A Financial Adversity of the 21st Century

By: Anushka Saxena, Lady Shri Ram College for Women, Delhi University

Abstract

Amidst geopolitical conflicts and economic tensions around the globe, the ‘x’ generation of the 21st century is faced with a seemingly unresolvable issue, one that is iconic to the founding values of this century – globalisation, multilateralism and international co-operation. The trade war between two global superpowers, the United States and China, has problematised the fabric of international trade and connectivity, thereby looming as an economic and financial threat over all nations of the world. Starting in March of 2018, the 16-month long trade war significantly hurt the economies of both parties involved, and of those caught in the cross-fire. Paula Meyers has rightly said, “Business is a battlefield.” In light of this statement, while this trade war commenced with ulterior political motives, trade and taxes became the perfect weaponry.

Introduction

It all began with Donald Trump becoming the President of the United States. Since his election in 2016, the States developed an all-round mercantilist commercial policy, aiming to strengthen the US economy in a shut economic system, and leaving the world wanting more. Trump’s preoccupation with China, however, was limited to three barriers :

1) The threat that China’s increasing ambitions undermine the US’ position as a global superpower and its military strengths,

2) The trade imbalance of $378.6 billion in 2018 between the US and China (the former being in deficit), and

3) The Trump view that China’s trade vision and practices go against the World Trade Organisation (WTO)’s regulations, because technically under WTO, China is still a developing country and therefore, its markets should be very welcoming to imports from developed countries.

President Trump consistently emphasised that China is stealing jobs from the US, and engaging in unfair trade practices, something which even Saudi Arabia seemed to agree to. Not surprisingly in the game of geopolitics and geo-economics, the foundation of the trade war was also based on the fact that 67% of the US trade deficit in the world was caused due to imports from China. Adding on to this was China’s very aspiring “Make in China 2025” vision, one which aims to manufacture 100% of the products in the Chinese economy, and work towards making China the economic number 1 in the world in the next 30 years, by making the yuan currency value stronger than that of the US Dollar.

However, this vision also relied on the fact that China will allow other countries to trade in their nation, only once they reveal all of their trade secrets, and that China is constantly coercing its corporates to align their vision with the Communist Party (CCP)’s Make in China 2025 vision. The common consensus among US government officials is that a huge trade deficit between the US and China accounts for greater indebtedness for the US, something which the Trump government certainly doesn’t want. Not to forget, China owns US $1.13 trillion in US Treasury Bonds.

Now, the task of tariffs is to act as a tax; an additional amount to be paid on top of the cost of exports. It is important to note here that the main items US imports from China are aluminium, steel, electrical machinery, furniture and of course, cheap labour, while China imports technical parts such as chips and soybeans from the US. Part of the task of a tariff is also to protect indigenous companies of a nation against market competition while also allowing this competition to enter the country at the cost of a tariff. And this is exactly what President Trump pursued in March of 2018. Realising the huge trade imbalance in US-China trade, on March 1st, 2018, he announced a 25% tariff on aluminium imports and 10% on that of steel, effective from March 15th, 2018. Moreover, Trump announced an additional import tax of $60 billion as “punishment” if China chose to retaliate, which it did, fortunately, or unfortunately. Not only this, but he also labelled China as a “currency manipulator”. Thus hitting a common weak spot, President Xi Jinping of China taxed the US imports of Soybean which is not just a major protein source for all of China, but the Soybean export from the US to China went from around 37.5 million metric tonnes in 2017 to negligible, in 2018.

For a long time, the States have benefited from the cheap labour provided by China, and have been on the gaining side of the trade imbalance. However, ironically, 60% of the exports from China to the US are products manufactured by American firms in China, who moved their production abroad to meet with high manufacturing demands and benefit from the low costs of input and labour. Walmart alone purchased US $18 Billion in products from China, making it China’s 8th largest trading partner. It is difficult to say if US claims on China’s unfair trade practices are meritable or not, based on the CCP’s history of heavily regulating its markets, and the fact that almost all nations in the world have a trade deficit with China. This scenario is also evident in the US ban on the Chinese company Huawei, the only tech giant in the world to have produced internationally networkable 5G.

