When Elephants Fight, It Is The Grass That Suffers

 

THE WHITE PAPER on China’s membership of the World Trade Organization (WTO) since it acceded to the world trade body in 2001 released by the State Council Information Office on June 26 implicitly acknowledges how much China has benefited from its membership.

This is all couched in terms of how China has lived up to its membership obligations and is now championing global free trade — an unabashed riding on the coattails of the global backlash against the United States’ protectionist turn.

The latest step in that come today with US tariffs of 25% on $34 billion worth of Chinese goods from ball bearings to lithium batteries coming into effect and China retaliating by imposing a similar 25% tariff on 545 US products, also worth a total of $34 billion, and likely to focus on agricultural products.

US President Donald Trump had previously threatened a 10% levy on an additional $200 billion of Chinese goods if Beijing’s trading practices remain unchanged, and raised the stakes on Thursday by saying that more than $500 billion of Chinese exports could be tariff targets.

Should that happen, Beijing may resort to non-tariff retaliation in forms such as more expensive and lengthy customs inspections and consumer boycotts of US products, as it did last year to South Korea’s Lotte Group.

That would be a display of patriotic citizen loyalty that the United States would be unable to match and may point to the Achilles’ heel of Trump’s belief that he can push hard on trade because the U.S. holds the strongest hand and thus the rest of the world will, ultimately, back down.

Two days before the imposition of these latest tariffs, the WTO reported that in the seven months to May, trade restrictions imposed by the G20 had doubled over the previous reporting period. These include tariff increases, stricter customs procedures and imposition of taxes and export duties.

In a nod to its purpose, the WTO noted that during the seven months reported on (so they do not include the latest tariffs), trade liberalisation measures taken by G20 members covered $82.7 billion of trade, versus the $74.1 billion affected by trade restrictions. But the gap is narrowing rapidly.

The WTO’s report is blunt in saying that further escalation of protectionism — measures and rhetoric — could carry potentially large risks for the global trading system itself:

At a juncture where the global economy is finally beginning to generate sustained economic momentum following the global financial crisis, the uncertainty created by a proliferation of trade restrictive actions could place economic recovery in jeopardy. The multilateral trading system was built to resolve such problems and it has the tools to do so again. However, further escalation could carry potentially large risks for the system itself. Its resilience and functionality in the face of these challenges will depend on each and every one of its Members. The G20 economies must use all means at their disposal to de-escalate the situation and promote further trade recovery.

Trump’s antipathy for the WTO — beyond a general belief that all multilateral organisations exist to do down the United States — is that it has provided China with a mechanism to create the vast trade surpluses with the United States on which he is now waging trade war.

Our man in Washington tells us that in private Trump repeatedly says that United States should get out of the WTO because it is anti-American and recalls the president on the campaign trail in 2016 calling the WTO a “disaster”.

Perversely, because the US-created the system and has lots of effective lawyers at the WTO, it does better than most when it comes to dispute resolution at the WTO. According to this year’s Economic Report for the President, the US has had an 85.7% success rate in cases it has initiated before the WTO since 1995, compared with a global average of 84.4% and China’s 66.7%. And it wins 25% of the cases brought against it, compared to the overall average successful defence rate of 16.6%.

Whether Trump would push the destruct button on the WTO remains an open question, though he is constrained to an extent in that the US Congress would have to pass legislation for the United States to leave the organisation.

Doing so would send both world trade and world financial markets into a tailspin. Stockmarket indices are scoreboards that get Trump’s attention. A deal to ‘fix’ the WTO might appeal more to him, especially if markets react badly to this latest round of tariffs.

For all the rightful concern, the US tariffs so far are tiny in the global scheme of things, affecting the equivalent of 0.6% of global trade and accounting for 0.1% of global GDP, according to Morgan Stanley.  The collapse of the WTO would be on an altogether greater scale.

Meanwhile, Beijing will continue to play its long game and to occupy the moral high ground over the WTO, its belief in its ability to outlast Trump as unshakeable as Trump’s belief that it cannot.

 

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1 Comment

Filed under China-U.S.

One response to “When Elephants Fight, It Is The Grass That Suffers

  1. Pingback: No Endgame In Sight As China-US Trade Tension Escalates | China Bystander

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