariffs was to announce higher tariffs on $3 billion worth of American imports. Analysts expect more action from China in response to Thursday’s announcements by the U.S.
These moves by both countries are expected to impact not just trade between them but also global trade and global supply chains, said William Reinsch, senior adviser at the Center For Strategic & International Studies. Reinsch previously served for 15 years as president of the National Foreign Trade Council in the U.S.. He was also a member of the U.S.-China Economic and Security Review Commission and has served as the under secretary of commerce for export administration during the Clinton administration.
We live in a global economy, things are made everywhere, there’s a lot of things that America imports from China that are not wholly made in China, they’re assembled in China with components that come from all over the world. If they can’t come in here anymore because they’re from China, or they come in with a 25 percent tariff, that’s going to force companies to rearrange all their supply chains. That’s enormously disruptive.William Reinsch, Senior Adviser and Scholl Chair in International Business, CSIS
The U.S. may turn to other countries to substitute China imports till its domestic industry can fill the gap. China may also consider reducing purchase of American goods. “If the Chinese stop buying soybean, you can say well, that’s $10-14 billion or whatever it is, that’s a small number. But that’s a lot of American farmers that are going to be in very difficult states if that’s what happens,” said Reinsch.
Some experts have also articulated the extreme case that China may consider using its holdings of U.S. dollars and treasury bonds in retaliatory action, though others say the prospects of that are slim.
These trade hostilities are also likely to impact geopolitical equations that are most often under-pinned by economic relations.
I think from an American point of view, the issue in this area has to do with American influence, and the erosion of American influence, particularly in Asia.William Reinsch, Senior Adviser and Scholl Chair in International Business, CSIS
While it’s tough to predict what President Trump will do next, India could very well be the next recipient of U.S. trade action Reinsch said when asked specifically about the impact on India of this new U.S. trade policy.
Here is a transcript of the interview with William Reinsch.
U.S. vs China
Your assessment of the tariff hikes announced by the U.S. on imports from China and China’s reaction.Is this the beginning of a trade war?
Well, it’s been fairly dramatic, although I think people here have seen this coming for a long time. The investigation on China was announced last August, so it’s not a sudden development. I think whether it’ll be a trade war, it’s too soon to say. Normally these things just last one round - we do something, they do something equivalent, both countries glare at each other for a while, and then there’s a negotiation.
The U.S. measures impact China imports worth $50 billion. The recent China measures are on $3 billion worth of U.S. goods. In context the the overall trade between U.S. and China and even the trade deficit of just over $330 billion, these don’t seem to be large numbers. What do you make of the impact on trade between these two countries and global trade.
Well, first of all, don’t equate their $3 billion with our $50 billion. The Chinese $3 billion was in response to the steel tariffs of two weeks ago; it’s not the response to Thursday’s announcement. So, there’s likely to be another Chinese announcement that will be bigger, so that’s number one.
Number two, if you look at it from a macroeconomic perspective, sure, both economies are very big, this is a small amount. If you look at it from the perspective of somebody who’s a victim, whose product is knocked out of our market or an American who can’t export to China because of the retaliation, it’s a big deal, because it makes a big difference for them. The biggest impact here will likely be on American farmers, who have made a very successful business over the last 15 years, exporting agricultural products - commodity crops particularly. China, they’re sort of on the front lines here. If the Chinese stop buying soybean, you can say well, that’s $10-14 billion or whatever it is, that’s a small number. But that’s a lot of farmers that are going to be in very difficult states if that’s what happens.
The other thing that I think the economic analysts haven’t really thought about is the extent to which this will disrupt supply chains. We live in a global economy, things are made everywhere, there’s a lot of things that America imports from China that are not wholly made in China, they’re assembled in China with components that come from all over the world. If they can’t come in here anymore because they’re from China, or they come in with a 25 percent tariff, that’s going to force companies to rearrange all their supply chains. That’s enormously disruptive. Eventually they’ll figure out a new one, but it usually is one that’s more expensive, and it takes them a while to get there.
So it’s more likely to be a medium term impact?
Well I think more in the long term than in the medium term, yes. I think your analysis is right, but the short-term impact would probably not be great, unless China’s further response is to simply, as a government, decide not to buy things. If they decide not to buy Boeing aircraft, if they decide not to buy soybean, or other American crops, that would be a significant short-term impact. Mostly what I’m talking about though is the potential to, in the longer term, rearrange trade in less favourable directions.
Impact Of Trade Wars
You’ve studied the impact of trade wars. For instance, the impact of high tariffs after the Great Depression and the impact on global trade. Should we be preparing for such a scenario?
