US, China customs tariffs
Views that they will destroy the global economy are erroneous
The US trade deficit with China is huge and Donald Trump feels it should be reduced. In the past, then President George W Bush had also increased steel tariffs for similar reasons but removed them a year later. Nevertheless, feverish activity has taken place from the current US administration in April and May as its highest economic officials — Treasury Secretary, Commerce Secretary, White House trade adviser, economic adviser, and the US trade representative and his deputy — explained, in no uncertain terms and rather unusually, Mr Trump’s intentions, even as the President himself made his usual myriad statements.
The intention is to “open China, not to change its economic system,” was declared, admittedly rather pompously, reminiscent of the 1900 landing on, and occupation of, China after quashing its socalled Boxer Rebellion, by eight powers — Western and Japan — to oblige the Chinese Emperor to open up China. Recall even the earlier closing by China including its tea exports, obliging the British to send an expedition up the Brahmaputra to find tea growing in the wild and initiate the tea industry in India. While that is going back a long time, it is crucial to assert that China, through its changing phases, has followed a closed path except when it has perceived an advantage in opening itself or has been forced to do so. And addressing it again, when China is now the second largest global economy, becomes a responsibility of the rest of the world.
The pink pages are full of articles listing the deleterious impact of Mr Trump’s increased customs duties on global trade, the terrible loss of jobs in the supply chain — multiple times that of job gain in steel or aluminium — the insignificant share of US steel imports from China, and the low negative impact on China’s GDP; hence what’s the point is pondered. Yet, it is true that the Chinese continue to dump their goods at artificially maintained exchange rates and subnormal prices (even though they have appreciated the yuan somewhat in recent years; See Shome, 2012*). Why else does China face the highest share by far of India’s anti-dumping duties allowed by the World Trade Organization? India should be relieved at the USChina tariff escalation cautioning China of its unacceptable international trade practices, a preferred condition to the earlier wringing of hands by the rest of the world at China’s climbing accumulation of foreign reserves.
Unfortunately, the US did not go fully in the right direction, or far enough. The selection of commodities for tariff increases has been erroneous in order to protect the American consumer. China’s tit for tat increases will hit Chinese consumers more directly in a clearer tightening of the belt. Again this reveals the difficulties democracies, where voters have to be kept happy, face compared to dictatorships. Nevertheless, it would have been more transparent for the US administration to impose tariffs on consumer goods — that are imported in higher proportions from China, keeping in mind that inputs such as steel and aluminium imported from China comprise less than 10 per cent of US imports of those commodities. It should have openly informed the public on the right policy package for correcting economic and trade imbalances, and then done it.
There is a second, perhaps more important, reason for US action. It reflects its claim, quite rightly, that China obliges US MNC’s to form joint ventures (JV) with China which, in turn, enables China to automatically imbibe and incorporate intellectual property (IP) of the MNC’s. China has maintained that MNC’s come voluntarily and are willing to accept those conditions. That is correct. The Chinese JV conditions are countered by their flexible labour conditions, modern and functional special economic zones (SEZs), little corruption affecting the MNC’s, clear tax policies and administration not mired in retrospective legislation, in contrast to say India which loses out by a long distance on each of these aspects. China has another advantage — a President for life capable of making unilateral and instantaneous decisions — while democracies, in the cause of freedom, struggle with an increasing inability to get decisions through parliaments. Again, therefore, it is of importance to keep the pressure on, on China, to adhere to prevalent international practices.
The US has moved forward in this second objective. It has demanded that China should stop state support to its high technology sector. It has banned trading with some of the Chinese high tech sector and stopped Chinese companies’ bid to take over US companies. More may come: Perhaps the US Treasury could restrict incoming Chinese investment, or even outbound US investment, to arrest the drain of US IP.
Coming to India, it may not be well known that, at the start of the 1980’s when China’s socio-economic indicators were behind India’s, India routinely shared knowledge with China in education and training. It is not known what China has shared in return even as its indicators have tripled India’s. While Japan has come forward with several aid projects to India, China has relentlessly constructed highways along the southern border of Tibet accessing Pakistan. This is unlikely to stop in the foreseeable future.
It is dreamt that one day India will be capable of pulling up its boot strings and take a step up to realistically compare with China, to make quick decisions, achieve high labour productivity, build reliable roads, modernise SEZs, have an incorruptible tax administration, and achieve minimal standards of health and education. Instead, today, India too suffers a high trade deficit with China, exporting raw materials and unfinished goods while importing all manner of finished products from China.
Almost all prevalent views appear to pertain to the ramifications for the international macro-economy. While this is important, China cannot be perceived in this vacuum alone but, going forward, also in its revealed geopolitical and politico-historical stance, role and impact. In this the Trump administration has been correct despite its domestic challenges, and India should not desist from perceiving the global, and its own, benefit from it.