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View: US and China are trading blows for the gallery

Trump is an egomaniac, quite capable of souring US relations with China. But so far on trade, his bark has been worse than his bite.

, ET CONTRIBUTORS|
Apr 20, 2018, 07.22 AM IST
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The fear that recent trade clashes between the US and China would severely slow down the world economy is grossly exaggerated. Other threats such as asset bubbles, risk of slow down in major economies, high oil price and interest rate hikes are far more potent.

This is not to deny that US President Donald Trump’s tweets, postures and policies are vitiating the enormous contribution international trade has made to economic growth. Over the past century, trade has been the single most important vehicle of economic growth, globally.

The Great Wall of America
Trump is protectionist by instinct and believes that the US has received a bad deal from its trading partners. And that his predecessors negotiated poor trade agreements hurting US interests. Trump is an egomaniac, quite capable of souring US relations with China. But so far on trade, his bark has been worse than his bite. Import duty increases on solar panels, washing machines, aluminium and steel will not trigger a global recession.

Both China and the US have made several threats to escalate the ongoing conflict. First, China retaliated with the announcement that it is considering imposing import duties on sundry items worth $3 billion. Trump hit back by proposing to increase tariffs on a list of 1,300 Chinese items worth$ 50 billion. To that, China threatened to impose a 25% duty on US goods worth $50 billion.

Trump was not going to let China have the last threat. He threatened to impose tariffs on another $100 billion of Chinese exports. China, exhausted, then simply threatened to take further measures.

Most of these retaliatory tricks are face-saving devices primarily meant for domestic audiences. It is likely that both countries will follow through on some of these threats. But that, too, will not cause a global economic decline.

Import duties by the US on China will not necessarily reduce imports. Chinese exporters will likely dent the impact of the proposed tariff increases by lowering prices. Further, even if Chinese producers pass some of the increase in duty to consumers, US retailers may choose to buy the same items from another country that is not subject to the tariff increase. If so, the US import bill may actually increase, as will its trade deficit.

Note that Trump and his officials are also making repeated assurances to the US public via Twitter and media interviews that they are engaged in negotiations with Chinese officials. Trump is often praising Chinese premier Xi Jinping via tweets. So, claims that both countries are moving towards a full-scale trade war have weak foundations.

In fact, the implication of recent sanctions imposed by the US Treasury on seven Russian businessmen, 17 government officials and 12 related companies are far more severe than the likely impact of Trump’s proposed import duties on Chinese goods. The sanctions are imposed to penalise Russia for non-economic offences, including its occupation of Crimea, violence in Ukraine and alleged interference in US presidential elections.

These sanctions enjoy bipartisan support in Congress, in contrast to the lack of consensus in Congress, or even in the White House, on hitting China. Gary Cohn, Trump’s chief economic adviser, resigned protesting Trump’s protectionist trade policies on China.

Mount Rushmore of China
The sanctions on Russians bar any business in US dollars with the sanctioned entities. US citizens are specifically barred from doing business with the sanctioned companies. Underthe Countering America’s Adversaries Through Sanctions Act (Caatsa), secondary sanctions apply to those dealing with sanctioned Russian entities.

The Russian stock market has tumbled in fear. So did the Russian rouble. The shares of Russian oligarch Oleg Deripaska’s companies Rusal and EN+ have fallen 50%. By contrast, Chinese shares fell only modestly in response to the announcement of increases in import duties.

The London Metal Exchange has temporarily suspended the use of its warehouses to stock Rusal’s aluminium for fear that this would attract US action. The banking industry is extremely cautious. In the past, HSBC, Standard Chartered, BNP Paribas and others that breached US sanctions had to pay huge fines.

Earlier this year, Congress asked the US Treasury to publish a list of over 200 Russian political figures and businessmen. While they have not been sanctioned, the Treasury is collecting additional information on these people. There is fear that they too may be subject to sanctions. If that happens, the Russian economy will be severely crippled and the impact may spread to other countries.

Russia is considering imposing sanctions on US products, in retaliation. But it will have only a modest economic impact on the US economy, not enough to force the US to reverse its policy.

Clearly, sanctions are a much more potent tool to attack enemies. In contrast, the trade squabbles with China appear business as usual.

(The writer is professor, social policy, Columbia University, US)
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)

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