FILE PHOTO: Flags of U.S. and China are displayed at American International Chamber of Commerce (AICC)'s booth during China International Fair for Trade in Services in Beijing, China, May 28, 2019. REUTERS/Jason Lee/File Photo 
FILE PHOTO: Flags of U.S. and China are displayed at American International Chamber of Commerce (AICC)'s booth during China International Fair for Trade in Services in Beijing, China, May 28, 2019. REUTERS/Jason Lee/File Photo

Trade War: Threats and Opportunities

Sun, Jul. 7, 2019
CAIRO - 7 July 2019: The world has been keeping a close eye on the trade war ignited by the United States that has set up barriers provoking retaliation by mainly China and leaving many countries wary of threats and contemplating opportunities.

The Trade War

Since 1998, the United States has become the largest importer of Chinese goods. In 2015, China became the United States’ largest trade partner instead of Canada as the size of goods exchange between both countries hit $500 billion occupying 15 percent of total U.S. trade.

Professor of Economics, Investment and International Finance, and Chairman of the Egyptian Forum for Economic Studies Rashad Abdo tells Egypt Today that U.S. President Donald Trump made clear in his campaign that “America First” and that he would “face the ultimate threat embodied in China.” The economics professor adds that the U.S. president declared at the time he would impose tariffs on steel imports.


Trump
U.S. President Donald Trump speaks at the Conservative Political Action Conference (CPAC) annual meeting at National Harbor in Oxon Hill, Maryland, U.S., March 2, 2019. REUTERS/Joshua Roberts

“After Trump had become President, the trade war started with raising tariffs to be 25 percent on steel imports and 10 percent on aluminum imports. The affected countries included the U.S. allies and not just China which ranks fifth as a steel and aluminum exporter to the United States. The top four are in order, Canada, Mexico, South Korea, and Brazil. Consequently, Canada threatened it would increase tariffs on its imports from the U.S. as well,” the economics professor explains.

“China is the main target of the tariffs because it exports countless and diverse products to the United States while imports very little from it. That has caused the balance of trade to be in favor of China. The goal of the U.S. tariffs is to push China to purchase more U.S. products. Another reason behind such trade war waged by the United States is that China steals product ideas developed by American companies. China develops those ideas and sells the products at lower prices,” Abdo clarifies.

The United States has been urging China to protect the intellectual property of American companies. The United States alleges China of adopting policies that force American companies to transfer technology to Chinese ones. Thus, one of its demands to end the trade war is that China stops such practices.

“The United States imposed additional tariffs worth $60 billion. China responded by levying tariffs on certain imports such as soybeans. The tariffs are imposed on imports from all countries which will negatively impact their purchasing power. In turn, that will take its toll on the U.S. exports. For instance, European imports of the United States vehicles may decline,” Abdo highlights.

Professor of Economics at Ain Shams University Yomn al-Hamaky tells Egypt Today, “The United States is even setting up barriers with countries it has free trade agreements with such as NAFTA states, and EU states. Those are considered violations of freedom of trade and breaches of the WTO regulations. Protectionism always hurts everybody.”

Impact on Egypt

“Egypt has put forward a motion to be granted an exemption. Egypt may not be able to increase its exports to the U.S. because they are relatively expensive compared to other countries. Although the value of Egypt’s currency is less than that of China, some categories of the factors of production are more expensive. For instance, we do not produce steel pellets. We import them in hard currency,” Abdo says.

Vietnamese factory
Employees work in a factory of Babylon Garments in Dhaka January 3, 2014. REUTERS/Andrew Biraj

“Egypt has a chance to increase its exports to the United States. The sectors that can benefit include the garment, furniture, leather, food, and handicraft industries. Our competitors in the garment sector can be Vietnam and Philippines. We should encourage small exporters and raise their awareness of the opportunities. We do not take enough benefit from the GSP and our shares of U.S. imports are quite low. India, for instance, was successful in benefiting from the GSP so it boosted its exports and the trade balance was in its favor,” Hamaky stresses.

“The revenues of the Suez Canal will fall, if the international trade shrinks. The purchasing power of the citizens in some countries may decline which can take its toll on tourism. That's why we started to market Egypt as a travel destination among potential Chinese and Eastern European tourists,” Abdo adds.