While the CCP also has a history of city surveillance, media and communication blackouts, and imposing massive regulations on its tech firms, the 5G is a revolutionary technology that drastically enhances data analytics, automation, machine-to-machine connectivity and network speed, making it a game-changer in networks and telecommunications in the world. While an average 4G network can cater to a population of 2000 per square kilometre, a 5G network provides the benefits mentioned above to a population of about 2.6 million people per square kilometre. For wide-area networks, a 5G network can capacitate a traditional base station’s network service by 20 times, while keeping it 3 times smaller than 4G. Not to forget, just like the US trade sanctions on China, the Huawei ban has affected almost all nations across the world and has caused a worldwide state of “dilemma”.

The Tariffs themselves

The total tariffs applied by the US on Chinese companies exclusively total to approximately US $550 billion, while those applied by China on the States equal approximately US $185 billion. China redirected its state-owned firms to stop buying any agricultural products from the US. These measures have significantly disrupted the lives of American businesses and consumers. While the prices of cars, gadgets, furniture, beer and plane tickets, the agro-industry of America took a deep hit – China’s 25% tariff on Soybean and pork caused US agricultural exporters to suffer major losses, and the cost of soybean faced a ten-year low in the US markets.

Stressed by the tensions in international agricultural trade, the US farmers even plead the government to find alternative markets and work out possible solutions for the trade feud; solutions which do not involve a tit-for-tat with tariffs. While American steel industries suffered back when China heavily exported steel to the country, the hiked up prices of steel in America now is worse for the consumers. The Wall Street faced its worst day on 2nd August 2019, when the Dow plunged more than 750 points on the Stock Exchange. This was worsened by the other trade wars the US had going on with Mexico, Canada, Turkey and the European Union (EU).

While the US pork industry is losing $12 per animal due to Mexico’s retaliatory tariffs of 20% on American cheese, pork, steel, apples and potatoes, the EU threatened to heavily tax imports of Levi’s Jeans, Bourbon Whisky and Harley Davidson motorbikes from the US, when Trump declared plans to tax EU steel and aluminium imports. Basically, President Trump justified taxes on imported steel and aluminium by saying that they were a threat to the US economic security, and its two largest trading partners, China and Canada (respectively), were deeply upset. Subsequently, Canada began imposing tariffs worth US $12.6 billion on US goods from 30th June 2019, as retaliation for the Trump administration’s new taxes on Canadian steel and aluminium imported to the United States.

On the other hand, the American tariffs have hurt Chinese manufacturing, the industry suffering losses of about US $15 billion. China owns 1/3rd of the technological equipment production in the Asian region, and ever since the US tariffs were imposed, a significant chunk of manufacturers shifted their industries to parts of Singapore and Taiwan, two major competitors against China in the field of manufacturing tech parts. Amidst the ongoing trade war, the Shanghai Composite Index, the strongest indicator of China’s Stock Market competence, plummeted by approximately 18%. Moreover, the US sanctions are expected to cause considerable unemployment, especially in the East Coast of China.

Way Forward

Analysts expect the US to continue to use non-tariff measures to push back against China. Restrictions on Chinese investment into the US, limits on the ability of US firms to export technology to China, and further pressure on Chinese companies are all recommended tools. “Non-tariff measures don’t get the attention from markets that tariffs do, partly because their impact is harder to quantify, but they can have far-reaching impact,” says Michael Hirson, Asia director at the consultancy firm Eurasia Group.

Steps to resolve the trade war may also involve strategic communications between two countries, ministerial dialogues, and formulating ways to resolve trade imbalances. As for China, the country faces a national issue that needs to be addressed. Firstly, China should save its sliding currency, Renminbi (RMB/ Yuan), which depreciated by almost 8% during the trade war months. The country is already facing a socially unstable economic trend of excessive household savings, and a further plummet in RMB can worsen the situation and devalue the currency greatly, creating a deflationary bubble. So as an immediate solution, the CCP can sell its foreign exchange reserves to maintain RMB value (currently, China owns the US $3.1 trillion in FER). Secondly, China needs to encourage citizens to invest more, consume more and save less. The nation must also establish a social safety system that enables the citizens to invest in safe, liquid assets such as market receivables and account securities, and not just maintain household savings.

China’s Trade Alternatives

China’s economic resume, and US’s critique of China, is incomplete without mention of the flagship Belt and Road Initiative. Today, under President Xi Jinping, an advanced version of the Ancient “Silk Road” concept, often termed as the 21st-Century ‘New Silk Road’, is becoming the focal point of the country’s geopolitical and economic approach to the world. Introduced by President Xi Jinping on his visit to Kazakhstan in 2013, the New Silk Road, more popularly known as the “Belt and Road Initiative (BRI)”, aims to connect Asia, Europe, Africa, the Middle East and the Americas via road-rail-water networks, with China at the geo-economic centre of the connectivity. Since its inception, the Xi government has had but one major goal – to create mutual benefit for all in the “neighbourhood;” to create a collective economic boom in the region, with the flagship BRI at its heart.

