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Geostrategy 12 Apr 2018

Is there a trade war between the United States and China?

Fears of a trade war between the U.S. and China are escalating by the day. Trump announced extra duties on 10% of Chinese imports and the two world powers have entered into a “tit-for-tat” trade retaliation that has unnerved investors and shaken financial markets. Nevertheless, the likelihood that these skirmishes will turn into a full-blown trade war are still low, as explained in a BBVA Research report.

According to the report, both sides are aware of the damage that could be caused by losing a hypothetical battle.  It is BBVA’s opinion that the scale of the dispute will largely depend on Chinese reprisals to the U.S. plans.

China’s response so far has been relatively measured, although Beijing is already preparing a package of tariffs covering 128 American products, as recently reported by the media. “China doesn’t want a trade war, but it’s not afraid to fight one either,” affirmed the Minister of Commerce in a statement.

Meanwhile, top U.S. officials as well as President Trump maintain that they are open to negotiations with China, and they are using this stand as a pressure tactic. However, they are sending messages in the opposite direction, such as the threat of Donald Trump, who is considering the imposition of extraordinary tariffs on imports from China for 100,000 million dollars, reports the North American newspaper Wall Street Journal.

The limited impact of Trump’s plans on China’s economy

BBVA Research has examined the potential impact of the bilateral trade clash on the Chinese economy. Currently, the risk to the Chinese economy seems contained especially because China has become an economy driven by domestic demand as opposed to depending predominantly on exports as it did in the past. Specifically, the United States represents only 15% of Chinese exports of goods.

That said “aggression from both sides could trigger a full-fledged trade war and presents a notable downside risk for China,” says BBVA Research. Even so, BBVA rules out this scenario for the moment and sticks to its current growth forecasts for China’s GDP: 6.3% for 2018 and 6% in 2019.

BBVA Research: Aggression from both sides could trigger a full-fledged trade war and presents a notable downside risk for China

The U.S. affirms its new trade policy

These tariffs don’t constitute the first of their kind announced by the Trump administration. Rather, they are just another step added to measures announced in recent weeks such as the 25% tariffs on U.S. steel imports and 10% tariffs on aluminum, announced last March.

Reactions to this much-talked about announcement were immediate. From China, specifically, it was characterized as “a serious attack” that the country would “strongly oppose” according to the Ministry of Commerce.

The news was not well received in Europe either; although the U.S. did eventually exclude the EU from the list of countries affected by the steel and aluminum tariffs. European Commission President Jean Claude Juncker called the measure “unfortunate, unilateral, unjustified.” Juncker flagged possible EU retaliatory measures against US goods.

The President of the European Central Bank (ECB), Mario Draghi, used the bank’s monthly news conference to express his concern for “growing protectionism” that could impact economic growth, something the International Monetary Fund also warned. He also admonished that “unilateral decisions are dangerous.”

ECB: Unilateral decisions are dangerous

The TransAtlantic Business Council (TABC), the official business interlocutor between the U.S. And the E.U., added its concerns to those expressed by the EC, ECB and IMF. The TABC believes that the unilateral imposition of tariffs could have unintended consequences and possibly result in effects contrary to those originally intended. The council urged both sides to refrain from adopting unilateral measures, and to focus on setting out long-term trade deals on both sides of the Atlantic.

NAFTA, also crucial for global trade

Carlos Serrano, Chief Economist at BBVA Bancomer in Mexico, in an op-ed in Mexican financial newspaper Diario Financiero, pointed at the new North American Free Trade agreement that the U.S., Canada and Mexico are currently negotiating as another threat to international trade stability.

If negotiations stall, he warns, the consequences could be “extremely severe for global trade and therefore, for growth and prosperity.” And President Trump has already threatened to pull out of the talks. This position could be motivated, the author concludes, by the U.S. government’s intent to “cut the trade deficit of the country with the rest of the world.”

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