Most of these products are already subject to high duties or extensive trade-remedy measures, so the amount of imports from China covered by the new tariffs, including EVs, is small at $18 billion. In fact, the US imports essentially no EVs from China. However, it is a sector of great concern to the European Union, which in October 2023 opened an anti-subsidy investigation into Chinese EVs, which may trigger countervailing duties. The US move may therefore have implications for the pending EU decision on countervailing duties on China.

An extraordinary decision, driven by domestic politics

The US decision on Chinese EVs is extraordinary in four respects:

• First, the 100 percent tariff is prohibitive. Ostensibly justified by China’s own subsidies, it would imply that half of the cost of Chinese EVs is paid for by government funds, far beyond the range of other estimates.
• Second, unlike previous protection episodes, such as when the US was responding to the threat of Japanese car manufacturers, there are virtually no Chinese car imports today, and US manufacturers, especially General Motors, already have large footprints in China, whereas they were marginal in Japan. Though GM sales in China have declined recently, for more than a decade until 2023, China was a profit engine and the company’s top sales market.
• Third, the EV tariffs depart from the US emphasis on national security to adopt anti-China measures (unless one believes that EVs are meandering Chinese spies), suggesting that all sectors are now in play.
• Fourth, the measure runs counter to the Biden Administration’s green transition goals, which include large tax breaks for EVs, intended to lower the cost for consumers of green alternatives.

The decision on EVs and its timing are strictly political and reflect the extraordinary power of the United Auto Workers union in swing states in the run-up to the US presidential election. The decision is nevertheless a surprise in the light of recent efforts at China-US rapprochement, including exchanges at senior military level, and talks on AI and climate change. China will be affronted and many China-dependent US firms, which had hoped for tariff reductions, will be disappointed. The decision is, however, consistent with US Trade Representative Katherine Tai’s “Worker Centric” trade policy which claims to place workers’ interests ahead of those of firms.

Global impact

The immediate economic impact of the tariffs will be minimal at the macro level, whether on quantities, prices, or exchange rates; $18 billion is tiny relative to the size of the two economies, and even the $500 billion that China exported to the US in 2023. Even so, they will hurt some Chinese companies and US importers. The effect on US consumers and prices will be minimal and take the form of lost future opportunities rather than immediate cost, especially in relation to EVs.

China’s retaliation (it always retaliates) will be proportionate and limited. If the past is a guide, retaliation will affect mainly some US agricultural exports, which can be sourced easily elsewhere, and US exporters will be compensated for their losses in China. But even if the Chinese government does not retaliate against US car exports and investments in China (which it continues to court), the Chinese consumer is unlikely to respond well to America’s extreme measure on EVs when he or she chooses the next car to buy.

Perhaps more worrying is the further escalation of tensions with China that the tariffs represent – a dangerous trend with many repercussions. It may undermine any Chinese willingness to play a moderating influence on the war in Ukraine. The tariffs also quash any notion that the US intends to abide by World Trade Organisation rules. These two considerations, by themselves, increase policy uncertainty globally and are bound to have a dampening effect on international trade and investment.

The US approach diverges from that of the EU, which is building a case for countervailing duties under WTO rules. Although the outcome may also be new tariffs, in the EU there will have been due process based on evidence. But politically, prohibitive US tariffs place enormous pressure on the EU to apply its own. Even though there is no immediate threat of trade diversion, EU firms such as Stellantis, and unions that lobby for tariffs, will argue that Chinese EV exporters, cut off from the US market, will focus on the huge EU market instead. Though EU firms are still the largest exporters of EVs from China to the EU by a wide margin, the share of Chinese indigenous manufacturers is rising rapidly.

The adverse effect on trade relations of the new tariffs will extend beyond trade under the WTO to encompass trade under regional agreements. This is because US politicians are determined to avoid China-sourced products coming in through the back door – strict rules of origin are already there to prevent that – and to prevent the products of Chinese-invested companies from entering. In their view, even if batteries, EVs and semiconductors are manufactured by a Chinese-invested company in a US trading partner, and are entitled to tariff-free treatment under a regional agreement, they should be discouraged. This also applies to Chinese companies producing in the US. Mexico and Morocco are two examples of US regional trade agreement (RTA) partners that host Chinese manufacturers of batteries and soon of EVs, where frictions are bound to rise.

