US-China Trade War - Part 1 - The dance of the Dragon and the Eagle

This was a piece written by me back in December, 2018 which never saw the light of the day until today. I shall follow this up with a part-2 covering the events of the trade war which occurred in 2019.

“It is the rise of Athens and the fear it instilled in Sparta, that made war inevitable”. These are the famous words of a Greece historian – Thucydides and it seems very apt in the current trade war between the two most powerful economies of the world – USA & China.

Till January 2018, everything was going pretty fine for both parties, the Chinese grew due to exports, Americans could buy things cheap. But then one fine day, Mr. Trump decided to cite the reasons of a threat to National security, Trade deficit, injury to US Industries and lay tariffs on Chinese products. In the course of the trade war Mr. Trump justified his stance by quoting IPR Theft and Unfair trade practices of the Chinese i.e. by not allowing foreign companies to enter the market unless they partner with Chinese firms, which then gives the Chinese firms access and permission to use, improve, or copy their technologies by terms of joint venture agreements.

However, one of the main reason came out when Mr. Trump’s list of tariffs in July 2018, targeted all the products which formed a part of China’s ambitious “Made in China 2025” plan. Now Lets us try to understand this a little better. Whenever we see the tag “Made in China” – we automatically tend to say “Aree ye to cheap quality product hai” and “ye to duplicate product hai”, but China now wants to change this with its “Made in China 2025” plan. China aims to become a world leader of manufacturing in high-value technological sectors and move up the value chain. Now, this gives direct competition to technological leaders across the world like say for e.g.: the United States of America, and it definitely cannot afford to lose its number one position.

So, the main reasons for this technological tariff war are IPR Theft, unfair trade practices in technology and China’s rise in the technological market, which has caused USA to be more cautious. Trade wars throughout history have been fought to protect national interests, promote home consumption and increase jobs. And this time too, it is not different.

But does this mean, China is not at fault? Many western countries do believe that China needs to open its economy to direct FDI and reduce trade barriers.

Nonetheless, let us take a look at how the biggest trade war in the 21st Century is playing out.

As you can see in January, US started its tariffs, but China did not react. But in March, when the US imposed tariffs on steel and aluminum, China too retaliated and after that whenever US announced tariffs, China too announced tariffs and both the parties since then have engaged in a tit-for-tat trade war. In July, Trump targeted China’s technological needs to implement “Made in China 2025” and China targeted Trump’s voter base i.e. rural America, by announcing tariffs on agricultural goods. Then in September 2018, USA announced the finalized list of tariffs on US$200 billion worth of Chinese goods. The tariffs went into effect on September 24 at an initial rate of 10 percent, to be increased to 25 percent by January 1, 2019. But as a sigh of relief to everyone, Trump and Xi met at the G20 Summit in Argentina on 1st of December, 2018 and called a 90-day truce. Markets gained and everyone was happy until US and Chinese issued contradictory statements and with the arrest of CFO of Huawei Technologies in Canada on orders of USA, for engaging in transactions with Iran despite sanctions, the markets crashed again wondering if there was really a truce.

But amid of all these what has been the impact on the global economy? An African proverb quotes that, “When two elephants fight, it is the grass that gets trampled”.  Tao Zhang deputy managing director at the International Monetary Fund warns that, “The ongoing trade tensions could cost the world economy about 1 percent of its GDP by next year”

And the reason is due to interconnected global economies and supply chains. As you can see, lower demand due to tariffs will lead to lower manufacturing causing unemployment and lower demand for raw materials, in turn, causing lower growth for all interconnected economies.

America is one of largest oil producer and in fact, it became the largest producer of Crude oil in 2018, surpassing Russia and Saudi Arabia. And one of its prime customers is China. As you can see China is the 2nd largest importer of US Crude and India takes the 9th place.

As trade war tensions rose, China had stopped buying crude oil from America. I am not even joking, not a single drop of oil in August and September.

And here comes the crude oil question, can India benefit from this? Undoubtedly Yes, dipping crude oil prices are always welcome and moreover a deal with the US for its surplus oil can help strengthen Indo-US relations. So crude oil has hit a positive note.

But what about the overall impact on India in terms of trade? Can India capitalize on opportunities by increasing its exports to US & China?

Many US Companies are looking to substitute imports from China with imports from other countries and also many American companies, who have their manufacturing base in China are looking to relocate to other countries in order to avoid heavy tariffs.

India has moved up the “Ease of doing business” rankings and “Make in India” has also given a push to manufacturing. Based on a research report by Deloitte in 2016 on the Global Manufacturing Competitiveness Index, it is projected that in 2020 India will rank among the top 5.  With India being one of the fastest growing economies and with an adequate push in form of government initiatives, India could really benefit from the same. Countries giving us tough competition are Vietnam & Malaysia in ASEAN (Association of Southeast Asian Nations) countries.

In case of substitution of goods let us try to understand what USA & China import & export to each other.