Suez Canal
A cargo ship takes a test run through the New Suez Canal, July 25, 2015. Photo: REUTERS/Stringer

As for whether China can direct its steel exports to Egypt, Abdo says, “when the prices of steel rose [two years ago], imports from Ukraine and Turkey increased since energy is subsidized there. Those countries benefited more by exporting. As a result, Egyptian producers had to lower steel prices. That is why [Egyptian] steel producers demand that they acquire gas in low prices,” Abdo clarifies. It is worthy to mention that the Ministry of Trade and Industry decided in December 2017 to maintain tariffs on steel rebar from China, Turkey and Ukraine for five years extending a temporary tariff that had been imposed in June 2017.

Steel
FILE PHOTO: Rolled steel are seen at a Hyundai Steel plant in Dangjin, about 130 km (81 miles) southwest of Seoul June 15, 2011. REUTERS/Lee Jae-Won/File Photo

“China invests in other countries for specific reasons. China has long-term visions and expected the U.S. decisions. Chinese investments in Egypt got subsidies from the Chinese state but the EU figured out,” Professor of Economics at Cairo University's Faculty of Economics and Political Science Ahmed Ghoneim tells Egypt Today.

Global-Scale Impact

“The size of international trade will shrink. Many countries will produce less and the manufacturing inputs they import from other countries will decline,” Abdo says.

“On the short run, the world will experience a decline in international trade, and international economic growth. On the long run, it is hard to make speculations. Yet, Trump's policies do not indicate a de-escalation will occur. China will not raise its imports [from the U.S.]. The depression that occurred last century may happen again,” Ghoneim says.

Abdo speculates a currency war may happen as some countries can devalue their currencies to export more. Abdo stresses that it is the role of the IMF to monitor such practices. He adds that banks will be affected badly because of the decline in transactions, and thus, the commission they get.

“The countries that can benefit will be Mexico, and countries whose production costs are low. The prices of oil and minerals will fall because of the decline in production. The U.S. understands those facts so it considers levying tariffs on imports from such countries,” Abdo explains. He gave the example of Mexico that is favored by automakers to assemble vehicles. In May, Trump threatened to impose a 25 percent tariffs on vehicles imported from Mexico.

Cars
FILE PHOTO: Newly assembled vehicles are seen at a stockyard of the automobile plant Toyota Motor Manufacturing of Baja California in Tijuana, Mexico, April 30, 2017. REUTERS/Jorge Duenes/File Photo

Abdo commented on the status of U.S. companies that manufacture in China and whose products are being subject to tariffs saying, “they sell most of their production to other countries than the U.S. but still their homeland is a big market that can impose sanctions on the world countries like what happened with Iran.”

On the contrary, Hamaky says, “some American companies are decreasing their investments in China and moving to neighboring countries such as Vietnam, Cambodia, Indonesia, Philippines, and other Asian countries.”

Impact on the U.S.

“There are no substitutes for China as its prices are the cheapest worldwide. It will rather decrease its margins of profit. The U.S. companies will continue to manufacture in developing countries, and those operating in China will remain because they got used to the market and the decision to move is not easy,” Ghoneim says.

“American producers will suffer because they import certain manufacturing inputs from China. The shares of prominent U.S. technology companies fell in the stock market,” Abdo says.

farmers
FILE PHOTO: A tattered U.S. flag flies on an old tractor in a farm field outside Sutherland Springs,Texas, U.S. November 8, 2017. REUTERS/Rick Wilking

“The American farmers exporting to China will be impacted badly despite Trump's subsidies. The United States has no advantage in some sectors such as the garment industry because of the high wages of workers. Also, low-income citizens in China will be affected negatively,” Professor of Economics at Ain Shams University Yomn al-Hamaky.

“The United States tried to ban Huawei's access to android so it would collapse. Nevertheless, Huawei can create an alternative within three months. And then, at least half of the world countries may ditch Google and choose Huawei. The UAE and South Korea signed a contract with Huawei to obtain the 5G technology. The company has also a partial contract with the United Kingdom,” Abdo says.