Even though the EU remains more open to Chinese producers on its territory than the US (eg BYD in Hungary, CATL in Germany and Hungary), it will face a similar challenge with its RTA partners if, as expected, it applies its own tariffs on Chinese EVs. These tensions among parties to RTAs, together with China’s retaliation against EU and US EV tariffs, is likely to mark this episode as a classic example of protectionist contagion.

A separation of Chinese and US value chains?

The EV value chain is destined to increase greatly in importance to mitigate climate change. From the standpoint of US industrial policy, a big question raised by the prohibitive tariffs on Chinese EVs and by the accompanying resistance against hosting Chinese producers is whether a US EV/battery value chain entirely separate from China is sustainable and realistic. The US is undoubtedly capable of developing such a chain, but can it do so at reasonable cost and without falling behind in quality and efficiency? On the answer to this question rests the calculation of long-term consumer losses from the tariffs against the counterfactual, the speed of the US green transition, the burden on government finance from the possibility of more subsidies, and even the solvency of US car companies.

Even a cursory examination of China’s current competitive advantage in EVs suggests that the answer to the question is no. China produces almost twice as many EVs as the EU and US combined, the share of EVs in new car registrations is rising rapidly, and it has reportedly moved ahead at the combined quality/price/technology frontier. The latest BYD Model, the Seagull, sells in China at slightly less than $10,000, and has been highlighted as an illustration of China’s competitiveness. Tesla founder Elon Musk has been openly pessimistic about the West’s ability to compete with Chinese cars.

China’s cost advantage arises from a combination of scale, advanced and lower-cost battery technology, availability of IT and AI expertise, lower labour costs, and intense competition in the Chinese market, with dozens of domestic and foreign producers active. Central and provincial government subsidies still play a role, and their extent is what the EU investigation will evaluate. The only available and presumably reliable numbers on subsidies received are those declared by Chinese publicly traded companies such as BYD, and are small relative to turnover or value added.

China’s EV exports increased by over 60 percent in 2023 to reach 1.2 million units, directed mainly at Europe, Mexico and several emerging markets in Asia. Since the biggest Chinese EV manufacturers and their battery suppliers have developed distinctive assets (brand, technology and design), they are new able to set up manufacturing and distribution channels overseas, in markets including Thailand, Indonesia, Australia, Morocco, Mexico and Hungary. Chinese EV manufacturers are also rapidly gaining market share in China, where competitors are increasingly struggling.

As EVs become even more established worldwide, the scale advantage of the most successful Chinese producers over US-based producers will only increase, as will their capacity to target individual markets with customized products on a common platform. Finally, it is important to note that the largest US car companies, Ford and General Motors, are not in the best shape to compete in the intensifying EV market. Standard and Poor’s rates Ford’s and GM’s long-term debt at BB+ and BBB respectively, just below and just above investment-grade. The market capitalisations of BYD and Xiaomi, the two largest Chinese EV producers, are $86 billion and $62 billion respectively, while those of GM and Ford are both around $50 billion.

The EU’s strategy

Should the EU adjust its policies in the light of the new Biden tariffs, and if so, how? Note that since there will be no surge of Chinese EVs diverted from the US market, it is not a given that the EU needs to alter its course.

The EU’s trade strategy on EVs must pursue six main objectives: 1) a fair deal for EU manufacturers insofar as they are affected by China’s subsidies in excess of subsidies they receive at home, and one that is in line with WTO rules; 2) stand up for the interests of EU car exporters and manufacturers in China, which are also recipients of various subsidies; 3) the long-run health and competitiveness of the EU car industry; 4) protect the interests of consumers, especially those with low incomes, who would benefit greatly from cheaper cars; 5) ensure the speed of the green transition; 6) maintain a cooperative and constructive relationship with China for both economic and geopolitical reasons. To progress towards all six objectives simultaneously is a challenge, but can be done:

