Trade war

Trade war

Since Donald Trump took office as US president, trade protectionism has once again become a hot topic. The US withdrawal from the Trans Pacific Partnership, tariffs on US imports of steel and aluminium products and the escalating trade war with China are all part of Trump's 'America First' policy. The US seems to be looking for a truce on the international trade front with its main trading partners by entering into bilateral negotiations with the EU and Japan. Meanwhile, the US is now focusing on China. An agreement in the negotiations between these two world economies remains vain hope for the time being.

Overview of the trade war

(1) Jan. 2017: President Trump decides to withdraw the US from Trans Pacific Partnership or TPP - the free trade agreement between 12 Pacific neighbouring countries.

(2) Launch of the US investigation into Chinese policies on technology transfers, intellectual property and innovation and their impact on US economic interests.

(3) US implements safeguard tariffs - import duties that can be applied as an emergency measure to protect domestic industry from harmful foreign competition - on US imports of solar panels and washing machines. The tariffs apply to solar panels and washing machines from all US trading partners, but are mainly focused on China. 

(4) When implementing US tariffs on steel and aluminium, Argentina, Australia, Brazil, Canada, Mexico, South Korea and the EU were initially excluded until 1 June. However, from then on, American imports of steel and aluminium from these countries were also subject to tariffs of 25% on steel imports and 10% on aluminium imports). The tariffs foreshadowed a complex trade conflict.

(5) Several US trading partners (Mexico, Turkey, Russia, Canada, India, EU, China) are introducing retaliatory tariffs in response to US tariffs on steel and aluminium.

(6) Launch of the US investigation into the impact of US imports of cars and car parts on US national security.

(7) Following the announcement in March 2018 and the subsequent process of hearings and adjustments, the first installment of US tariffs on imports from China are implemented. In total, $50 billion of imports from China are subject to a 25% import tariff rate. On the first part of imports (worth $34 billion), the tariff enters into force in July 2018. From August, the tariff also applies to the rest (imports from China worth $16 billion). In response, China also implements a 25% tariff rate on imports from the US worth $50 billion. The growing trade deficit between the US and China seems to justify the US government's hard trade policy (figure 1). Yet this interpretation is not correct. Basically, the debate is not about free trade, but about technology.

(8) Juncker-Trump deal: agreement on the start of negotiations between the US and the EU. The abolition of import tariffs, non-tariff barriers and subsidies in the industrial sector, among other things, are part of the trade negotiations. As long as these negotiations are ongoing, the introduction of additional tariffs is suspended.

(9) After the announcement in June 2018 and the subsequent process of hearings and adjustments, follows the implementation of the second installment of U.S. tariffs on imports from China. In total, $200 billion of imports from China are subject to a 10% import tariff. This import tariff will rise to 25% from January 1, 2019 on. In response, China also implements import tariffs (between 5 and 10%) on imports from the US worth $60 billion. Subsequently, President Trump threatens with new import tariffs on American imports from China worth $267 billion (≈ the rest of the total American imports from China).

(10) The US, Mexico and Canada agree on a new version of the former NAFTA agreement. The new agreement was renamed USMCA or US-Mexico-Canada Agreement. It revises the rules for trade relations and also adds a number of new chapters, which adapt the agreement to modern times (including a new chapter on digital trade).
 

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US trade balance deficit

Figure 1 – US trade balance by trading partner (merchandise trade, in billions USD)

Source: KBC Economics based on US Census Bureau

The US trade deficit for goods - measured as the difference between exports and imports of goods - has increased sharply since 2000. In 2017, it reached more than $800 billion. The main reason for the growing trade deficit was the trade relationship with China, with the US importing far more from China than it exports to China. The US also has a significant bilateral trade deficit with other major trading partners such as the European Union, Canada, Mexico, Japan, etc. President Trump wants to reduce this trade deficit by exporting more and reducing imports, mainly from China. By buying fewer foreign products, Trump wants to support the American economy and create more jobs. Although Trump describes a trade deficit as primarily negative for the economy, this doesn’t need to be the case. In the case of the US, the trade deficit reflects strong domestic demand and economic performance in recent years. Moreover, the deficit is a logical consequence of different specialisations of countries. For example, the US imports more goods than it exports because other countries produce them more efficiently. On the other hand, the US does have a trade surplus in services (around $255 billion in 2017). Besides, the bilateral trade balance is probably not the most appropriate measure to describe any trade imbalance between countries:
 

US versus China

Figure 2 - Recently implemented import tariffs in the US-China trade war (in billions USD)

KBC Economic Research based on IMF – Art. IV Consultation People’s Republic of China (July 2018)

China has been the scapegoat for President Trump from the very beginning. Already during his election campaign, Trump accused the emerging economy of exchange rate manipulation, unfair trading practices and theft of intellectual property. Although trade negotiations between the US and China have been going on for some time, little progress has been made. In that context, President Trump already introduced import tariffs on two tranches of imports from China for a total value of $250 billion. China responded with retaliatory tariffs. Because Chinese imports from the US are much smaller than American imports from China, the value of imports subject to Chinese tariffs is also more limited ("only" 110 billion dollars). In addition to the tariffs already introduced, Trump also threatened with additional import tariffs on American imports worth $267 billion. As a result, virtually all US imports from China would be subject to import tariffs. The current focus on trade matters is only the beginning and will probably shift to the essence of the matter: technology
 

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