V. Damage of the improper practices of the US administration to global economy
The US government has taken extreme trade protectionist measures, which have undermined the international economic order, caused damage to China-US trade and trade relations around the world, disrupted the global value chain and the international division of labor, upset market expectations, and led to violent swings in the international financial and commodity markets. It has become the greatest source of uncertainty and risk for the recovery of the global economy.
1. Such measures undermine the multilateral trade rules and the international economic order
In the advance toward civilization, humanity has widely accepted an international governance system based on rules and credibility. Countries, big or small, strong or weak, should respect each other, engage in equal-footed dialogue and jointly safeguard international rules in the spirit of contract. This is fundamental to promoting global trade and investment and boosting global growth. However, the recent steps taken by the US administration that are contrary and even destructive to the existing multilateral trade rules seriously undermine the current international economic order. The US administration has issued open criticisms of the rules and operation mechanism of the WTO on various occasions. It has refused to endorse the multilateral trading system, and at the same time has adopted a negative attitude toward global economic governance, which caused the failure of the APEC Trade Ministers Meetings, in both 2017 and 2018, to reach consensus on supporting the multilateral trading system. In particular, the US administration's objection to writing "opposition to trade protectionism" into the ministers' statement was met with opposition from every other APEC member. The US lashed out at the WTO appellate body and repeatedly blocked the appointment procedures of the body, resulting in an understaffed appellate body and pushing the WTO Dispute Settlement Mechanism to the brink of paralysis.
2. Such measures obstruct world trade and the recovery of the global economy
As globalization moves forward, the economies of the world are increasingly connected through trade. Trade has become a major engine for global growth. According to the World Bank, the international economy's dependence on trade rose from 17.5 percent in 1960 to 51.9 percent in 2017 (Chart 13).
Chart 13: World Economy's Dependence on Trade (1960-2017)
The global economy has just emerged from the shadow of the 2008 global financial crisis and the recovery is yet to be solidly-based. In this context, the US administration's actions to instigate large-scale trade frictions and impede the flow of world trade will undoubtedly affect the recovery of the global economy. In order to mitigate the protectionist moves of the US, countries are left with no choice but to take countermeasures. This will disrupt the world economic and trade order, and hold back global recovery, damaging the interests of companies and people of all countries and pushing the global economy back into recession (Table 6).
Chart 14: Impact on Trade in the Case of Tariff Increase to Bound Levels
Source: "Global Economic Prospects", World Bank
According to "Global Economic Prospects" published by the World Bank on June 5, 2018, a broad-based increase in tariffs worldwide would have major adverse consequences, which could translate into a decline in global trade amounting to 9 percent by 2020. The impact would be more severe on emerging markets and developing economies, particularly on those with large trade or financial market linkages with the US (Chart 14). According to WTO Director-General Roberto Azevedo, if tariffs return to the pre-GATT/WTO level, the global economy would contract by 2.5 percent instantly and more than 60 percent of global trade would disappear, creating an impact more serious than that of the 2008 global financial crisis. A trade war is detrimental to all, and particularly to the poor, who could lose 63 percent of their purchasing power.1 History has proven time and again that trade wars produce no winners and can severely affect world peace and development (Box 8).
