Trade

Need to know: Trade War latest explained

BY Francesca Peacock   /  12 September 2018

How are China and the Russians forging an alliance?

This morning, Chinese President Xi spoke at the Eastern Economic Forum in Vladivostok. Xi spoke against the ‘politics of force, unilateral approaches and protectionism’, before declaring that ‘Chinese and Russian relationships are at an all-time high’. Xi’s comments were echoed in Vladimir Putin’s address in which he defended the ‘basic principles of trade’. The conference, also attended by Japan, shows a growing movement against Trump’s protectionist trade policy, including somewhat unlikely advocates of free trade in Russia and China.

Only yesterday, China applied to the World Trade Organisation to impose sanctions of $7 billion a year on America for their non-compliance with a WTO ruling on ‘dumping duties’. These are levies imposed by America on countries who allegedly price their products to undercut American-made goods, but that was ruled illegal in a WTO arbitration. Over the weekend, Trump also threatened a new package of tariffs worth $267 billion on Chinese goods.

What are the American trade policies that have caused such controversy?

In March 2018, Trump imposed a 10% tariff on aluminium and 25% on steel imports, tweeting ‘Trade wars are good, and easy to win’. In June, the temporary exemption for Canada, Mexico, and the EU was removed. These tariffs were highly controversial, not least because the orthodoxy of free trade formed a key pillar of the American post-war economic order and the foundation of the World Trade Organisation in 1995 was a largely American-led project.

The legal basis for the tariffs was controversial. Under the Trade Expansion Act of 1962, tariffs are permitted if “an article is being imported into the United States in such quantities or under such circumstances as to threaten or impair the national security.” To invoke this clause over imports of aluminium and steel was not only legally dubious, but to imply that the allies who produce these metals are threatening ‘national security’ was seen as an insult particularly by America’s European partners and in Canada.

What was the international response to these earlier tariffs?

As the largest source of aluminium imports to the US, Canada bore much of the economic brunt of the tariffs. Trudeau denounced the national security justification as ‘absurd’ and introduced $16.6 billion of retaliatory tariffs.

The European Union launched a legal challenge in the WTO, and also imposed retaliatory tariffs on over 180 US-made goods.

Mexico introduced tariffs of $3 billion on US products.

The trade war between China and America has a different quality to disputes between other countries. Trump repeatedly focusses on China’s alleged role in ‘stealing US intellectual property’, rather than simply affirming the benefit the tariffs would give to the US as he did with other nations. China did initially respond with tariffs on cars, planes, and the cancellation of imports of US soybeans. That prompted a rather bizarre reaction from the American government as they confirmed that tofu would be introduced to government canteens.

Why did Trump introduce such policies?

As the tariffs have now caused such a diplomatic storm, it seems difficult to understand why Trump would expend so much political capital on introducing them. That’s partly because tariffs are as much a symbolic move as anything else – Trump has repeatedly claimed that the introduction of tariffs will help the ‘so-called Rust Belt’; the industrial areas in America whose products had been undercut by foreign imports. Prioritising American industry fits into Trump’s ‘Make America Great Again’ rhetoric, even if it’s unclear at the moment whether the tariffs will improve the economic situation in ‘left behind’ America.

He has repeatedly expressed anger at the American trade deficit, claiming in the 2016 election campaign that there is a ‘trade deficit of $500 billion a year, with an intellectual property theft of another $300 billion’. These numbers are slightly exaggerated, but America does currently have a trade deficit with China of around $375 billion. Why such a trade deficit angers Trump is unclear; in recent years, consumer economies that import more than they export have tended to be richer than those who export more.

Has the introduction of tariffs helped the US economy?

On Monday, Trump claimed that the American economy was experiencing a much stronger period of growth compared to under Obama – it is difficult to directly link Trump’s policies to growth in GDP. Whilst the US stock market hasn’t dramatically suffered as a result of the introduction of tariffs, it is perhaps too early to tell.

The trade war does appear to have harmed the global economy. Emerging market stocks reached their lowest level since May 2017 today; rates for all forms of production have fallen across the Eurozone; and, in China, the stock market has hit a 31-month low.