Trade War

Biden continues to escalate the American trade war with China by increasing the tariffs on goods made in China, from steel and aluminium to EV’s (electric vehicles) to solar panels apart from, of course, denial of high-end semiconductor chips. Trump promises such and even more stringent measures if he comes to power.

 

Raghu S Jaitley correctly says that in an election year, American politicians will only try and out-do each other in what they say and do. In a polarized country like America, the reactions are also totally predictable – the right says Biden is too soft on China; while the left says that Trump’s measures would be taking things too far and would hurt America. Only their own side knows the right course of action on China.

 

Jaitley evaluates the consequences of such American tariff policies, on both America itself and on China.

 

He looks at America. First, if they try and de-couple themselves from China, they need to build up alternate manufacturing capabilities within the US.

“Top-down industrial policy looks deceptively easy to implement, but as the Indian experience has shown, it is almost impossible to manage every variable when you distort the market through tariffs.”

Starting in 2021, the US government had promised to fund 5,000 electric vehicle charging stations across the country – so far, only 7 have been built. Yes, 7 of a planned 5,000. If that doesn’t count as a colossal failure, what does? Yet, after such an experience, the US is confident it can do differently in other sectors. Even if they do succeed, it will cost the US citizen a lot:

“The taxpayers will pay for it both ways - by subsidising the industry and then paying more for what they produce.”

 

Second, it is not as if China won’t retaliate with similar tariffs against America:

“From Apple, Qualcomm and Tesla to Nike, Cargill and Hollywood, China is the primary growth market for all.”

Third, China can decide to ban the export of all kinds of day to day consumer goods to the US. Just imagine the spike in prices of such items in the US, he says. If inflation rises in the US, you can be sure it will have political fallouts. Fourth, there are all kinds of critical raw materials which are either mostly found in China or controlled world-over by the Chinese. They could ban the export of such key minerals to the US, and the industries it would thus bring to a brink is huge.

 

Then he looks at the impact of this trade war on China. First, while China has reduced its dependence on the West for its economic growth, it is still quite high. Endless tit for tat measures will hurt Chinese growth, and in turn raise the risk of domestic unrest with the potential to become an existential threat to the Chinese government itself. Second, China has invested heavily in the “clean energy” sector – if the US, and possibly the EU, ban Chinese green energy tech, a lot of Chinese companies would go bankrupt. Given that the Chinese government has subsidized the entire sector, the losses would not be limited to China’s private sector alone. Third, other countries will do what they already do – take advantage of the US-China skirmishes to maximize their own benefits.

“Emerging markets like India, the Philippines or Indonesia aren’t going to open up to China easily.”

These countries won’t ban Chinese goods – instead, they’ll demand manufacturing facilities be set in their own countries, more local components be used etc. Such concessions may be unavoidable for China, but they will eat into China’s domestic employment and revenue opportunities.

 

I feel Jaitley summarizes the situation perfectly when he says:

“Economic nationalism, de-globalisation, nativism and populism seem to be the dominant and somewhat irreversible trends around the world at this moment. There’s a rising insecure China with a belief in its inevitable destiny of being the global superpower taking on an aging, bumbling superpower (US) that won’t back down nevertheless."