As US steps up tariffs, China is seen as strongest defender of rules-based global trade
US President Donald Trump’s latest move to impose tariffs on a further $200 billion of Chinese imports is seen by many as a major challenge to the rules-based system of global trade. The tariffs come on top of $50 billion in tariffs already announced and are a clear indication by the Trump administration that it intends to escalate trade tensions.
The new tariffs will take effect on Sept 24 at a rate of 10 percent and will be increased to 25 percent on Jan 1.
They have been met by an immediate response from Beijing, which has slapped an additional $60 billion of
tariffs on 5,207 categories of US products. These will be levied at two rate levels — 10 percent and 5 percent — and also will take effect on Sept 24.
Trump, who has already threatened to pull the US out of the World Trade Organization, which he claims no longer acts in the interests of the US, is seen as intent on disrupting an international order that has been in place since the end of World War II.
The WTO, preceded by the General Agreement on Tariffs and Trade, was one of the three pillar institutions to emerge as a result of the Bretton Woods Conference of 1944, alongside the International Monetary Fund and the World Bank (originally the International Bank for Reconstruction and Development).
With Trump’s tariffs affecting 2.5 percent of world trade, according to Dutch financial group ING, many now see Trump’s actions as a major assault on this order.
Meanwhile, China, which played no role in the birth of the existing order and only joined the WTO in 2001, is now seen as one of its strongest defenders, with President Xi Jinping frequently extolling the virtues of globalization, most famously at the World Economic Forum meeting at Davos in January 2017.
In addition, Premier Li Keqiang has called for safeguarding economic globalization and accelerating the new industrial revolution by promot- ing more inclusive development, innovation and new drivers for economic growth.
The authority of the rule-based multilateral trading system, which is the foundation for globalization and free trade, should be respected and safeguarded as uncertainties and anti-globalization sentiment are on the rise, Li said at the opening ceremony of the World Economic Forum’s Annual Meeting of the New Champions 2018, also known as Summer Davos, in Tianjin on Sept 19.
Unilateral action cannot solve problems, and all nations should help boost the new industrial revolution, Li added.
He Weiwen, who was an economic and commercial counselor at the Chinese consulates in New York and San Francisco at the time of China’s accession to the WTO, says Trump’s challenge to the WTO order is unprecedented.
“During my time in the US (19972003) neither (president Bill) Clinton nor (president) George W. Bush went totally against WTO rules. They were not pursuing an ‘America First’ policy. Under Bush, there was a case of steel import surcharge, but that was an isolated case,” he says. “The Trump administration has not only challenged China but also the multilateral trade system, launching hostile conflicts against Mexico, Canada, the European Union and others.”
He says China is right to respond to the unilateral US action with its own tariff sanctions and must steer clear, unlike South Korea, of being intimidated into caving in to negotiating separate trade deals.
US Commerce Secretary Wilbur Ross said in March that South Korea would not have made concessions — allowing US automakers greater access to its market and reducing steel exports to the US — if there had not been the threat of tariffs on steel and aluminium exports.
“This goes against the whole system of trade rules,” says He. “If we all behave like South Korea, then what is the point of the WTO? When its rules are undermined like this, the whole world trade order is in jeopardy.”
Paul Cheng, a businessman and former Hong Kong politician as well as author of On Equal Terms: Redefining China’s Relationship With
America and the West, says Trump’s actions are indicative of the US now showing the same disrespect for the WTO as it has for countries it has previously backed and then dumped.
“America would support some country and when they didn’t want to support it anymore, they would just drop it. Now this is not a country but the WTO. They were a big supporter of the WTO at the beginning, but now that the power is shifting, they don’t like it. They are no longer calling the shots,” he says.
Wang Huiyao, founder and president of the Beijing-based independent think tank Center for China and Globalization and counselor for the State Council, China’s Cabinet, says the recent US trade actions suggest it is becoming more unilateral, while China is becoming increasingly multilateral on the world stage.
“It is not that China cannot see the faults in the current global governance system. There are numerous problems. These include inequalities between rich and poor and multinational companies out of control in terms of jurisdiction. The solution, however, is not to tear everything up.”
Wang, however, says he does not believe it is just the US that is undermining the global trading order, with there now being a sense of the developed world as a whole, including the European Union, wanting to act in its own interests.
“The US and EU are trying to talk about a zero-tariff agreement. Both Japan and Canada have reached free trade agreements with the EU. It looks — particularly from China’s and other emerging nations’ perspectives — that the developed world is trying to create some sort of alliance of its own,” he says.
“This is very unwise, because the emerging market countries will provide the growth engine for the world economy over the next three or four decades.”
Stephen Roach, senior fellow at Yale University’s Jackson Institute of Global Affairs and author of Unbalanced: The Codependency of America
and China, says that despite Trump’s threat of pulling out of the WTO, he does not believe it signals “a major move in the pendulum against a rules-based trade order”.
“I do not see the United States in large part abdicating its global leadership role,” he says.