“The G5 technology was acquired by Huawei but has not reached the United States yet. There is a major drawback of the G5 because it will annul many industries and give rise to others such as the industry of self-driving cars. The United States produces only traditional cars. The G5 depends on data and information so it may facilitate espionage activities by acquiring state secrets,” Abdo adds.

Huawei
FILE PHOTO - A man talks on his phone beside a Huawei's billboard featuring 5G technology at the PT Expo in Beijing, China September 26, 2018. REUTERS/Stringer

“Unemployment in the United States may decline to 3.5 percent from nine percent. The United States made new gas discoveries. Since China purchases gas from the United States, the latter can exert pressure on the former. However, the United States will not always benefit. In wars, everyone is a loser,” Abdo stipulates.

“China will increase its imports from the United States. That will slow down the escalation from the part of the United States. That will make room to study the negative impact of the tariffs, and to hold a calm dialogue. Trade protection harms all parties,” Hamaky estimates commenting on the U.S.-China agreement to a tentative trade truce.


Knockdown

As reported by the Financial Times, the Vietnamese Customs Department pledged to combat the fraudulent labeling of Chinese goods as made in Vietnam. In a note published by Societe Generale’s Chinese Economy Specialist Wei Yao, Chinese exports of electronics parts to Taiwan and Vietnam grew sharply compared with last year, as reported by Quartz. Societe Generale estimates that can be a sign of “knockdown” whereas a product is disassembled in China and reassembled later in a foreign country.

Tricks like knockdown can work on the short run, Abdo says. On the other hand, Ghoneim highlights that products are subject to the rules of origin so putting the label "made in whatever country" will not cover the fact that they were made in China. “Importing countries can verify the origin. Many flooding cases unraveled by using such criteria,” Ghoneim explains.

“The knockdown is initially a business choice and adjustment to the economic conditions. China invests in markets in Africa, Europe, and Asia based on the circumstances of each market, its ability to absorb its products, and the relations between China and those countries,” Hamaky clarifies.

Existing Outcomes of Tariffs

Over 20 percent of U.S. imports used to be made in China. In the first four months of 2019, the figure dropped to less than 18 percent. According to data released by the U.S. International Trade Commission, the top seven countries whose export shares to the U.S. grew the most during that period compared to the same duration last year are Mexico (0.75%), Vietnam (0.70%), South Korea (0.48%), Taiwan (0.37), France (0.33%), India (0.26%), and Japan (0.21%).

The tariffs have mainly targeted electronics, advanced machinery, and industrial parts. Hence, the share of Vietnam that already exports electronics to the U.S. was expected to increase. The shares of Korean and Taiwanese exports increased in the other two categories.

A report by the New York Federal Reserve Bank suggested that those tariffs will cost a typical American household $831 annually. U.S. Treasury Secretary Steven Mnuchin argued before the House of Representatives in May that the impact will be mitigated by several factors. One of those is that companies at the United States will switch to products from other countries than China. However, the Federal Reserve’s report suggests that American companies may resort to more expensive countries which would reduce the revenues collected from tariffs on Chinese goods. The other factors mentioned by the Treasury Secretary are currency effects and lowering of profit margins among others.

In January, Reuters reported that China contemplates boosting its imports from the United States over six years until 2024 to eliminate the trade surplus that hit last year $324 billion. To reach zero by the aforementioned date, the rise in purchases from the United States over the six years must be worth $1 trillion.

Societe Generale states that foreign investment in Vietnam and Thailand has hiked since the beginning of this year. The Taiwanese electronics company Foxconn, the world's largest contract assembler of consumer electronics for companies such as Apple, is moving production from China to India and Vietnam.

In May, the CEO of Brooks Running announced it was moving operations from China to Vietnam because of shoe tariffs. Similar steps were taken by other corporates because the wages of workers in other countries are less of those of Chinese workers.

Tariffs Imposed by the United States

In February 2018, the United States imposed a 30 percent tariff on all solar panel imports, exempting only Canada, and a 20 percent tariff on washing machines.