• The EU’s stated objective should be to arrive at competitive neutrality in the EV sector, enhancing and not preventing fair competition that will promote productivity growth and innovation. Accordingly, the countervailing duty margin on Chinese EVs should be computed objectively and realistically; it should be defined and documented in a way that is entirely robust to legal challenge at the WTO. It should also take account of subsidies at home to reduce the EU’s vulnerability to a Chinese counter: if the net subsidy is found to be zero, the countervailing duty margin should be zero, and the countervailing duty, if any, should be set at the minimum level consistent with the findings. The duty should be accompanied by a proposal to set up a China-EU working party with a mission to identify and monitor EV subsidies, and to reduce them with a view to eliminating the duty margin over a defined period.
• To ensure the long-term vibrancy and competitiveness of its car industry, to safeguard the interests of its consumers, to sustain the green transition, and to maintain good relations with China, the EU should adopt an open-door policy on Chinese inward investment in its EV and battery sectors, while insisting on continued fair treatment of its firms that have already established footholds in the Chinese market. The EU may need to prepare, ultimately, to confront US restrictions on China-invested cars produced in Europe, such as Geely-owned Volvos.
• It is possible that, once embarked on this course, the EU may nevertheless face an excessively rapid penetration of imported Chinese EVs sometime in the future. Should that happen, the EU may resort to a WTO-compatible safeguard measure. The advantage of the safeguard course is that the increase in tariffs would be time bound (three years). Safeguard tariffs must, however, apply to all imports, not only those from China.

Uri Dadush is a Non-resident fellow at Bruegel, based in Washington DC, and a Research Professor at the School of Public Policy at the University of Maryland where he teaches courses on trade policy and on macroeconomic analysis and policy.

To read the full analysis as published by the Bruegel, click here.

The post Rippling Out: Biden’s Tariffs on Chinese Electric Vehicles and Their Impact on Europe appeared first on WITA.

The US is mulling an end to the de minimis provision that allows shipments valued under US$800 to enter the world’s largest consumer market, a move largely aimed at Chinese exports. Such a move would escalate a raft of trade controls Washington has already placed against China, including controls on semiconductor technology and outbound investment.

In many ways, a key piece of legislation impelling the momentum is the US Uyghur Forced Labor Prevention Act (UFLPA). Passed in late 2021, the ambition of the UFLPA is far more comprehensive than the “small yard, high fence” scope of containment policies, as it seeks to restrict imports in toto from an entire region inextricably linked to global supply chains. Growing political pressure and technical know-how within the retooled oversight agencies portend much more robust UFLPA enforcement across a growing category of goods.

This is likely to be one of the more conspicuous developments in the US’ international trade posture in 2024. The Biden administration signaled last week that it may escalate controls on China’s access to sophisticated semiconductor technologies, as Commerce Secretary Gina Raimondo vowed “we will do whatever it takes.” Alongside these tech controls, Washington has existing policy weapons it could use to target the extent to which Xinjiang is embedded in global supply chains, including in strategic industries suffused with Chinese overcapacity. Early signs of enhanced enforcement action suggest a particular focus on the automotive sector.

Henry Storey is a senior analyst at Dragoman, a Melbourne-based political risk consultancy. He is also a regular contributor of The Interpreter published by The Lowy Institute.

To read the full article published by the Hinrich Foundation, click here.

The post US Sets Trade Policy Sights on China’s Xinjiang appeared first on WITA.

Since its accession to the World Trade Organization in 2001, the CCP has pursued a multidecade campaign of economic aggression against the United States and its allies in the name of strategically decoupling the People’s Republic of China (PRC) from the global economy, making the PRC less dependent on the United States in critical sectors, while making the United States more dependent on the PRC. In response, the United States must now chart a new path that puts its national security, economic security, and values at the core of the U.S.-PRC relationship.

The House Select Committee on the Strategic Competition between the United States and the Chinese Communist Party (Select Committee) has studied the PRC’s pattern of aggression and economic manipulation and recommends the following strategy for economic and technological competition with the PRC.