“What I think the Trump administration is all about is maintaining leadership, but on different terms than have been evident over the past 10 years.”
Kerry Brown, director of the Lau Institute at King’s College London, says that to understand the current trade situation, it is important to reflect on the writings of Carl von Clausewitz, the Prussian military strategist.
“Clausewitz said in his great treatise On War that if the battlefield is dominated by confusion, then things are often not what they really look
like. I actually don’t think the US is walking away from the WTO. It is just creating an enormous amount of faff just to get what it sees as a fairer deal. It may be as a result that China has to recalibrate the way it does trade with the world.”
Rana Mitter, director of the University of Oxford China Centre, says the current US stance does not make a great deal of sense, since the US has largely benefited from the current system.
“It is not logical, because the United States is the country that has done the best out of the global international order over the past 70 years or so. It may have many flaws, but it seems essentially to produce stability and prosperity, and to turn against it does not quite add up.
“I don’t think it is strange, either, that China is now such a defender of the current system. China’s impressive development over recent years is partly a result of it incorporating itself into that order, particularly since joining the WTO.”
One of the major questions is to what extent the Bretton Woods system is now under threat by the current trade dispute.
Roach, also a former chairman of Morgan Stanley Asia as well as its chief economist, says the world could descend into a dark place if this is the case.
“What we are seeing now is skirmishes, but if we get into a full-blown trade war, then you can conjure up all sorts of draconian scenarios. What is not clear to me is what would emerge to replace it, if anything. The world might be a very fragmented and disorderly place for a while.”
Brown, also author of the just-published China’s Dream, believes the direction of travel of a new global order will not be one that more favors the US, but one that accommodates the rise of China as a major economic power.
“China eventually will want more of its own space. It has set up the Asian Infrastructure Investment Bank, launched the Belt and Road Initiative, set up the Shanghai Cooperation Organization, and these are setting out the stall for allowing it more space. It will be just a reflection that China is such a huge economy. There is clearly going to be some growing pains over this change.”
Mitter at Oxford University says the Bretton Woods system has been tested before, not least in 1971 when then US president Richard Nixon ended the direct convertibility of the US dollar into gold, which had been the mainstay of the former system.
“The classic Bretton Woods system was blown up rather suddenly by Nixon at the same time as he was opening up to China. So it is not the first time the system has faced challenges,” he says.
“Currency is still key to the global order. Until China or any other international actor has an internationally tradable currency that is seen as safe and stable across the entire financial and trading world, then it is very difficult to see who could take that rapprochement role the United States currently has in being at the center of the global order.”
Former People’s Bank of China governor Zhou Xiaochun has said that Trump’s actions could, however, drive investors to the Chinese yuan.
“If the US uses too much financial sanctions against the other country, it drives (investors) to consider the other currency,” he told CNBC.
Zhou has also said that China is in a strong position to withstand any trade war, even if Trump imposes tariffs on all its $506 billion of imports from China.
“We used a mathematical model to calculate the negative impact of the trade war. It is not very large, it is not significant. It is less than half a percent (of an) impact to the Chinese economy,” he said in another interview with CNBC.
“The worst-case scenario is that China is no longer going to export $500 billion of goods to the US market, and then it’s dependent on how quickly you can diversify those export goods to the other countries. Actually, I think China could act quickly.”
The prospect of a trade war between the US and China also has repercussions for Europe.
Herman Van Rompuy, former president of the European Council and former prime minister of Belgium, told a meeting in Brussels of the Belgian think tank Bruegel on Sept 17 that it was important that trade disputes were settled peacefully.
“There is no life without compromise, even in every political system. The (European) Union is more than others a living example of a continuous conversation between 28 member states.
“Ending disputes, also trade disputes, ending conflicts, wars can only be achieved by negotiation and talks.”
Claudia Vernotti, founder and director of the China-EU Association for Digital, speaking at the same meeting, says trade wars do not generate any winners.
“The global supply chain is so complex, there are so many interconnectivities around it that make even third party countries probably not have much to gain, so the EU also will not be better off from a trade war between the US and China,” she says.
However, Cheng, the Hong Kong businessman, says it is clear that the biggest losers are likely to be US consumers.
“If you go into Walmart or Costco today, a large percentage of the products will be made in China, so consumers will undoubtedly be hit,” he says.
“You will also be hitting the US companies who make these products in China. If you are making large volumes, you can’t switch production away from China, because nowhere else has the same scale of manufacturing capability.”
Shi Guangsheng, then China’s minister of foreign trade and economic cooperation, and Charlene Barshefsky, then the US trade representative, sign an agreement in 1999 regarding China’s entry into the World Trade Organization in 2001.
Rana Mitter, director of the University of Oxford China Centre
Herman Van Rompuy, former president of the European Council and former prime minister of Belgium
Zhou Xiaochuan, former People’s Bank of China governor
Containers of goods are unloaded at the port in Qingdao, Shandong province, on Aug 8.
Paul Cheng, businessman and former Hong Kong politician
He Weiwen, a former China trade diplomat