Trade War – Developing Countries Should Respond

By Martin KhorReprint | |

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Martin Khor is Advisor to the Third World Network, and a former Executive Director of the South Centre

Developing countries cannot afford to be mere spectators of a US-China trade war. They should assess how their countries will be affected, and prepare for the effects. More importantly, they should examine who is at fault, speak out and act.

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PENANG, Malaysia, Jul 24 2018 (IPS) - The escalating trade war initiated by United States President Donald Trump is a major threat to world trade and the global economy. The developing countries will be among those most affected. It is time for them to respond and speak out.

The trade war is a very dangerous game that will engulf the whole world if it is prolonged. The country most directly affected by the US trade attack is China. But it is not just a tit-for-tat fight between two giants, the US and China.

Many developing countries are among the most vulnerable to a trade war. Taiwan, Korea, Singapore, Hungary, Malaysia Thailand, Vietnam, Chile, and the Philippines are among the most dependent on global supply chains and would thus be susceptible to a breakdown in trade

The US has also increased tariffs against European countries, Mexico, Canada and others with regards to steel and aluminium. Additional US tariffs on automobiles and their components are now imminent, and if implemented this will take the conflict to a much higher level, with US versus Europe as the centre.

But many countries that are integrated in the regional and global supply chains will also be affected. Some could even suffer more damage than the direct protagonists.

For example, many Asian countries like South Korea, Vietnam and Malaysia export components to China, such as electronics. The components are used to make products such as mobile phones and computers, some of which are exported to the US. If the extra US tariffs reduce Chinese production, there will be less demand for components exported by these countries to China.

Moreover, a decline in economic growth in China and the US will depress their demand for commodities and other products, thus affecting many developing countries including in Africa and Latin America.

A study done by Pictet Asset Management of 45 countries shows that many developing countries are among the most vulnerable to a trade war. Taiwan, Korea, Singapore, Hungary, Malaysia Thailand, Vietnam, Chile, and the Philippines are among the most dependent on global supply chains and would thus be susceptible to a breakdown in trade. For example, Malaysian exports are about 60% dependent on global supply chains, while the rates are about 48% for China and 40% for the US.

A Reuters report using OECD data to calculate value-added embodied in Chinese exports by its source countries shows that the most exposed Asian countries to a reduction of Chinese exports would be Taiwan (8% of its GDP value is embodied in Chinese exports), Malaysia (6%), South Korea, Hong Kong and Singapore (4-5%).

Another study by the Development Bank of Singapore found that in Asia, South Korea, Malaysia, Taiwan and Singapore are most at risk from a trade war, based on trade openness and exposure to supply chains. A trade war would reduce economic growth in 2018 by 0.4 percentage point for Korea, 0.6% for Malaysia and Taiwan, and 0.8% for Singapore, and double these rates in 2019.

These are significant losses indeed. Thus, developing countries cannot afford to be mere spectators of a US-China trade war. They should assess how their countries will be affected, and prepare for the effects. More importantly, they should examine who is at fault, speak out and act.

It is clear that the US is the initiator and provocateur of the trade conflict. Its tariff hikes are unilateral actions, against the rules of the World Trade Organisation and the global trading system. Complaints have been filed against the US at the WTO, including by China, the EU, Russia and India. Other countries should join in as complainants.

The US actions threaten the very survival of the trade system. If moves and counter-moves keep taking place, there will no longer be any predictability for any country’s exports. The EU remarked at the WTO recently that the trading system is facing now acute “stress and uncertainty.” The uncertainty and the reduction of trade will hit the whole world, but most affected will be export-dependent countries.

This is also the worst time for a trade war. It comes on top of the increasing shakiness of the world financial system, now on the verge of a new crisis. Already foreign funds are moving out of developing economies, and their currencies are weakening, thus increasing inflationary pressures and making it more expensive to service external loans.

Trump and his advisors have been planning a trade war for some time and now they are putting it into action. It started in January with an extra 30% tariff on solar panels and components, and 20% tariff on washing machines.

Then came US tariffs of 25% on steel and 10% on aluminium on all countries, except some that are exempted. The US used Section 232 of its Trade Expansion Act 1962, which allows the President to impose extra tariffs to counter threats to national security threat. This section has been rarely used and until now never invoked since the World Trade Organisation was established in 1995.

Using “national security” as a reason is clearly a disguise for what is a commercially-motivated move, as the imported metals are hardly a security threat, and most countries affected are close US allies.

There are well-founded concerns that the use of the “national security” factor by the US will undermine the world trading order, since it will also open the door for other countries to cite the same reason to take similar unilateral actions. Although there is a clause in the WTO rules allowing trade measures to ensure national security, it has been hardly used as there is a fear it can be abused.

China in April and the EU in June initiated complaints at the WTO against the US action. Retaliatory actions in the form of tariffs on imported goods from the US with equivalent value have been taken by China on 128 US products worth $3 billion; by Canada on 299 products valued at $13 billion; by the EU on 180 products valued at over $3 billion; and by Mexico on $3 billion of US goods.

On 6 July the US imposed an extra 25% tariff on US$34 bil worth of Chinese goods, with similar action coming soon on another UD$16 bil of imports. This time the US invoked Section 301 of its Trade Act 1974, accusing China of violating intellectual property rights of US companies, and of pressuring American firms in China to transfer their technology. Section 301 is deemed by almost all countries and experts to violate WTO rules.

China immediately retaliated with tariffs on US$34 bil of imports from the US. It accused the US of launching the “largest trade war in economic history.”

US tariffs will hit China’s exports of electrical, telecom and transport equipment, engines and motors, farm machines. Chinese actions will affect US agriculture goods, especially soybeans, autos and aquatic products.

Responding to China’s retaliation, the US on 10 July announced it would slap a 10% tariff on another US$200 billion of Chinese imports, again invoking Section 301. China said it is shocked by the US’ behaviour and vowed to retaliate.

Trump has calculated the US will win a trade war because in 2017 the US imported US$506 bil from China, while China imported US$130 billion of US goods. He thinks China would soon run out of retaliation capacity as it does not have much more US imports to slap tariffs on.

The Chinese however could still retaliate by taking other measures, such as setting more conditions for US firms based in China, not giving access for US companies in various sectors, or not implementing WTO obligations on intellectual property.

Trump will probably go into a rage and raise more tariffs against China, thus escalating the war further. This will provoke even more actions from China, which has vowed to stick to its rights and not to retreat.

The US is also examining imposing tariffs on automobiles and parts. Trump has threatened to place a 20% tariff on all European cars. This would have dire consequences, warned German leader Angela Merkel.

In short, the world is on the brink of a Trump-induced global trade crisis. It will have spill-over effects on exports and GNP growth in developing countries, and secondary effects on policies of banks (which may increase the price and volume of credit) and on the financial markets (with effects on stock prices and the outward flow of funds).

The developing countries should now strongly speak up against the unilateral measures of the US at many venues, and to take or join other initiatives to stop the trade war from escalating into a very big crisis that the world cannot afford to have.