The strategy that follows is guided by three pillars:

First, the United States must reset the terms of our economic relationship with the PRC and recognize the serious risks of economically relying on a strategic competitor that harnesses the power of the Party-State to compete economically. While economic exchange with the PRC will continue, the United States government and the private sector can no longer ignore the systemic risks associated with doing business in the PRC or allow companies’ pursuit of profit in the PRC to come at the expense of U.S. national security and economic resilience. For over two decades, the U.S. government and businesses have sought access to the PRC as a market for consumer goods, a source of low-cost production, and a recipient of U.S. investment. In that time, the PRC has failed to live up to its trade promises, tightly controlled access to its markets, stolen hundreds of billions of dollars a year in technology and IP, and employed subsidies and unfair trade practices to squeeze out American competitors. These are not merely an assortment of separate moves made by individual actors but a feature of Beijing’s long-term strategy to harness the scale of its domestic market to achieve global dominance for PRC firms in critical technology and products and to make foreign countries, including the United States, dependent upon the PRC and subject to its coercion.

Second, the United States must immediately stem the flow of U.S. technology and capital that is fueling the PRC’s military modernization and human rights abuses. General Secretary Xi has made plain his intent to “resolutely win the battle of key and core technologies” and build the People’s Liberation Army (PLA) into a “great wall of steel.” At present, U.S. capital, technology, and expertise aid that effort. They support the PLA’s modernization, the CCP’s predatory technological goals, and genocide. The United States must change course. To quote Dr. Eric Schmidt’s remarks at the Select Committee’s hearing, “Leveling the Playing Field,” “it’s never too late to stop digging our own grave.”

Third, the United States must invest in technological leadership and build collective economic resilience in concert with its allies. The best defense against the CCP’s predatory economic practices will fail if not paired with a proactive strategy to invest in America and increase economic and technological collaboration with likeminded partners. The United States must bolster its unique advantages in technological development by funding research, incentivizing innovation, and attracting global talent in critical areas. In addition, the United States needs to invest in workers, who must remain competitive for jobs of the future, including by helping workers acquire skills-based training and adapt to technological transitions.

Consecutive U.S. presidential administrations have sounded the alarm on growing U.S. dependence on the PRC for critical goods, including rare earth minerals, components and chemicals used in U.S. weapon systems, and pharmaceutical products and precursors. The PRC has already demonstrated its willingness to weaponize these dependencies to coerce the United States and its allies and seek to constrain our policy options. The PRC’s growing leadership in key critical and emerging technologies vital to long-term competitiveness heightens the risks. 

The strategy presented here includes sets of findings and recommendations for each pillar. Taken together, they would level the economic playing field, reduce the PRC’s hold on U.S. and allied critical supply chains, and invest in a future of continued economic and technological leadership for the United States and its likeminded allies and partners.

To read the full committee report, click here

The post Reset, Prevent, Build: A Strategy to Win America’s Economy Competition with the Chinese Communist Party appeared first on WITA.

Introduction

Since 2018, the United States and China have been embroiled in a trade war. The trade war stems from US President Donald Trump’s decision to impose tariffs on several products and commodities imported from China. In response to the policy, China also imposed tariffs on several products and commodities imported from the US. Research conducted by Chad P. Bown (2022) from the Peterson Institute forInternational Economics shows that as of July 2018, the average US tariff on imports from China was still 3.8%. However, tariffs on imports from China gradually increased until they peaked at 21% in September 2019 and then dropped to 19.3% in February 2020.

Meanwhile, on the Chinese side, in July 2018, the average tariff on imports from the US was at 7.8% and then gradually increased to 21.8% in September 2019. As of February 2020, Chinese tariffs on imports from the US decreased to 21.3% and reached a low of 21.2% on July 2020. Furthermore, based on the impact of tariffs on the percentage of trade, around 66.4% of US imports from China and 58.3% of Chinese imports from the US in June 2022 are still affected by tariffs set against each other.

There are efforts between the US and China to defuse the trade war through the Phase One agreement, which was agreed upon in December 2019. The two countries agreed on structural reforms to China’s economic and trade regime, particularly in intellectual property, technology transfer, agriculture, financial services, and currency and foreign exchange. In the deal, China also committed to increasing the imports of goods and services from the US. Furthermore, a dispute resolution system was established with immediate and effective implementation and enforcement. Finally, the US agreed to modify Section 301 of the Trade Act of 1974. Despite these efforts, as shown from the data in the previous paragraph, the tariffs that the US and China imposed on each other remained relatively high.