I hope not, but I think it’s a greater possibility now than it was two years ago. In the 1930s what happened was that the United States, in particular, enacted very high tariffs. It was right after the markets crashed, you can’t say that the tariffs caused the Depression. But one of the consequences of the Depression was that Congress here enacted high tariffs, then a lot of other countries responded by doing the same thing. So, you had a significant decline in global trade, which in turn impacted growth, it made the Depression worse, and made it last longer. I think there’s no debate about that. And so, if we start a round now of expanding tariff increases – in other words, we don’t just stop with what’s happened in the last few days, but it grows – then yes you’ve got the possibility of going back to the 1930s, which would be difficult for everybody.
What about the impact on geopolitical equations. A long held belief is that more trade integration is beneficial to global peace.
Yes, I mean one of the basic rules here is that, you know, and there are some exceptions, but the general rule is that countries that trade with each other don’t usually make war on each other. And to the extent that countries cut themselves off, they increase the risk of geopolitical difficulties. I think from an American point of view, the issue in this area has to do with American influence, and the erosion of American influence, particularly in Asia.
I think the President’s first and really the biggest trade mistake was to pull out of Trans-Pacific Partnership, because a big part of TPP was geopolitical. It was to remind everybody in Asia, particularly in South-East Asia that America has a strong and enduring commitment to the region, and that we intend to remain there and remain engaged there. Pulling out of TPP caused a lot of countries, particularly in Southeast Asia, to be nervous about the extent of our commitment to the region, and that caused them to think that perhaps they needed to become closer to China which is going to reorient politics in the region in a way that benefits China and hurts us. So it was a big mistake, to the extent if we repeat that mistake with more trade fights, we’re going to diminish American influence worldwide.
President Trump has promised or rather threatened that there are many more such trade actions to come. Can you assess for us his presidency, the impact of this on America’s position in the world and what the next steps could be?
Well on the next step, frankly, I have no idea what he meant. It’s not clear if he was referring solely to China, i.e. there’ll be more complaints, more tariffs that are about China, or whether he was referring to other countries, it’s just not clear. There’s also some history I think to keep in mind that he has not consistently followed up on everything that he’s threatened to do. In fact, some of the analysis here was that yesterday’s announcement was not as far reaching as people expected. They expected higher tariffs, they expected a bigger number and they expected things to go into effect sooner; and what you got was lower tariffs, a smaller number, and a delayed impact.
So, it’s not entirely clear that everything he says is what he ends up doing. At the same time if you look at the history of Donald Trump, he’s said the same thing about trade for 30 years, and his views are not really going to change. They haven’t changed and they’re not going to change. So, it’s logical that I think we’ll probably see him threatening to do more things, probably to other countries, anybody he’s unhappy with that day. Whether he, actually, follows through though is a more complicated question, because he doesn’t always follow through.
China’s response has so far been muted. No belligerence in comments or otherwise. President Xi has come off looking more of a statesman than President Trump? Looking at this from an India point of view - does it give China’s position in the world a boost?
Well we kind of handed him a little opportunity, to play the role of a statesman, and Xi Jinping has been doing that very effectively both in Davos and elsewhere. So, they’ve been very quick to seize that opportunity. I think other countries, India in particular, should follow the principle of “watch what they do and not what they say”. It’s a good speech that he’s given, but if you look at Chinese policy, if you look at restrictions on investment, if you look at the way they treat foreigners in China, not just Americans but foreigners, in terms of discrimination and discriminatory licencing department, if you look at their long history of intellectual property theft, this is not a free-trade country. This is not a country that is a rule-of-law country, like India is. It’s not a country which engages in an open, free trade system. So, it’s a good speech, but I think other governments need to look beyond the speech to see what they’re actually doing.
Is India Next?
U.S.-India Trade In 2017
- India ranked 9
- Exports: $25.7 billion
- Imports: $48.6 billion
- Total Trade: $74.3 billion
- Percent of total trade: 1.9 percent
Though India’s deficit is much smaller, is it next on the list as far as President Trump and trade measures go? He’s specifically mentioned India in the past, there was the Harley Davidson controversy too. And more recently the U.S. has gone to WTO to take action against most of India’s export subsidies, albeit it hasn’t taken any unilateral action yet.
His top targets are the countries with the biggest deficit, with whom we have the biggest deficits. So that’s China, Japan, Mexico and Germany, and then it goes down from there. So, India’s not a top target, but since he measures all relationships by the size of the deficit, if we have a deficit with India, then you’re going to be a target sooner or later. I think frankly right now in the case of India, what the U.S. does will likely play out in the WTO, it’ll play out in the form of WTO cases. To be honest with you, as far as India goes, it’s a target-rich environment. You do a lot of things which violate your WTO obligations and so it’s relatively easy for us to file complaints there and pursue it that way.
So, well I don’t know if you’re next on the list, but you’re on the list.