In March 2018, the United States imposed a 25 percent tariff on all steel imports, exempting Argentina, Australia, Brazil, and South Korea, and a 10 percent tariff on all aluminium imports, exempting Argentina, and Australia.

In July and August 2018, the United States increased tariffs on 50 billion worth of high-tech “Chinese” products to become 25 percent instead of 10 percent. The number of high-tech products affected is 1,300. That is the first time the United State targeted Chinese products in specific.

In May 2019, the United States raised tariffs on $200 billion worth of Chinese goods to 25 percent from 10 percent.

In the same month, The U.S. president announced in a tweet that tariffs on $325B worth of goods may soon be subject to the increase as well.

Until present, the Chinese goods facing the 150 percent rise of tariffs are telecommunications equipment ($19.1 billion), computer circuit boards (12.5 billion), processing units ($5.6 billion), metal furniture (non-seats) ($4.1 billion), computer parts ($3.1 billion), wooden furniture ($2.9 billion), static converters ($2.7 billion), vinyl tile floor coverings ($2.5 billion), seats with wooden frames ($2.5 billion), and car parts ($2.3 billion), as reported by Bloomberg.

ZTE
FILE PHOTO: People stand at ZTE's booth during Mobile World Congress in Barcelona, Spain, February 27, 2017. REUTERS/Paul Hanna/File Photo

In May 2017, the United States penalized ZTE, the Chinese telecommunications equipment company, for exporting U.S. goods to North Korean and Iran violating the sanctions imposed against them. The penalty included a fine worth $1.19 billion and a punishment against the employees involved. The company did not abide by the latter penalty so the U.S. Commerce Department threatened to bar all American firms from selling key parts, such as microchips, to ZTE. In April 2018, the United States started to implement a seven-year ban on exports to ZTE. Two months later, the ban was lifted and replaced by a $1 billion fine while allowing a new compliance team staffed by American experts, as reported by CNBC.

Tariffs imposed by China

In April 2018, China levied tariffs ranging from 15 - 25 percent on 128 products, including fruit, wine, seamless steel pipes, pork and recycled aluminium. That was in retaliation for the U.S. tariffs on steel and aluminum.

In August 2018, China imposed 25 percent tariff on 545 U.S. goods that are worth $34 billion, including agricultural products, automobiles and aquatic products.

In June 2019, China increased tariffs by 25 percent, 20 percent, and 10 percent on 5,140 American products worth $60 billion. It has also hinted that it would restrict rare earth exports to its rival. China offers 80 percent of rare earth elements production.

The EU

In February, U.S. President Donald Trump tweeted that his country would impose tariffs on $11 billion of EU products as a response to subsidies granted by the union to Airbus. The European Union responded that it was preparing a list of tariffs to counter American subsidies to Boeing.

The three experts affirm that such war between Boeing and Airbus has been going on for decades. Hamaky clarifies that the WTO rules on their disputes case-by-case.

On Wednesday, Trump alleged the EU and China of devaluing their currencies. Ghoneim comments, “Trump is trying to paralyze the WTO. He refuses to appoint judges for the Appellate Body that implements the dispute settlement mechanisms.”

“If you wonder where was the WTO when the United States increased the tariffs, the answer is Trump threatened to withdraw from the WTO after China had sought its help,” Abdo clarifies.

In August 2018, China lodged a formal case against the U.S. at the WTO because of the tariffs on solar panels and a complaint because of the 25 percent tariffs on Chinese goods worth $16 billion.

India

On June 5, India was excluded from the Generalized System of Preferences (GSP) that covered $5.6 billion worth of Indian exports. As a result Indian steel and aluminum products are no longer subject to duty-free benefits. On June 14, India levied tariffs worth $235 million on 29 U.S. products worth $1.4 billion. Those tariffs are up to 70 percent of the value of the products.

In 2018, the value of US-India bilateral trade was $142 billion increasing sevenfold since 2001. Major Indian imports from the United States include almond and fresh apples. Those are worth $645 million and $165 million, respectively.

“India is not a least developing country, and has a free trade agreement with the EU so it was excluded from the GSP,” Ghoneim explains. Ghoneim and Hamaky attribute the U.S. decision to the fact that the balance of trade was becoming in favor of India.
 
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