How Trump's Trade War Is Roiling Global Commerce

Posted on 04 December 2018
 

Source: Bloomberg

U.S. President Donald Trump triggered a global trade showdown in 2018 to punish — and try to extract concessions from — countries he said engaged in unfair practices such as stealing American technology, subsidizing industries and dumping cheap products in the U.S. His tariffs, designed to punish countries for imposing duties on U.S. goods, roiled global commerce. As the levies began to disrupt supply chains and raise prices for manufacturers and consumers, there was growing concern the trade war would crimp economic growth and undermine the World Trade Organization, the international body that negotiates, monitors and mediates trade rules. Even the declaration of a temporary cease fire in the trade war with China at the start of December didn’t fully ease tensions.

1. Why did Trump invite this fight?

He routinely points to the large U.S. trade deficit, the difference between imports and exports, as a symbol of a declining manufacturing base and the loss of American might. He aims to reduce the goods-and-services gap, which totaled $566 billion in 2017, by both browbeating and enticing U.S. companies to import less and export more. 

2. What has he done?

In January, he imposed tariffs (which act like a tax on imports) on foreign-made solar panels and washing machines shipped into the U.S. Then he levied duties on steel and aluminum from most countries, including allies Canada, Mexico and the European Union. They retaliated with tariffs on U.S. goods. Trump in stages slapped duties on $250 billion of goods from China, including furniture and food, and said he’d consider adding goods worth $267 billion to the hit list. All told, Trump imposed or threatened tariffs on virtually all products from China, which struck back with duties on almost all U.S. goods entering the country. Trump also considered tariffs on autos.

3. Will Trump’s strategy work?

It depends on who blinks first and whether U.S. trading partners offer to cap their exports or meet U.S. demands. Trump’s threat to abandon the North American Free Trade Agreement prompted Canada and Mexico, the two other signatories of that treaty, to agree to revisions. Tariffs on metals and threatened duties on cars had the EU and Japan also looking to deal. Getting China to bend could prove harder, as the U.S. is seeking fundamental changes in how the Chinese government manages the economy via subsidies and state-owned enterprises. Meanwhile the U.S. trade deficit has widened in 2018, partly because the stronger dollar made U.S. exports pricier.

4. What’s the economic effect?

That’s still playing out. In the U.S., the trade war alarmed business leaders, who largely support existing trade deals. As of mid-2018, however, U.S. economic growth remained buoyant, with economists partly crediting Trump’s tax cuts. The International Monetary Fund cut its forecast for global growth in 2018 and 2019 by 0.2 percentage point, in part blaming trade tensions.

5. How about in China?

The trade fight came at a time when the Chinese economy was already slowing, and in September it helped push the country’s benchmark stock gauge to its lowest level since 2014. Should Trump apply all threatened tariffs, the fallout would shave 1.5 percentage points off China’s economic growth, Bloomberg Economics estimates. The tensions also dragged down other Asian financial markets, including those in India and Indonesia.

6. Who are some of the winners?

Metals tariffs have helped producers that have American plants, such as ArcelorMittal, U.S. Steel and Nucor. They’re charging higher prices, and some have reopened shuttered sites. Some businesses in Southeast Asian nations expect China’s pain to be their exporting gain, among them Vietnamese furniture producer Phu Tai Corp., which makes home furnishings for Wal-Mart Stores Inc. outlets in the U.S.

7. And some of the losers?

As Trump intended, Chinese exporters are feeling the squeeze. The products hit by Trump’s initial tariffs could be replaced by other goods, meaning exporters must cut prices to keep buyers, according to a report by research network EconPol Europe. Caterpillar, General Motors, Harley-Davidson and other U.S. manufacturers say tariffs have pushed their costs up as well, hurting profits. Harley-Davidson Inc. said it’s shifting some production overseas. U.S. farmers have needed $12 billion in government bailout funds. Some companies that initially benefited from tariffs have become victims: Whirlpool Corp. added 200 jobs in the U.S. after Trump put tariffs on washing machines, but it was then hurt by levies on steel. One study projected that steel and aluminum duties might kill 16 jobs for every 1 gained by metal producers.

8. Can’t the WTO resolve the dispute?

 

Both the U.S. and China justify their tariffs under domestic laws. That could limit the global trade body’s ability to mediate, undermining the rules-based system for global trade. 



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