In recent years, Asian trading partners, such as China, have seen a massive increase in their trade surplus with the US, which has been grappling with widespread deindustrialisation and manufacturing layoffs.
US President Donald Trump has taken up the issue and has promised to “bring jobs back to the US”. In the first year of his presidency, he effectively commenced a trade war by imposing hefty tariffs on imports of foreign-made solar panels and washing machines, where China and South Korea have been world leaders.
Over the coming months, Washington is expected to up the ante by targeting rivals in hi-tech industries, with a particular focus on China’s alleged intellectual property rights’ theft.
But the risk is an unwanted escalation of hostility that could burn bridges among nations. In its wish to “protect American jobs”, the Trump administration could unleash a dangerous tit-for-tat dynamic among leading industrial nations. What is at stake isn’t only an unprecedented era of economic globalisation, but also peace among major powers.
‘Massive intellectual property theft’
In his highly anticipated speech at the World Economic Forum in Davos, Switzerland, Trump openly warned that his country “will no longer turn a blind eye to unfair economic practices” of other nations. Decades from now, Trump’s speech could be remembered as the de facto declaration of the 21st-century global trade war.
In particular, he focused on alleged “massive intellectual property theft, industrial subsidies and pervasive state-led economic planning” by rival nations. Though he fell short of naming names, it was more than obvious that he had state capitalist nations such as China in mind.
What’s clear is that almost overnight the US has transformed from a pre-eminent advocate of free trade into a protectionist villain in the eyes of both friends and foes.
Robert Lighthizer, Trump’s hardline trade official, defended the imposition of 30 percent tariffs on selected foreign products as a clear indication that the new administration “will always defend American workers, farmers, ranchers, and businesses in this regard.”
The US International Trade Commission has determined that imports of solar panels and washing machines, for instance, have unfairly hurt domestic manufacturers.
China, the world’s leading trading nation, immediately shot back. The Chinese commerce ministry expressed “strong dissatisfaction” with Trump’s latest trade measure for it “aggravates the global trade environment”.
The Asian powerhouse prodded the US to “exercise restraint in using trade restrictions”, warning that it will not shirk from “resolutely defend[ing] its legitimate interests” if push comes to shove.
Key US allies were also livid . South Korean Trade Minister Kim Hyun-chong characterised the measures as “excessive and a clear violation” of World Trade Organization rules.
Leading Korean companies, namely Samsung and LG, were the prime targets of the latest American tariffs. Mexico, another major trading partner, warned that it “will utilise all legal resources available” against the US.
All these came against the backdrop of the Trump administration’s decision to unilaterally renegotiate existing free trade agreements with both South Korea and Mexico, embittering historically cordial relations with long-time allies.
A leap into the abyss
The 1930 Smoot-Hawley Tariff Act, under which the US imposed tariffs on over 20,000 imported goods, added fuel to the Great Depression of the early 20th century.
As the world’s leading economy back then, the US’ aggressive protectionism ensured the virtual collapse of global trade, as each nation adopted corresponding measures to defend their local industries.
The upshot was a mutually assured financial destruction, which precipitated the most destructive war in human history. In recent decades, the US has flirted with virtual trade wars with often-disastrous results.
When former US President Barack Obama decided to imposea 35 percent tariff on Chinese tires in 2009, the Asian powerhouse responded by imposing restrictions on US food imports.
Were the Trump administration to impose new trade sanctions, China would likely respond by squeezing US companies already operating on its soil, while permanently shutting out others form the world’s largest consumer market.
China could start ditching multibillion-dollar purchases of US Boeing aircrafts in favour of European Airbus, tighten regulation on manufacturing and sales of Apple products, reduce imports of US soybeans and food products, and even draw down its purchase of US treasury bills, which have kept the US economy afloat.
The Trump administration, however, is obstinately standing its ground, as it panders to its nationalist base. Specifically, it’s moving to employ a triumvirate of unilateral trade weapons, which could precipitate wide-scope sanctions against China and other major trading partners.
These include provisions in US trade law to launch investigations. In early January, the Department of Commerce submitted a report on steel imports based on Section 232 of the 1962 Trade Expansion Act, which allows restrictions on trade to be imposed to protect national security. In the next few months, the Trump administration will have to decide whether to impose tariffs on steel imports, which would affect China – the world’s biggest exporter of steel.
A probe has also been initiated into aluminium imports and another one into violation of US intellectual property rights under Section 301 of the 1974 Trade Act.
Trump has already warned of a “very big intellectual property potential fine”, which, he claims, “is going to come out soon”. If the threats push through, China and other major trading partners are widely expected to, at the very least, take the US to court for alleged violation of multilateral trading regimes.
This frightening scenario would immediately have a ripple effect across the whole global economy, which depends heavily on stable trade relations among leading powers.
What’s clear is that almost overnight the US has transformed from a pre-eminent advocate of free trade into a protectionist villain in the eyes of both friends and foes. The bigger threat, however, is trade war turning into hot war, as the nationalist fervour extinguishes the fruits of globalisation.