The traction of the BRI project can be best explained by looking at the African subcontinent as an example. In Africa, China has provided immense infrastructural benefits in exchange for BRI partnership. The fact that China is a provider of huge amounts of foreign aid in African countries overpowers their political concerns, especially since most African countries are in need of rapid urbanisation, upliftment, for which they need external infrastructural support. For example, China has provided $3 billion to Ethiopia, Ghana and Sudan in telecom support has helped with the construction of the tallest tower and the new Administrative Capital of Egypt, and will have lent approximately $1 trillion in all sorts of aid to Africa by 2025 (an estimate of the Chinese Exim bank). There have been persistent doubts on Chinese presence in Africa, considering the fact that the debt of Africa to China is rising tremendously, and that there remains certain uncertainty on the nature of “aid” China provides to Africa. At the same time, China provides loans in the name of “development financing” to African countries, and the collateral against it is taken in the form of Chinese control over minerals and natural resources those countries may be rich in. For example, China provided the $4 Billion in loans to Angola in 2004, in return for which, it took over multiple oil blocks in the country. China’s military presence in Djibouti has also been a matter of concern, especially for the United States, which is trying to balance out China’s influence in Africa. Nonetheless, African countries have been seeing “the bright side” in their relations with China since the cold-war era, and will probably continue to do so for longer.

With the disruptions in the global manufacturing and labour supply chains, the massively labour-dependant Belt and Road is set to face unprecedented vagaries. It is widely-known that BRI projects around the world depended on funding and raw materials from China, and there is no local ingredient in the recipe for the BRI that could spice things up in the absence of the former. For the success of the BRI, the availability of a labour market was a critical tool. Now that migrant workers from China have been barred from entry in more than 100 countries, many of them being Belt and Road allies, the circumstance of the project across the region and beyond is flailing. This could mean that as long as workers are unable to return to foreign building sites, the projects are under threat of languishing, or stopping completely (as can be witnessed in the case of the China-Pakistan Economic Corridor or CPEC, Cambodia’s Sihanoukville Special Economic Zone, a high-speed rail project in Indonesia, and many more).

Hence, China has been toeing the line by attempting to become a helping hand. The many trains that are still functional along lines of communication in the BRI are being utilised by the Chinese Government to supply medical aid to Corona-ravaged nations. For example, a train from Yiwu in East China left for Spain on the 21st of March, 2020, filled with over 700 protective suits and 1,10,000 medical masks (Shepard, Forbes, 2020). Health diplomacy could certainly be a critical link for China to connect what was to what can be, and the “Health Silk Road” can be seen as a move in the right direction. China can also consider restricting BRI projects to a fewer nations while saving its larger investments for countries that claim to be close allies of China (while being parasitic to its aid) but may react differently once the Pandemic halts. A changed BRI must also mean that it should transition from being China-centric to becoming a community project, with all member states investing in it. Perhaps, streamlining the definition, policies and motives of the BRI into a White paper may help China in this regard, both geopolitically and financially.

China’s success will largely depend on its ability to minimise its own losses and land back on its feet in the disrupted global markets and supply chains while exercising constraints on its ambitions. It will, however, be an interesting endeavour to closely monitor China’s next moves, and how the world responds to them, over time.

Conclusion

The US preoccupation with China has continued for a long time. Now the question remains: What is it that the US wants? Is it market access, reform of intellectual property rights and forced technology transfer, improved ease of doing business in China or restructuring of the entire Chinese economy? The path and motivations of the trade war have been uncertain, and have been further perplexed by inconsistencies in the US government and China’s restless ambition to be on top. US President-Elect Joseph Biden’s administration presents some scope of relief in the tensions, but not to the point where China can be let off with a clean chit, considering the US deficit against China has reached a new low under Trump’s presidency, which, at any given day, is favourable for America. Given the economic power that the two countries yield in the international political economy, there needs to be more clarity and cooperation to finalize the terms that could lead to a gradual easing of these sanctions, so that the collapse of the global economy can be prevented, especially considering the impacts of the current Pandemic. However, the scope of this war goes beyond economic and market motives, for it clearly is a power play – a play between two giants who want to be number one and in the process, they step on many others, hurt economies, and still have a need to think outside their thick skin.