The US put several Chinese companies on the Entity List as the trade war escalated between the two countries. The US Bureau of Industry and Security (2022) reported on August 23rd, 2022, that about 600 Chinese companies were already included on the list, with 110 companies included during President Joe Biden’s tenure. In practice, companies on the Entity List will have restrictions on access to commodities, software, and technology from the US. However, US entities may export, re-export, and transfer such matters to companies on the Entity List with a license from the US Bureau of Industry and Security.

The conflict between the US and China is not limited to political economy issues but also security politics. China’s claim to much of the South China Sea, known as the nine-dashed line, is contrary to the principles of the US freedom of navigation. This situation leads to freedom of navigation operations (FONOPS) by the US Navy in those waters that China regards as part of its territories as opposed to its claims. The existence of Taiwan also creates issues between the two countries. Although since 1972, it has recognized the communists in Beijing as the sole representative of China, the US maintains its ties with nationalists in Taipei and ensures their independence from Beijing. China’s growing economic and military power over the past two decades allows the country to become increasingly assertive of Taiwan. This raises tensions with the US as Taiwan’s ally and security guarantor.

The conflict between the US and China prompted the two countries to reduce their dependence on each other. US manufacturing imports from China have decreased, while Asian countries categorized as low-cost countries, have increased. At the same time, the issue of reshoring US companies’ operations in China arose. A survey conducted by A.T. Kearney (2022) found that about 47% of executives of US manufacturing companies operating in China have moved part of their operations back to the US in the past three years. 29% said they would restore parts of their operations in the next three years, and 16%said they had considered reshoring but are yet to make a decision. In the survey, US company executives also outlined that their options also include Mexico, Canada, and Central American countries (nearshoring), not limited to reshoring to the US. This decision coincides with the trend of automation by US companies; instead of looking for cheap labor, they are replacing them with robots. The process creates challenges for countries that host part of US companies’ operations characterized by the labor-intensive and technology-laden process.

From the Chinese side, the disruption caused by the conflict with the US encourages them to become more economically self-sufficient. Such efforts to achieve self-sufficiency are made through the dual circulation model, which includes changing the growth model from export-based to domestic consumption and reducing dependence on imports. Concerning the second element, according to the Economist Intelligence Unit (2020), China focuses on three sectors. First, technology with a priority towards semiconductors. China provides fiscal incentives and subsidies, and encourages cooperation between industries and universities to reduce dependence on US semiconductor companies or companies from other countries that use US technology. China also provides fiscal incentives and subsidies, and encourages cooperation between industries and universities. The second sector is energy. China does not rely on the US or its allies for energy supplies, however, shipping oil and gas by sea is vulnerable to a blockade or interception. The threat of a blockade prompted China to increase its renewable energy sector investment. The third sector is food. China’s agricultural sector is labor-intensive, but they experience labor shortage and are dependent on imports of seed and technology. This limitation prompted a policy of agriculture modernization from labor-intensive to technology-intensive.

Alfin Febrian Basundorois a graduate student at the Strategic and Defence Studies Centre, Australian National University, Canberra, Australia.

Muhammad Irsyad Abraris a graduate student at the Department of International Relations, Universitas Gadjah Mada (UGM), Yogyakarta, Indonesia.

Trystantois an undergraduate student of international relations at Universitas Gadjah Mada (UGM), Yogyakarta, Indonesia.

To read the abstract as it was originally posted by the Journal of World Trade Studies, click here.

To read the full research article, click here.

The post The Positive Impact of US-China Trade War on Global South’s Position in the Global Value Chain appeared first on WITA.

Trade wars are usually bad for the countries involved. After the U.S. and China launched tit-for-tat tariffs on imports from each other in 2018, prices rose for American consumers, jobs were lost and corporate profits fell. Economic growth in both countries slowed. 

