In a new report, by the United Nations Conference on Trade and Development (UNCTAD), titled Key Statistics and Trends in Trade Policy 2018: Trade tensions, implications for Developing Countries, it has been stated that India is one of the countries that stands to benefit from the ongoing “tit-for-tat” trade tensions between the world’s top two economies i.e. US and China. Other expected beneficiaries include the members of the European Union, due to a USD 70 billion increase in the bloc’s exports, as well as Japan, Mexico and Canada, due to increase in their exports by more than USD20 billion each. This will reflect in the global export and import patterns.
The American-Chinese trade tensions started in early 2018 when both countries, imposed tariffs on each other’s goods worth $50 billion. This escalated in September 2018 when the US imposed 10% tariffs on $200 billion-worth Chinese imports. In retaliation, China imposed tariffs on additional US imports worth $60 billion. This imposition was initially supposed to increase to 25% in January 2019. However, both countries decided in early December 2018, to freeze further tariff increase, until March 1, 2019.
According to the study, bilateral trade tariffs would be of no help to the domestic firms in their respective markets. Pamela Coke-Hamilton (head of the UNCTAD’s international trade division) said that, “because of the size of their economies, the tariffs imposed by Unites States and China will inevitably have significant repercussions on international trade.”
She also said that “our analysis shows that while bilateral tariffs are not very effective in protecting domestic firms, they are very valid instruments to limit trade from the targeted country. The effect of US-China tariffs would be mainly distortionary. US-China bilateral trade will decline and replaced by trade originating in other countries.”
The study has estimated that out of the $250 billion-worth Chinese exports that have been subjected to US tariffs, about 82% will be absorbed by firms of other countries, 12% will be retained by the Chinese firms and only 6% will be captured by the firms in the US. Similarly, about 85% of the $85 billion US exports will be captured by other countries, US firms will retain less than 10% and Chinese firms will capture about 5%. These estimates are consistent across multiple sectors, ranging from communication equipment, wood products and furniture, precision instruments and chemicals.
As the chart below reflects, Europe will benefit the most from this trade war, simply because bilateral tariffs alter the global competitiveness and economic capacities, in a manner favourable to firms that are not operating in the countries directly impacted by them. Thus, the European Union’s exports will probably increase the most, as it captures about $70 billion of the US-China bilateral trade i.e. $50 billion-worth Chinese exports and $20 billion-worth American exports.
These figures do not represent a massive chunk of global trade but US-China bilateral trade was valued at $640billion in 2017 and the tariff impositions have impacted more than half of this. Thus, for many countries, the resultant boost to their exports will be substantial. However, even for these countries, not all results will be positive and overall negative global effects are likely to dominate.
The report lists five macroeconomic factors over which the confrontations in international trade can have far-reaching consequences, given the fragile nature of the global economy and the economic interdependencies of the developing countries that may be less resilient to unfavourable conditions.
- Global growth: disturbances in commodity prices, financial markets and currencies due to global economic downturn; the imposition of adjustment costs to international firms reflect upon investment decisions, profitability and productivity
- Monetary policy and currency markets: risks of the trade tensions spiraling into currency wars given that the interlinkages of currency markets have already increased the volatility and downward pressures for many currencies, thus making the dollar-dominated debt tougher to service
• Stagflation: increase in prices coupled with lower growth due to inflationary pressures and reduced efficiency, resulting in rising unemployment
• Globally escalating trade tensions: more countries joining the bandwagon of protectionist policies
• Domino effect of the “tit for tat” policies: of the two trade giants, in an interconnected global economy, beyond the targeted countries and sectors
Several examples have been given to illustrate these.In the soybean market, Chinese tariffs on American soybeans have caused trade distortionary effects that are advantageous for several exporting countries, particularly Brazil. Suddenly, Brazil has become the main supplier of soybeans to China. However, given the lack of clarity over the duration and magnitude of the imposed tariffs, Brazilian producers have shown reluctance in making investment decisions, in case the tariffs are revoked and they incur losses. In addition to this, the Brazilian firms that are operating in sectors (livestock feed etc.) that use soybeans as inputs, will lose their competitiveness due to rising prices, fueled by Chinese demand for the Brazilian soybeans.
Increase in tariffs penalize the suppliers along the value chains, in addition to the assembler of a specific product. Thus, the impact of the US tariffs on the high volume of Chinese exports is probably going to hit the East Asian value chains the most. UNCTAD estimates that they will suffer a contraction of about $160 billion.
The multiple rounds of retaliatory tariffs and protectionist policies adopted by US and China will not only result in trade spillovers and ripple effects that hurt weaker countries and economies, but will also have implications for the global trading system. Negotiations and settlements for the ongoing trade disputes are taking place bilaterally rather than within the ambit of the WTO. This indicates a weakening of the existing framework of the multilateral trading system.
The current rules of international trade might be in for drastic reform, given that the ongoing confrontations are underlined by disagreements over government subsidies, intellectual property rights and other types of non-tariff barriers that affect market access. However, it is left to be seen how conducive they will be in restoring balance to a well-functioning multilateral trading system, which can successfully defuse any protectionist impulses and maintain market access, especially for the poorer countries, while securing their interests.
All representative images and content sourced from the report.
India Outbound
February 6, 2019
source https://indiaoutbound.org/unctad-the-pain-and-gain-in-the-american-chinese-trade-war/
No comments:
Post a Comment