The US trade wars: An update

The US trade wars that were initiated by President Trump early this mid-year are playing out their expected path. There is a high level of tension in the future of trade affecting the major powers, and as a consequence, on that of world trade in general.

The three fronts of the trade wars. The three fronts of the trade wars are against China, Europe, and North America.

The two fronts in Europe and North America have slightly quieted down. There is an apparent impasse that presages that a favorable negotiated settlement is possible.

In the case of the European front, a visit by the president of the European Commission –Mr. Jean-Claude Juncker, paying a visit to Washington to meet with Mr. Trump – led to the exploration of future negotiations.

In the case of the NAFTA (North American Free Trade Agreement) front, progress in bilateral negotiations between Mexico and the United States has produced a bilateral agreement, among other issues, contains concessions on US demands for improved rules of origin on trade and production of automobiles toward American production.

The possibility of Canada being brought into this settlement looms to make it NAFTA-wide, but that would depend still on a number of issues affecting US-Canada issues.

Nevertheless, the contentious relationships initiated by the steel tariffs that affect both Europe and NAFTA seem to be leading toward a settlement of broader trade issues.

The issues that separate the US and China are far deeper and larger. The big noise in the trade war is happening between the US and China. This is a far more serious confrontation.

The US-China trade war escalates. The state of play of the trade war involving the US and, individually, with Europe and with NAFTA still revolves around the initial reactions to the steel and metal tariffs. Other items of US imports of goods are only prospective trade threats.

Pressured to do more trade actions that were specifically directed at China, President Trump had threatened to impose comprehensive, but selective tariff increases against a range of Chinese exports to the US. Initially, this was to be on a list of Chinese goods amounting to $50 billion subjected to an average tariff rates of 25 percent.

The US had prepared a list of Chinese goods exports amounting to $34 billion that went into effect on July 5. China had retaliated tit-for-tat for a similar amount of goods upon those measures taking effect almost immediately.

On Aug. 23 a second list of Chinese imports amounting to $16 billion took effect, to which the Chinese have an immediate answer in comprehensiveness.

Thus, in the case of China, the trade war has gone far beyond the first salvo of steel tariffs being raised. There are signs of a path toward negotiation of differences. However, recent efforts at this route have not yet brought the two trading parties closer to any agreement.

President Trump has indicated that he would expand the tariff hitlist to cover $200 billion of Chinese exports to the US. In fact, he has threatened to cover all of the $500 billion of US imports from China.

WTO and the trade wars. The war between the trading giants is waged along a front that is outside the WTO rules. The major power asserting the need to change the rules uses big power tactics. The aggrieved is trying to lasso the issues within the WTO dispute resolution.

President Trump’s tactics employ a brutal market power game. He claims that China does not play by the rules of trade, especially in relation to property rights and openness. China’s viewpoint has been to play the aggrieved party, willing to negotiate the issues at stake but also willing to defend its economic interests by fighting back.

The comprehensive list of imports subject to discriminatory tariff that apply only on Chinese goods entering the US are seen as unreasonable since tariffs are applied on all trading nations.

These tariffs are almost similar to counter-vailing tariff measures that an importing country can use against an exporting country. These tariffs, however, are on a wide list of goods. Counter-vailing measures are very product specific and harm specific.

Counter-vailing tariffs are allowed under WTO rules. These are generally actions taken because of specific harm to the domestic interests of the importing country. In particular, the damage could be “enterprise-”, “industry-,” or “region-” specific to a country, or as a result of subsidies by the exporting country which harms competition.

Political economy of the hurt to both China and the US. There is consequential harm being felt by both the economies of the US and China.

A simple trade war could hurt the parties engaged in it. The hurt could be felt by both, even if there is a winner, for there may be unintended adverse consequences even in the case of victory.

Also, there are impacts on third parties that have to be measured too.

In the case of the US, tariffs directly induce an increase in the prices of imports from China. Since that country is the main source of a lot of inexpensive imports, the price increases cause a loss of welfare to American consumers.

Even American business enterprises are being harmed. Some American producers and merchants of imported goods are affected in terms of reduced output or sales or a drop in profits. Imports of consumer goods from toys, bicycles to tires and chemicals and furniture are affected and there are complaints already being registered at home. Agricultural exporters are also victims of retaliation.

For China, the impact could be a reduction in the volume of its export trade and hence a potential fall in output. Such damage increases with a wider list of exports subject to high tariffs.

There is a large potential impact on those countries whose production chains are linked with China or with the US. Any reduction of trade arising from these could lead to a reduction in trade volume with these other countries.

So far, the magnitudes are not significant to world production. Further escalation of the trade wars, even of only between the US and China, could also lead to an escalation of the adverse impact.

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