There was also some fear that the Trump administration’s tariffs, which hit other U.S. trading partners, would suppress global exchange and lead to a new period of protectionism. 

But for countries not in the middle of the trade war, research suggests, the opposite happened. 

In a working paper, UCLA’s Pablo Fajgelbaum, Yale’s Pinelopi Goldberg, UC Berkeley’s Patrick Kennedy, Yale’s Amit Khandelwal and the World Bank’s Daria Taglioni describe how “bystander countries” — those on the sidelines of the U.S.-China dispute — increased their exports of products subject to the tariffs to both the U.S. and to the rest of the world. (Exports to China were mostly unchanged.) 

The findings suggest that these countries didn’t just shift goods from their existing trading partners to fill a gap caused by the higher tariffs. Instead, they were able to boost production and increase exports of targeted goods into new and expanded markets. Overall, bystander countries increased their exports of taxed items an average of 6.7% during the period studied, compared with nontaxed products.

Winners and Losers 

“The trade war created net trade opportunities rather than simply shifting trade across destinations,” the authors write. 

Not all countries benefited, though. Some — notably Vietnam, Thailand, Korea and Mexico — were able to boost exports significantly, in part by providing substitutes for goods subject to the U.S.-China tariffs. Others, such as Ukraine and Colombia, saw a decline, largely because their exports complemented goods hit by the tariffs. 

The U.S.-China trade war began in mid-2018 when then-President Donald Trump hit China with a series of rising tariffs on a variety of imported goods and China retaliated by raising duties on U.S. products. (At the same time, the Trump administration also imposed duties on steel, aluminum and machinery imports from other trading partners.) The U.S. tariffs affected about $350 billion in imports from China, or about 18% of the total, while China’s tariffs covered about $100 billion, or about 11%, of goods imported from the U.S. 

Although trade tensions eased in 2020 when the two countries agreed to put a freeze on plans for additional trade duties, the existing tariffs remain in place.

Tariffs Caused a Huge Shift in Trade

The tariffs quickly had an impact. An analysis by the Peterson Institute for International Economics found that in 2022, Chinese imports subject to the highest U.S. tariffs — including semiconductors, furniture and some consumer electronics — were about 25% below their levels before the start of the trade war. The decline wasn’t due to a larger economic slowdown — Chinese imports that weren’t covered by added duties, such as laptops and computer monitors, increased by 42%.

But what about the rest of the world? To see how the trade war affected exports from bystander countries, the authors examined data from the United Nations’ Comtrade database about the trading patterns of the 48 largest exporting countries, (excluding oil exporters) between 2014 and 2019. 

They found that bystanders increased exports to the U.S. for products with high tariffs, but not to China. Shipments to the rest of the world increased for products subject to both U.S. and Chinese tariffs. Not only was there considerable variance among exporting countries, but also the most successful were those that were able to increase exports to the rest of the world, not just to the U.S. 

Two factors seem to explain the difference. For one, successful exporters tended to ship goods that were substitutes for Chinese imports. So when U.S. customers looked for a replacement for, say, smartphones made in China, countries like Vietnam that made phones were poised to benefit.  

What’s more, they were able to scale up production and achieve economies of scale so that the unit costs of their goods fell. This meant that the countries not only could compete successfully with the higher cost of taxed items, but their products became more competitive in markets that weren’t subject to the tariffs. 

Vietnam, for instance, was one of the biggest winners from the trade war, increasing its exports of tires, sweatshirts and vacuum cleaners to both the U.S. and the rest of the world. 

The study also suggests that successful countries weren’t just lucky enough to already specialize in products that would increase in demand after the trade-war tariffs hit. Instead, country-specific factors — such as a strong labor market or preexisting trade agreements — likely accounted for all the variation among countries.

Michael Totty is a freelance reporter and editor. Previously, he was a news editor with the Wall Street Journal in charge of assigning and editing Journal reports on technology, energy, health care, management and other topics. Totty works from Berkeley, California.

To read the full research brief, please click here. 

To read the full report as it was originally published by the National Bureau of Economic Research, click here.

The post In U.S.-China Trade War, Bystander Countries Increase Exports appeared first on WITA.

