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US Tariffs Against China: More About Politics Than Economics

US and China are in dispute over shipments of export cargo and import cargo in international trade.

US Tariffs Against China: More About Politics Than Economics

In another controversial move, President Donald Trump has announced plans to impose tariffs on a number of Chinese products and at the same time introduce barriers to Chinese Foreign Direct Investment (FDI) entering the US. A battle around Intellectual Property Rights (IPR) protection and the potential use of cutting-edge technology for military purposes is at the core of this dispute.

This is not the first time the two countries fight over IPR protection. In 2007, the US filed a complaint against China in the dispute settlement mechanism with a positive outcome for the US in 2010. China had to implement a number of measures that would protect IPR. The question is, therefore, why did the US not follow the same route again and announced plans to impose tariffs as a countermeasure to the lack of IPR protection? There are two driving factors behind this move.

First, it is consistent with the Trump administration’s overall approach. There is a clear lack of confidence to resolving these disputes through international bodies such as WTO as this usually takes a long time (the last dispute took close to three years) and a lot of resources. Imposing tariffs on a unilateral basis is considered to make an economic but mostly a political argument.

President Trump clearly stirs up the waters and forces other countries to respond quickly. It is not the first time that tariffs are being used, primarily in a political way, from the US administration. The recently announced plan to impose tariffs on steel and aluminum was a clear message to Canada with regards to renegotiating the North America Free Trade Agreement (NAFTA).

Second, this is a more complicated matter. The main argument is not around trade deficits or anything else but around national defense. China is now a global power and will soon demand to play an equal role on the world’s chessboard. Having weapons that build on cutting edge technology would be immensely important and US wishes to stop China from getting access to these technologies.

There will be winner and losers from this trade war if it develops further. Currently, the US has a $375 billion trade deficit with China. Looking at the data more closely, almost 45 percent of that deficit comes from a single category of products, computer and electronic products. This is a very clear case were technology created in the US is used in other locations with a very cheap cost basis to produce competitively priced products that are then exported back to the US. Imposing tariffs on these products will make them more expensive for US consumers with ambiguous results for the protection of IPR issue.

Looking at FDI, with data coming from FDIMarkets (a Financial Times subsidiary) there have been over 600 greenfield Chinese investments to the US in the period 2003 to 2018, generating over 90,000 jobs and with a capital expenditure of $45 billion in total. The numbers are negligible when compared to the amount of trade. Most Chinese companies identified proximity to customers as their key motive and the vast majority are in the sales, marketing and support functions of an organization. Imposing restrictions will have probably a very small effect on safeguarding technology leaks and IPR protection.

In conclusion, this is another political move from the US administration which has manifest itself through economic tools. Looking at the data it has a doubtful economic outcome but could possibly serve the political goals of Washington.

Fragkiskos Filippaios is a reader in international business in the Kent Business School at the University of Kent.

Trump has imposed tariffs on steel and aluminum shipments of export cargo and import cargo in international trade.

Trade Wars Have No Winners

The last 60 years we have seen a significant move towards trade liberalization both in merchandise goods as well as services. With the General Agreement on Tariffs and Trade immediately after the Second World War, countries indicated their willingness to work together in order to remove barriers to trade and enhance global efficiencies that will generate benefits for all.

This was further reinforced with the founding of World Trade Organization in 1995, an organization that would further facilitate free trade but also act as dispute settlement arbitrator. A number of free trade agreements have also been signed over the same period of time with the European Union moving forward with the creation of the Single Market and Canada, Mexico and US signing the North America Free Trade Agreement.

While protectionist governments have always made efforts to re-introduce barriers to free trade in the past, such as the steel tariff imposed by the Bush administration back in 2002, these disputes were always addressed through the Dispute Settlement Body of WTO.

In fact, the US had to remove those tariffs as WTO’s verdict was that these were not imposed during a period of import surge. Thus far, trade disputes have always been addressed through WTO’s arbitration and countries have accepted the organization’s verdict.

It is the first time in the last few years where major trade partners, such as US and EU, consider direct retaliation moves to each other’s barriers to trade. Moving away from WTO dispute settlement means that retaliation can easily escalate and we might find ourselves in the middle of a trade war between the two most important trade regions in the world with possible implications for other countries. A tit-for-tat approach means that consumers and industries in both regions will lose simply by paying higher prices for final and intermediate goods.

Higher prices that will not necessarily lead to the creation of more jobs as the Trump administration is arguing. In any case, the last time import tariffs were imposed on steel from the US, the actual effect for the US economy was a negative one.

Fragkiskos Filippaios is a reader in international business at the Kent Business School at the University of Kent.

Trump imposed new tariffs on shipments of export cargo and import cargo in international trade.

Is Trump Ready to Embark On Trade War?

Recently, the US administration decided in favor of the introduction of trade barriers on the imports of washing machines and solar products. This move was based on a World Trade Organisation rule that allows countries to re-introduce trade barriers in those cases where evidence clearly suggests that “a domestic industry is injured or threatened with injury caused by a surge in imports.”

It is the first move that will be, possibly, followed by the introduction of trade barriers to other industries such as steel and aluminum. The introduction of these tariff barriers was heavily criticized by China and South Korea the two most important exporters of washing machines and solar products to the US.

Although they have both claimed that they will seek to resolve this issue through the mechanisms offered by WTO it is still not certain that they might not decide to take other actions in imposing trade barriers themselves to products, but primarily services, originating from the US. This could possibly lead to a domino effect with bilateral attempts to retaliate.

This is not the first time a Republican president introduces trade barriers. George W. Bush in the early 2000s introduced tariffs on the imports of steel. The matter was raised from other countries to the WTO and the ruling of the international organization led to the immediate withdrawal of the measures.

It is highly likely that this is going to be the outcome in the washing machines and solar products case. Donald Trump will have gained brownie points internally by fulfilling his promise to put America First but at the same time will put the blame on WTO and its rulings for not being able to maintain the trade restrictions.

But what if this case does not go smoothly and we end up in a trade war? The main losers will be consumers in the US who will have access to a smaller range of products (especially in the case of washing machines) and potentially higher prices. Whirlpool has already announced an additional investment creating 200 new jobs but these will come at a significant cost to the average American consumer.

It is worth examining whether the US administration has performed a cost-benefit analysis of the additional cost for the average consumer against the benefit of protecting the white goods industry and the additional jobs created. In the solar products case things become even more complicated as quite a wide range of these products are not final products sold to consumers but intermediate ones that eventually go as inputs in the production of American firms that either sell in the US or re-export the final goods abroad. These companies will face a steep rise to their costs and will lose in the short term any price/cost related competitive advantage.

You might end up with the opposite of the desirable effect, i.e. losing instead of creating jobs. The US administration makes the over-simplistic assumption that production in the US of solar products can increase overnight at a cost and quality that is competitive to the currently imported goods. This is an assumption that is far from true.

In conclusion, the Trump move, although politically positive for his own profile, could have not only geopolitical implications but also implications for US businesses and consumers. Nowhere in the rhetoric justifying the introduction of tariffs have we seen a solid economic impact analysis or a cost-benefit analysis and therefore both the political and economic outcomes are ambiguous.

Fragkiskos Filippaios is a reader in international business at Kent Business School at the University of Kent in the UK.