Trade war: causes and consequences

The world is witnessing a fierce trade conflict between the US and China. It all started in January last year when US President Donald Trump ordered a ‘section 301’ enquiry against China for intellectual property theft.

Under this section, the American president can take all appropriate action, including retaliation, to obtain the removal of any act, policy, or practice of a foreign government that violates an international trade agreement or is unjustified, unreasonable, or discriminatory, and that burdens or restricts US commerce.

The US investigating committee concluded that, China’s acts, policies and practices related to technology transfer, intellectual property and innovation are unreasonable and discriminatory.

Consequently, in April 2018, the US authority came up with a list of 1,333 Chinese goods, valued at $50 billion, that would be subject to an additional 25 percent tariff. China hit back with reciprocal tariffs on a list of American goods of equal value, matching US threats on a dollar-for-dollar basis.

History suggests, trade wars are not that uncommon. There are number of precedence of such trade conflicts between these two countries. During the last thirty years, America launched five ‘section 301’ investigations against China. In all those cases conflicts were resolved either by diplomatic ways or by the dispute settlement mechanism of WTO.

Disputes were settled quickly in the past as in most of the cases China did not want to annoy its biggest trade partner and, they lacked the bargaining power as well.

In 1991, when allegations were made against China for unfair trade barriers and not having adequate intellectual property protection; China immediately took measures to promote intellectual property protection and eliminating trade barriers unilaterally.

China faced two more ‘Section 301’ investigations in 1994 and 1996 for the same old reasons. This time it was not one-sided action taken by China only, rather efforts were made by both sides.

China promised to enhance intellectual property protection, and the US also agreed to provide more technical assistance to China.

Another investigation was launched against China in 2010. This time the dispute was resolved by WTO dispute settlement process.

As China became an economic superpower, naturally, they earned that bargaining power to negotiate things differently. It was quite evident during this ongoing crisis that, each time the US took any measure, China retaliated.

The US and China relationship has passed through several phases in last seven decades. First two decades after the inception of People’s Republic of China was not that friendly between the two countries.

However, right after the visit of US President Nixon to China in 1972 their relationship entered into a new era. China became one of the key strategic allies of the US in its fight against Moscow and this warm rapport continued until the collapse of the Soviet Union in 1991.

Thereafter, the economic cooperation between the two countries continued to get stronger. In the next 20 years China become the largest trade partner of the US. Bilateral relationship twisted once again when China under the leadership of Xi Jinping started to exercise a more assertive foreign and security policy across the globe.

Mistrusts started to creep in. A good number of thinktanks believe, the ongoing trade war is an outcome of the prevailing distrusts between the two economic superpowers. History has time and again proved that, trade disputes are not necessarily driven by economic reasons only, many a times politics do play critical role as well.

In this context, the US Japan trade war can be sighted as an example. After the second world war, Japan was essentially in a subordinate state not only militarily but also economically and politically because of the safeguard treaty signed in 1951.

However, as Japan started to recover its strengths they sought more equal relationship which eventually resulted in counter attacks from the US. Japan was literally forced to impose restrictions on its exports of a wider range of products like automobiles, colour televisions, semiconductors, textiles etc.

The 1985 Plaza Accord was again a big blow to Japan’s economic progress as this treaty intervened the country’s exchange rate policy. Yet, Japan continued to gain its potencies economically. As the demand for equal rights became stronger the bilateral trust between the two countries deteriorated. 

Mistrust further escalated when a Japanese company Mitsubishi Real State bought the historic American landmark Rockefeller Centre. Dismayed US media portrayed this incident as ‘Japan bought the soul of the United States!’ The book titled ‘The Japan That Can Say No’ published by the former Chairman of Sony Corporation Akio Morita was a great testament to Japanese public sentiment on its overall status.

Japanese local industries were badly affected by the export restrictions. However, this opened up the opportunity to develop their global production facilities and upgradation of products.

For instances, since 1982, Japanese auto companies have set up a number of factories in the US, including the Toyota Kentucky plant, the Honda Ohio plant, and the Nissan Tennessee plant.

Toyota and GM established the largest joint venture in the automotive industry. At the same time, they started to produce high-end luxury cars. Brands like Lexus, Infiniti, Acura became very popular in the US market. These two actions, in fact, helped Japan to face the trade war successfully.

If the US-China trade war continues, IMF warned that, the GDP of the US and China will be reduced by 0.9 percent and 0.6 percent respectively, which would cause a 0.4 percent fall in long-term world GDP. 

Few Asean countries can take the advantage of this situation as China might think of shifting their production units to these countries to avoid the additional tariff while exporting to the US. Indian exporters can also be benefitted as the US importers would look for alternate supply source. 

Good news is that, efforts were underway from the top leaders of the two countries to come to a solution. Chinese President Xi Jinping rightfully said: “China and the United States both benefit from cooperation and lose in a confrontation.”

The writer is the chairman and managing director of BASF Bangladesh. Views expressed here are personal.