The relationship between the United States and China is destined to be increasingly fractious. The two countries occupy geopolitical tectonic plates, the movement of one unavoidably generating friction with the other. It is an open question as to how much the world economy, where the market has largely determined trade flows to date, will be reshaped to reflect geopolitical forces.

Global trade figures in gross terms do not reflect the growing geopolitical rivalry.

Despite being strong allies of the United States, for Germany, Japan, and Korea, China is the largest trading partner. In this still undivided world economy, the US, EU, Japan, and the Republic of Korea accounted for 42% of Chinese merchandise exports in 2021. In 2022, the EU, Taiwan, the Republic of Korea, Japan, and US supplied 43% of Chinese imports. Not even the invasion of Ukraine by China’s closest friend, Russia, has caused the trading system to divide into two camps – one led by Beijing and the other by Washington.

The overall numbers tell only part of the story. While the volume of trade between the US and China remains high, bilateral strategic decoupling is proceeding. This is a US-China bilateral phenomenon. It is reflected in the trade of others only selectively. For America’s allies, the US-China trade war had been a spectator event only. Two exceptions began to occur – one for supplying geostrategic-relevant goods, services and technology, and a second the result of identifying sources of geostrategic relevant supplies. Where the US pressed Japan and the Netherlands to join in restricting exports to China of semiconductor production equipment, they have done so. Separately, learning from the European experience with excess dependency on Russia for fossil fuels, Western capitals have begun planning the diversification of sourcing of critical minerals, to avoid dependency on a single country, particularly China.

Any decoupling that does occur between China and the West will likely be substantially “made-in-China”, that is caused by China’s own policies. US preaching in favor of supply chain resilience would fall on deaf ears were there no concerns generated by China with respect to its reliability as a supplier of critical materials.

The general trade policies of the two rivals will also shape trade flows. China is aggressively moving to lower barriers to its trade with others, first through RCEP and then applying to join CPTPP. The United States has moved in the opposite direction, failing to deepen economic relationships with even its avowed friends. In fact, through its recent trade measures it has tended to alienate these trading partners.

Other factors, not traditionally the subject of trade agreements, will contribute to fragmenting the trading world. The contest over global standards has yet to play out – setting standards regarding 5G telecommunications, internet protocols, privacy, AI, electric vehicles and other products at the frontiers of technology may divide markets. Potential effects on trade can be expected as a result of the debt owed to China by the beneficiaries of the Belt and Road Initiative (BRI) and China’s other development programs. For example, the need to repay debt has enabled privileged Chinese access to raw materials, a phenomenon just beginning to be witnessed. The exponential growth of Chinese overseas investment, which will affect trade, is likewise at an early stage. Another factor is the RMB perhaps taking on a more central role as a global currency. All of these economic and financial variables may play a part in shaping world trade. 

None of the aforementioned influences may prove to be as consequential for world trade as the deterioration of the multilateral trading system itself. The immense increase in global economic prosperity made possible by international trade over the last three-quarters of a century has depended in very large part on the certainty provided by the rule of law. As the two largest trading countries begin to ignore the existing structure of rules, this could become a tipping point, seen in retrospect as the end of an era and the beginning of another, a darker one. If the rules are increasingly ignored, the new age would more likely than not be characterized by slower economic growth and fragmented trade.

This is not to suggest that either of the two contesting powers have a conscious plan to discard the current trading system. Neither appears to have reached the conclusion that an end to the multilateral trading system would be in its interest. It is possible that neither is fully conscious of the spreading damage caused by their acting at cross purposes with the current rules. But their conduct is telling. In the case of the US, the departure from the international rule of law is demonstrated by ending binding WTO dispute settlement by blocking Appellate Body appointments, applying tariffs at odds with its contractual commitments (tariffs on trade with China in general and embracing a national security rationale to restrict steel and aluminum imports from all sources), and unapologetically subsidizing domestic industries without regard to any international rules. China’s departure from the rules is at one and the same time more overt and more opaque. China uses trade measures for purposes of coercion and denies that market forces must govern competitive outcomes as it increases the role of the state and the Communist party in its economy.

