US President Donald Trump lit the fuse for a possible global trade war with his decision earlier this month to slap tariffs of 25% and 10% on steel and aluminium imports respectively.
Some commentators now fear an escalation of trade tensions and an unstoppable lurch to protectionism.
The decision sparked a storm around the world, leading to a recent South China Morning Post (SCMP) editorialising that, ‘Time is running out on avoiding a full-on US-China trade war’.
The SCMP reported that the US Administration, increasingly frustrated by what it perceives as an unfair and much-publicised trade deficit with China, is targeting other industrial sectors in response to grievances over intellectual property, particularly its hi-tech and telecommunications trade. Sources quoted in the SCMP said Trump wants to reduce the trade deficit with China by $100b, and he also threatened to clamp down on Chinese investments into the US.
What is certain is that highly integrated global supply chains rest on the outcome of the ongoing trade disputes. Beijing-based Cofco, one of the largest buyers of soybeans from the US, is potentially caught in the crossfire of the looming trade war. The Chinese have threatened to impose retaliatory measures against the $14b annual trade with the US, as reported in the SCMP.
Dr Winnie King, Teaching Fellow, Specialist in Chinese International Political Economy and International Relations, University of Bristol, is convinced China does not want a trade war but insisted China would not tolerate any US tariffs without reciprocal measures.
She explained to Forward with Toll, “China has already responded to the tariffs. It is, unsurprisingly, and like other economies, very unhappy. It has called the decision a threat to the multilateral trading system, and called upon America to reconsider.”
She clarified that specific sectors have been earmarked for reprisal action, “It has also identified sectors where it may be willing to impose retaliatory tariffs, including the soybean sector and aerospace. The Chinese have made it clear that it was willing to take measures to secure its own interests.”
She fears the global economy could be in for a shaky period should retaliatory tariffs and punitive economic policies be adopted, warning of possible industrial and consumer price inflations, particularly if measures taken include agricultural products.
She issued a clear warning, “Potential impact for global supply chains may also arise, should this protectionist behaviour spill over to become the new status quo.”
Like many commentators over recent weeks, King stated that it is in neither the US’s nor its economic allies’ interests to have a full-blown trade war.
She added, “While Canada, Europe and China have all made it very clear that they were willing to take retaliatory action, we have yet to see this take place; though they have identified sectors to redress the potential costs.”
It was reported in the UK’s Financial Times that without exemptions from the tariffs, around 200 US products were being targeted for higher duties by the EU. King commented on possible exemptions by various countries across the globe.
She said, “Trump has provided for tariff ‘carve-outs’ to both Canada and Mexico to exempt them from the brunt of this policy. Australia, Brazil, South Korea and the EU are looking for equal treatment.”
For Dr John Glen, Visiting Fellow, Cranfield School of Management, a main consideration is who pays the cost of this policy.
Indeed, Jim McGreevy, president of the Beer Institute, referring to the aluminium threat, said the US beer industry would suffer drastically as more as than 50% of the beer is packed in aluminium cans or bottles. He added that the 10% tariff would result in a tax of US$347.7 million on US brewers and beer importers, and more than 20,000 American jobs will be at stake.
Glen concurred with this analysis when considering the effect of steel tariffs, “As only 12.5% of US steel production is exported, the obvious answer to this is US steel consumers and, by association, those consumers who buy goods into which US steel is an input.”
“I feel Trump’s decision is stupid,” Li Xinchuang, vice-chairman of the China Iron and Steel Association, told the New York Times. “It will only make the US steel industry, which is already ten years behind China, more left behind.”
Glen highlighted the reasons behind the pressure cooker atmosphere. He stressed, “The underlying concern is the size of the US trade deficit was $56 billion in January and the fact that a large proportion of that $56 billion is with China. The size of the deficit with China is politically sensitive and has led to accusations that China is not ‘playing by the rules’.”
In a Tweet, Trump made clear his intentions for his planned tariff increases, “When a country (US) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win. Example, when we are down US$100 billion with a certain country, and they get cute, don’t trade anymore — we win big. It’s easy!”
“China would argue that currency revaluations of the renminbi and opening up of the Chinese domestic market to more US imports are all policies with which it has some sympathy, but there is an issue of sequencing. Open the Chinese economy too quickly, and it could cause Chinese growth to stall this would not be good for China or the global economy,” Glen insisted.
Glen pointed out that post-second world war the global economy has sought to reduce the level of tariff and non-tariff barriers, and has been broadly successful in doing so. Some commentators have voiced concern that these tariffs announced by Trump are contrary to World Trade Organisation (WTO) rules.
According to King, the national security basis of the most recent steel and aluminium tariffs has proven to be a bit of a red herring.
She stated, “As the Department of Defense (DoD) has already stated, the DoD requirements for steel and aluminium are only approximately 3% of US production, and the current context of trade in these sectors does not impact their ability to acquire steel or aluminium to meet national defence requirements. In fact, the DoD expressed real concerned about the negative impact these tariffs might represent for America’s allies.”
However, these reservations were dismissed by Scott Paul, President of the Alliance for American Manufacturing (AAM) in a radio interview broadcast on BBC radio. He believes much of the problem stems from overcapacity in the Chinese steel sector.
He commented, “We view it as a last-ditch effort to save the steel industry of the USA when other options have either failed or have proven to be inadequate to ensure that we are able to restore American market share, protect our national security, and to once and for all end the overcapacity that plagues the steel industry globally.”
Currently, the US has only one aluminium smelter and one manufacturer of high-quality steel. The smelter makes the high-purity aluminium that fighter jets and other military aircraft and vehicles need, and the steel firm makes high-quality steel required for transformers for electricity distribution, as outlined in the daily broadsheet newspaper The Intelligencer.
Paul described how China is responsible for the vast oversupply of steel, often down to “zombie steel mills” that manufacture steel no-one needs. He insisted that half of the world steel that China ships ends up in countries like Korea, Malaysia, Thailand, Vietnam. It is then either transformed, relabelled or mislabelled and shipped on to the US. Paul supports exemptions for countries like Canada and Mexico due to the integrated supply chain networks.
He stressed, “I urge governments around the world to look at the real source of the problem, which is this global overcapacity.”