Could Reshape Global Trading Systems
THE BATTLE SOUNDS
The U.S.-China trade war which sparked in 6, July 2018, has been dubbed the “the largest trade war in economic history”. The dispute found its roots in President Trump’s accusations that China is violating international trade law by systematically stealing intellectual property. China forces many foreign businesses to hand over their most prized technology in exchange for access to their market.
The White House is using Section 301 of the Trade Act of 1974 to impose unilateral tariffs. Section 301 is a crude tool for solving trade disputes. It allows the U.S. government to investigate and then take unilateral action against a country it accuses of using unfair market practices. But, since the formation of the WTO, Section 301 almost disappeared. The WTO was formed with international bodies of judges who were given the responsibility to create a fair, legalistic, trade dispute system. It was meant to replace the implementation of unilateral tools like Section 301. The WTO also included trade regulations like trade in services and intellectual property right – regulations that the U.S has been trying to enforce on its own.
Section 301 comes with its own setbacks. The gambit is a risky one for two main reasons. First, once the global community agreed to the formation of the World Trade Organization, the U.S. effectively agreed to stop using the act. If the US does actually take actions against China under the provision, it would undermine the global trade system — and could set off a whole wave of economically destabilizing tit-for-tat actions between China and the U.S..
Secondly, the new investigation doesn’t cater to the protection of American workers, like most of Trump’s trade actions. Instead, it primarily serves American corporations making it easier for them to expand their operations overseas. The problem with that is the process often implicates that U.S. workers are in a losing battle with cheaper foreign labor. To state it simply, it could punish many of the blue-collar voters that helped Trump win the White House.
Both the U.S.’s and China’s initial round of tariffs against each other are strategic hits to wound deeply. So far, the U.S. has imposed three rounds of tariffs on Chinese goods, totaling more than $250bn. The duties range from 10% to 25% and cover a wide range of industrial and consumer items – from handbags to railway equipment. The U.S. has also put tariffs on worldwide imports of goods like steel and washing machines, which further affects products from China. In retaliation, Beijing hit back with tariffs on $110bn of U.S. goods targeting products which include chemicals, coal and medical equipment with levies that range from 5% to 25%. It has strategically targeted products made in Republican districts and goods that can be purchased elsewhere, like soybeans.
The U.S. is targeting high-tech Chinese goods to put economic pressure on Beijing’s “Made in China 2025” program — a Chinese government initiative to transform China into an advanced manufacturing powerhouse. And China has deliberately targeted big U.S. agricultural exports like soybeans that come from states in the heart of Trump country, where neither the president nor his party wants to see economic instability or job losses.
With tensions running high, a truce was agreed upon in December. Both the U.S. and China halted new trade tariffs for 90 days to make space for much-needed discussions and decisions. The deadline to reach a resolution has been set for early March, or the battle may ensue again.
WORLDWIDE WAVE
Trump’s argument that global oversupply of steel and aluminum, driven by China, threatens American steel and aluminum producers, which are vital to the U.S. led him to introduce tariffs of 25% on steel and 10% on aluminum imported into the U.S. The duties on steel and aluminium went ahead on 1 June 2018 and affected the EU, Canada, Mexico and other close US allies, including India and neighboring Bangladesh.
In response to Trump’s tariffs, many countries like South Korea, Argentina, Australia, and Brazil have agreed to put limits on the volume of metals they can ship to the U.S. India has said it will raise taxes on 29 products imported from the U.S. – including some agricultural goods, steel and iron products – in retaliation. Mexico put tariffs on $3bn worth of American products ranging from steel to pork and bourbon. Canada imposed retaliatory tariffs on C$16.6bn (£9.5bn) worth of U.S. exports.
The U.S. President launched the tariff wars for two reasons – to reduce the trade deficit and to curb China’s market practices. The problem that Trump has identified is real. But his proposed method for solving it is troubling to most since it challenges to upend a stable, rules-based trading system. If Trump revives unilateralism in trade, what’s to stop other countries from doing so as well? China has already promised to respond in kind, and there’s no reason to think it would be the only nation to sidestep the WTO and target other governments on its own.
The global trade wars that could result would inevitably hurt American consumers and exporters as countries around the world would adopt a more protectionist stance. Incoming goods from abroad would become more expensive, and American exports would see a plunge in demand.
The International Monetary Fund says an intensification of the retaliatory tariffs could trim 0.5% off global growth by 2020. Separate releases recently showed growth in China’s manufacturing sector slowing and according to a media report, one measure of US consumer sentiment has fallen due to tariff concerns. Morgan Stanley estimates that a full-blown escalation of the trade war could cause a whopping drop off 0.81 percentage points in global gross domestic product.
This scene would involve the U.S. slapping a punishable 25% tariffs on all goods from both China and the EU, causing them to respond in kind taking similar measures. The bank stated that most of the effect of tariff hikes on growth would probably be seen only in 2019. Most of the impact – or almost 80% – would come through disruption of domestic and international supply chains, the bank added.
HOME FRONT
What does the trade war mean for Bangladesh? The first impact of the war was first felt in Bangladesh’s steel industry. For the last few months, the price of the rod has significantly increased in the domestic market, threatening both the major public infrastructure projects—which the government wants hurriedly to make progress on – and the real estate sector. The rising cost of producing steel is the side effect of Trump tariffs on steel and aluminum. Bangladesh imports scraps, a raw material for steel, mainly from the United States, also the major global exporter of scraps, but steel millers in the country are stockpiling the raw material anticipating more protectionist measures from the Trump administration, reducing supply and thus increasing the price.
Bangladesh scrapped 25% of the ships dismantled worldwide in 2017. In light of upcoming development projects, Bangladesh should develop its ship-breaking yards, in hopes of sourcing a greater amount of cheaper steel domestically, which has already been providing more than half of the country’s supply of steel.
However, the trade war has been a blessing in disguise for Bangladesh’s RMG sector. Bangladesh has been receiving large volumes of work orders from both the U.S. and China. According to the Bangladesh Foreign Trade Institute, Bangladesh had a 6.46% growth in market share in the American garments market during the first three quarters of 2018. For a country where 20% of GDP comes from textiles and apparel, this has been a silver lining for Bangladesh.
Along with tariff cuts on goods imported from the country, Bangladesh also stands to gain from cotton purchases. Since China has stopped purchasing cotton from the U.S. Bangladesh has become the largest cotton importer as China stopped sourcing the fiber to promote its domestic growers and to end the previous stocks.
Bangladesh will also receive a lot of investment as the owners of the Chinese sunset industries are looking for a new location to set up productions since costs in China rose due to higher tariff measures by the U.S. coupled with a shortage of skilled workforce. As a result of the trade war, many factories from China may be relocated to some of the potential Asian countries and Bangladesh should nab opportunities as they arise.
Although it is fairly unpredictable as to what products may become the next target of the US-China trade war, Bangladesh should be on the lookout and closely monitor matters and find opportunities where the country can have an upper hand or incur the least losses as the situation evolves and changes.