Neither Washington nor Beijing has declared an end to its adherence to the WTO-administered multilateral trading system. The reverse is the case. Perhaps current conduct at odds with the system is an aberration. US officials state that there is no general policy of decoupling from the Chinese economy. China’s policy of working towards “dual circulation” has not been accompanied by it announcing a retreat from global trade. What is clear is that each wishes to be less reliant on trading with the other. The world has seen nothing like this in inter-hemispheric trade since US measures toward the Empire of Japan in 1940-41, and no analogy with the past is a sufficient guide to the future.

The game changers for the global trading system consist of the adoption by the United States and China, for domestic reasons, of economic nationalism as a controlling factor in formulating their foreign economic policies. In the US the Trump Administration embraced economic nationalism primarily with rhetoric. The Biden Administration made the rhetoric reality in its major economic legislative initiatives. For China, nationalist policies were evident in its statements about achieving dominance in key industries of the future and the episodic deployment of trade measures for purposes of coercion. China’s domestic concerns for regime stability and its contest with the United States led it to support Russia during its invasion of Ukraine. Its priorities blinded it to the inevitable Western reaction. Neither nation has room in its current world view for actively supporting multilateralism.

Most other countries continue to steer an uncertain, non-aligned course, which may increasingly be governed by ad hoc determinations of self-interest. The world’s largest trading bloc, the European Union, has called for a policy of “strategic autonomy”. Whatever this turns out to be, it is not a vote to join Beijing or Washington in a trading bloc, nor is it a declaration in favor of the multilateral trading system. As for some of the others, one would not expect to hear from India nor South Africa that adherence to the existing multilateral trading system is a national priority. Neither are there any indications whatsoever of any country, including these two, aspiring to join a trade bloc.

The bottom line: world trade is not at present coalescing into two trading blocs, but the center, the multilateral trading system, is under stress. The question increasingly asked in academic symposia is whether it will hold.

Alan Wm. Wolff is a distinguished visiting fellow at the Peterson Institute for International Economics. He was Deputy Director-General of the World Trade Organization, Deputy US Special Representative for Trade Negotiations (USTR), and USTR General Counsel. He was a principal draftsman for the administration of the Trade Act of 1974, which provided the basic US negotiating mandate for future US trade negotiations. His book, Revitalizing the World Trading System (Cambridge University Press), is being published this month.

To read the full paper, please click here.

The post Discarding a Utopian Vision for a World Divided: The Effect of Geopolitical Rivalry on the World Trading System appeared first on WITA.

Furthermore, more recent developments, and in particular the U.S.-China Economic and Trade Agreement concluded in February 2020, require attention as their protectionist nature can be regarded as a factor limiting the further development of China-U.S. trade relations. This could also affect their WTO trade partners. These historical as well as more recent events set the stage for viewing the effects of COVID-19 on China-U.S. trade relations. 

This chapter, both in its theoretical and empirical layers, mainly applies the analyticaldescriptive method, but also uses the normative when the author shares his conclusions and opinions. Comparative analysis was used in commenting on the historical path of China’s development, its long term economic relations with the U.S. economy and their implications for the global economy. This was done bearing in mind political factors and the changing geopolitical environment. 

The focus of the analytical section is predominantly on trade in goods, as this plays a key role in the build-up of China’s export surplus, which consequently leads to a widening of the international payment disequilibrium. Therefore, the bilateral trade balance and the factors shaping it in the long term are analysed. It is argued that its growing imbalance in favour of China has substantially contributed to international imbalances of payments and consequently to the P.R.C.-USA trade war. 

While theoretically and methodologically the chapter is located in the area of international economics, application of an interdisciplinary approach and analysing how changing patterns of global political relations increasingly affect international economic relations is the key contribution of this chapter. In this context, the author builds on prior research on the opening mechanism of the Chinese economy, the specifics of its market transformation, theoretical and practical aspects of international payment imbalances as well as factors and determinants of China-U.S. economic relations within the changing pattern of the world economy and global political environment.

To read the full chapter, click here

The post China-United States Trade in the Long Term Implications for the World Economy appeared first on WITA.