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US-China trade dispute, how far?

10/7/2019

The feared tariffs dispute between US and China has come to reality. Yet, predicting a rapid easing would be optimistic.

TRANSCRIPT // US-China trade dispute, how far? : October 2019

FOCUS

François Doux:

It was long thought that China and the US would manage to avoid a conflict, but here we are in the midst of a trade war.

Jean-Luc Proutat, hello.

Jean-Luc Proutat:

Hello François.

François Doux:

In one episode after another, tariffs keep rising. Where do things stand now in fall 2019?

Jean-Luc Proutat:

It has been about two years since the United States first launched its trade offensive by raising tariffs. It began by targeting just about everyone, with tariffs on aluminium and steel.

Thereafter, the US has increasingly focused on China, its number one trading partner. Initially, only a limited number of products were targeted, but the list has gradually expanded, and little by little, tariffs were raised.

Today, they apply to roughly USD 250 billion worth of Chinese goods imported annually into the US, at an average tariff of 25%. This figure could rise to 30% as of October. President Trump announced that he wanted to apply tariffs to the rest of imports from China as well. This would account for another 250 to 300 billion dollars in Chinese products. In the end, all US-China trade would be hit by tariffs.

François Doux:

How has China reacted?

Jean-Luc Proutat:

Tit for tat. They have raised tariffs and are mainly targeting US farm products, like soya beans. They are also curbing purchases and redirecting their supply chains to other countries like Australia, for example. Finally, they have also cautiously depreciated their currency.

François Doux:

The US-China trade war has clearly intensified. What are the economic consequences for the two countries?

Jean-Luc Proutat:

The Chinese economy is slowing, but this not a new phenomenon. What is true is that the drop-off in Chinese exports has made the slowdown worse. As a consequence, China is buying less, too. In the end, world trade has slumped across the board. This has hit the big export countries that are highly focused on the Asian markets, like Germany, which is on the verge of recession. Survey indicators have deteriorated even for the United States, as we saw this summer. US manufacturing output is down and the Federal Reserve had to step in to boost the economy by lowering key rates. The eurozone is also seeing greater monetary support.

All in all, we can say that we are beginning to feel the first negative effects of the trade war, and almost no one has been spared.

François Doux:

Hardly anyone. But when it comes to the US budget, President Trump welcomes the inflow of tax and tariff revenues.

Jean-Luc Proutat:

Yes, but who is paying for them? US companies and consumers. By raising tariffs, President Trump is taking away with one hand what he gave with the other, i.e. tax cuts. And if he goes all the way with his reasoning, then higher tariffs at the borders will eventually win the upper hand, without any particularly good consequences for the Federal budget.

François Doux:

If the trade war is only creating losers, why shouldn’t we expect President Trump to tone things down a bit or even to back track at one point or another?

Jean-Luc Proutat:

First, protectionist tendencies are not limited to Donald Trump and the United States. President Trump can be seen as a symptom more than the cause.

If we take a closer look, the rise of US protectionism pre-dates Trump. Over the past decade, protectionism can be seen primarily in the increase in non-tariff barriers, quotas, sanitary and phytosanitary protective measures and technical standards.

François Doux:

Trade wars have broken out in other parts of the planet, too.

Jean-Luc Proutat:

Yes, that’s right. The trade war between Japan and South Korea does not receive as much media coverage, but it is just as fierce as the one between the US and China.

Moreover, it is not just the deficit that is at play. There is also the battle for technological, political and cultural leadership. China is making this increasingly clear.

To better understand the ins and outs of the US-China trade war, we can look at how the nature of trade has changed between the two countries. Today, US-China trade is totally different than when China first joined the World Trade Organisation (WTO) in 2001. Currently, the United States essentially imports mechanical engineering goods, as well as electrical and electronic products from China. Communications equipment is the US’s biggest import item from China. It is no longer textiles, shoes and household appliances. All that has largely evaporated. As a result, the stakes are no longer the same. Chinese equipment is now present virtually everywhere throughout the value added chain of US companies, for both civil and military purposes. When Beijing and Washington sit down for trade talks, the trade deficit is of almost secondary importance relative to the questions of cyber security and defence.

François Doux:

Does that mean that trade tensions are bound to escalate?

Jean-Luc Proutat:

Not necessarily. But to prevent things from going too far, we must not forget the advantages of a multilateral approach. Supranational and international institutions were created precisely to prevent conflicts between neighbouring states from getting out of hand. In other words, they are there to make sure that “every man for himself” doesn’t end up hurting everybody.

François Doux:

Jean-Luc Proutat, thanks.

We will continue to monitor the trade war.

We will be back in a moment with William De Vijlder and the Chart of the Month.

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