US & China are very co-dependent on each other.
China was the United States' largest supplier of goods imports in 2017.
China was the United States' 3rd largest goods export market in 2017.
China was the United States'  4th largest supplier of agricultural imports in 2017.
China was the United States' 2nd largest agricultural exports market in 2017.

The Top 10 exports and Imports of US & China are:

Source of Data:  U.S. Department of Commerce, U.S. Census Bureau - https://www.census.gov/foreign-trade/statistics/country/index.html

US IMPORTS FROM CHINA / CHINESE EXPORTS TO USA	2017 (US$ Million)		US EXPORTS TO CHINA / CHINESE IMPORTS FROM USA	2017 (US$ Million)
Cell phones and other household goods, n.e.c.	70,360		Civilian aircraft, engines, equipment, and parts	16,265
Computers	45,515		Soybeans and other agricultural produce	12,259
Telecommunications equipment	33,491		Passenger cars, new and used	10,211
Computer accessories	31,649		Semiconductors	6,077
Toys, games, and sporting goods	26,751		Industrial machines, other	5,447
Apparel, textiles, nonwool or cotton	24,137		Crude oil	4,401
Furniture, household goods, etc.	20,669		Plastic materials	4,003
Other parts and accessories of vehicles	14,406		Medicinal equipment	3,453
Household appliances	14,139		Pulpwood and wood pulp	3,359
Electric apparatus	14,081		Logs and lumber	3,177

 

In case of trying to substitute US goods in China, we cannot compete in products like industrial supplies, semiconductors or aircraft, but we can definitely bridge the gap in agricultural goods. The government’s focus is on doubling farmers income but the problem is we lack agricultural infrastructure in terms of storage and packaging of goods. If necessary measures are taken, then we can gain.

The Common items which come under China's top 50 exports to US & India's top 50 exports to US in 2017, wherein there is an opportunity of over hundred million and out of those items, goods which can be easily produced, are the goods which we can capitalize on in this trade war by bridging the gap and exporting to US.

And in case of trying to substitute Chinese goods in US?

Source of Data:  U.S. Department of Commerce, U.S. Census Bureau - https://www.census.gov/foreign-trade/statistics/country/index.html

	US Imports from China		US Imports from India		Difference
List of Goods	2017 (US$ Million)	Chinese ranks	2017 (US$ Million)	Indian ranks	(US$ Million)
Cell phones and other household goods, n.e.c.	70,360	1	334	34	70,026
Toys, games, and sporting goods	26,751	5	202	46	26,550
Apparel, textiles, nonwool or cotton	24,137	6	1,239	8	22,899
Furniture, household goods, etc.	20,669	7	592	14	20,078
Other parts and accessories of vehicles	14,406	8	1,041	9	13,366
Footwear	11,537	12	351	31	11,185
Apparel, household goods - cotton	12,273	11	4,589	3	7,684
Cookware, cutlery, tools	7,178	18	329	35	6,849
Other consumer nondurables	5,567	20	195	48	5,372
Apparel, household goods-nontextile	4,945	43	354	30	4,592
Chemicals-organic	5,305	22	1,403	7	3,902
Iron and steel products, n.e.c.	1,930	36	398	22	1,531
Synthetic cloth	1,753	44	342	33	1,411
Stone, sand, cement, etc.	1,715	35	411	21	1,304
Chemicals-fertilizers	1,435	34	462	18	974
Fish and shellfish	2,688	25	2,288	4	401

In fact, if we compare the Imports of US, country-wise of December 2017 & October 2018, we can find that India has moved up the ranks.

India capitalizes or not on the opportunity is a question in itself, but the trade war is now not only a trade war but also a “Cold War” as aptly named by economists. This cold war of technology will cause us to choose sides too.

With tiffs with China over border standoffs, to maintaining ties with US – The Superpower. At the AEPC (Asia-Pacific Economic Cooperation) Summit, on 19th  November, 2018 US Vice-President Mike Pence, warned the Asian countries of China’s Belt and Road Initiative and offered US as a better alternative.  BRI is an ambitious Chinese project to build multiple corridors via road and sea, across Asian countries like India, Pakistan, Russia, all the way to Europe. A project which as China claims will unify All Asian countries, but it will be a strategic road for China’s as all the roads originate in China, but compromise on the national security of other countries.

With all this in Mind, India also has to make strategic as well as economic decisions. Both US & China have to let go of their protectionist policies. In this era of globalization, Mr. Trump’s “America first policy” and China’s closed economy and forced partnerships with local firms are taking us back to the de-globalisation era. The global economy has taken a toll, investors sentiments are down and markets are also down. WTO’s role is also being severely challenged.

History teaches us that, “In war, there are no winners”. The 1930 Smoot-Hawley Tariff was a trade war that worsened the Great Depression. It is upon the world leaders to come together and work towards achieving global growth as “In unity, there is strength”. US-China Trade war is a story of War or Peace, and peace is the best and the only alternative.