Oscar Ugarteche / Armando Negrete (*) – ALAI
U.S.-China trade negotiations will resume the first week of August in Shanghai. So far, neither side has yielded to the conditions of the other. It can be recalled that the United States is seeking to reduce its trade deficit, improve productivity, its internal industrial apparatus, its competitiveness in the world market, and curb China’s rising commercial dominance by expanding punitive tariffs.
Recently the US president stated, via Twitter, that “tariffs are having a major effect on companies wanting to leave China for non-tariffed countries” and that: “We are receiving Billions of Dollars in Tariffs from China… These Tariffs are paid for by China devaluing & pumping, not by the U.S. taxpayer!” He said China will reach, in the second quarter, the lowest level of growth in 27 years as a result of his international trade strategy.
U.S. economic growth in the second quarter slowed, while China remains stable at 6.2% because the tariff is a tax, applied by the importing government, paid by the importer and the final consumer. The logic is to increase the price of imported goods to reduce their consumption and thus favour local goods. Unless the importers are Chinese companies or consumers in the U.S., there is no way tariffs can be transferred to the Chinese economy except if China has a single market, but this is not the case. The U.S. is China’s largest market (20%) whose trade is spread 45% to Asian countries, 22% to European Union countries, and 9% to Latin America and Africa.
That is why the response to protectionist measures of one State by another State cannot be other than tariff increases in the opposite direction. There is no other way to retaliate. On this occasion, after five rounds of tariff increases, a brief truce and countless threats, the war does not seem to favour anyone. It is estimated that the total measures imposed have reached $250 billion dollars for Chinese imports and $110 billion dollars for U.S. imports. Thus, the strategic question would be quantitative for certain final consumer goods and qualitative for certain industrial branches. The impact, however, is on international trade as a whole.
In a limited sense, it is true that the U.S. deficit with China has decreased, but only to pre-trade-war levels of 2017. The accumulated deficit decreased by 9.9% between May 2018 and May 2019, but China still accounts for 38% of the total U.S. trade deficit. In contrast, the total U.S. deficit to May 2019 is 25% higher than the previous year and reached -359,579.8 million dollars. This increase corresponds largely to the growing deficit with Mexico (see graph). The question is if Mexico is importing more from China for its industrial base, substituting the US as an intermediary of these goods. The answer is yes, imports from China have risen 25% between January 2018 and December 2018 according to DOTS.
The reduction of the US trade deficit with China has been the result of a contraction of its imports as a result of the slowdown. This situation, given the conditions of the U.S. productive structure, only further complicates its levels of productivity and international competitiveness. The reduction in imports reflects its level of domestic consumption and the limited capacity of the economy to grow. Hence, when the Bureau of Economic Analysis announced July 26 that GDP growth fell from 3.5% in the second quarter of 2018 to 2.1% in the second quarter of 2019, this is an anticipation of less growth for 2019 than for 2018. This means to say that US policies are hurting them domestically after a brief short-term boom. The reason is the rise in costs of production due to the tariffs, which leads to reduced consumption. Investment is then affected as profit rates are hurt due to rising costs of production and reduced consumption. This could eventually hurt stock prices.
On the other hand, a good part of American production chains depend on Chinese inputs. In 2017, 50% of its purchases were composed of electronic devices, broadcasting machinery, computers, electronic parts and pieces and other industrial inputs and final consumption. The technical and specialization level incorporated in Chinese products, supported by very low production costs, displaced U.S. products. This condition of the U.S. productive apparatus does not allow it to substitute Chinese imports without making products more expensive and generating inflation.
Conversely, the U.S. export matrix to China consists mainly of machinery (22%), transportation equipment, mostly automobiles (15%), chemicals (14%) and petroleum products (11%). As the Huawei plot and the 5G network have shown, the U.S. economy has lost leadership in the technological-industrial branches and does not seem to find ways to recover it. What it can do is secure its internal (expanded) market via the TMEC; put punitive tariffs on the European Union (especially Germany) and expect its protectionism to undermine China’s 6.2% growth, without further affecting its own meagre 2.1% GDP growth.
Finally, if we consider that there is a self-induced recession in Mexico due to adjustments in fiscal spending, and the fall in demand in the U.S. is likely to continue, the end result should be fewer Mexican imports and a larger Mexican deficit with the U.S. by December 2019. This could mean more tariffs on Mexican goods given the US economic team’s peculiar view of the world. The Smoot-Hawley Tariff Act of 1930 must be kept in mind as well as its non-ratification of the League of Nations Covenant, in 1920, founded by President Woodrow Wilson in 1919. The Republican bench, led by Henry Cabot Lodge, argued then that “the League would commit the United States to an expensive organization that would reduce the United States’ ability to defend its own interests.” Republican Governments have been known for isolationism and for xenophobia in the past. This might mean that further economic woes in the US might lead to further isolationist measures with dreadful impacts on the global economy like in 1930.
(*) Oscar Ugarteche is a Senior researcher at the Institute of Economic ReAserch, UNAM, SNI/CONACYT; coordinator of the Latin American Economic Observatory, www.OBELA.org / Armando Negrete is a doctoral student at UNAM; webmaster of the Latin American Economic Observatory, www.OBELA.org. https://www.alainet.org/en/articulo/201340