Table 6: Impact of Trade Frictions Provoked by the United States on the Global Economy
Forecast Institutions | Impact of a Trade War on the Global Economy |
WTO | If tariffs return to the pre-GATT/WTO level, the global economy would contract by 2.5 percent instantly and more than 60 percent of global trade would disappear. |
IMF | An increase in tariffs would slow down global growth by about 0.5 percentage point. |
Barclays Capital | Global growth rate would drop by 0.6 percentage point and the global inflation rate would increase by 0.7 percentage point. |
Standard & Poor's | Global growth rate may possibly decline by 1 percentage point. |
Bank of England | An increase in tariffs of 10 percent between the US and all its trading partners would take 2.5 percent off US output and 1 percent off global output. |
Bank of France | If a country levies a 10 percent extra tariff on imports, the exports of its trading partners would drop by 13 percent to 25 percent. |
Sources: WTO, IMF, Barclays Capital, Standard & Poor's, Bank of England and Bank of France
Box 8: Lessons of the Smoot-Hawley Tariff Act of 1930 In 1930, in the name of protecting the domestic market, President Hoover of the United States signed into law the Smoot-Hawley Tariff Act, which raised tariffs on more than 20,000 imported items and increased the average tariff rate on dutiable imports to nearly 60 percent. The measure stoked much controversy and outcry both inside and outside the country. Domestically, 1028 economists signed a petition expressing their opposition. Internationally, the Act drew fierce criticism from more than 30 countries and many took immediate retaliatory measures. As a result, US imports saw a steep drop by 67 percent from US$4.4 billion in 1929 to US$1.45 billion in 1933, and an even worse plunge of 68 percent in its exports from US$5.16 billion to US$1.65 billion. Both exceeded the 50 percent fall of the US GDP in the same period. Meanwhile, global tariff rates soared, further aggravating the global economic crisis, which became the breeding ground for Hitler's Nazi rule in Germany and expansionist militarism in Japan. Such lessons from history should never be forgotten, and past tragedies should never be repeated. |
3. Impact on the global value chain
In a deeply integrated global economy, countries form a highly efficient global value chain and share in the dividends of economic globalization through division of labor by harnessing their respective strengths in technology, labor and capital. Companies, especially multinational ones, minimize their production costs and raise the quality of their products and services through global allocation of resources, thus achieving a win-win result for themselves and for consumers.
By raising tariffs and erecting trade barriers, the US administration has provoked trade frictions worldwide. US multinationals are being threatened with "traitor" labels and punitive taxes if they do not move their operations back to the US. Such moves will seriously undermine or even break the global value chain, and jeopardize the normal flows of trade and resource allocation across the world. And because of the interconnections between countries through trade and economic links, they will also produce extensive spillovers, and reduce the efficiency of the global economy. For example, sectors such as automobiles, electronics and aircraft are all supported by complex, massive industrial chains. Economies on the supply chain, including Japan, the EU and the ROK, would all be adversely affected by contracting trade. Even US suppliers would not be immune from the subsequent ripple effect. According to the estimates of the Chinese Ministry of Commerce, of the US$34 billion of Chinese products targeted by the first round of US tariff increases, over US$20 billion – nearly 59 percent of the value – are goods produced by companies from the US, the EU, Japan, the ROK and other economies operating in China. Ultimately, companies from all countries on the global industrial chain – including those from the US – would have to pay the price for tariff measures introduced by the US administration.
The "World Economic Outlook" report released by the IMF on April 17, 2018 noted that raising tariffs and non-tariff trade barriers will disrupt the global value chain, slow down the spread of new technologies, and lead to a drop in global productivity and investment. The Peterson Institute for International Economics (PIIE) argued that if the US imposes trade sanctions on China that prompt countermeasures, many countries and regions that export intermediate inputs and raw materials to China will also take a heavy hit.2
4. Trade protectionism will ultimately hurt US interests
Thanks to economic globalization, economies, particularly the larger ones, are highly interdependent. Ultimately, trade wars unilaterally initiated by the US administration will not only hurt other economies but also undermine US interests.
It will push up manufacturing costs and affect American jobs. A PIIE report contends that since 95 percent of the Chinese products hit by higher tariffs are parts and electronic components used in end products made in the US, raising tariffs on these Chinese products will only damage US businesses.3 According to the New York Times, electric motors and other components from China are vital to the US boating industry, and it is not easy for importers to find substitutes. Their profit margins are too thin to absorb the cost of 25 percent tariffs, and raising prices would cost them market share.4 General Electric estimates that new tariffs on imports from China could raise its overall costs by US$300-400 million. General Motors, Ford Motor and Fiat Chrysler Automobiles have lowered their full-year profit forecasts due to escalating tariffs.5 Mid-Continent, the largest nail manufacturer in the US, said its sales would plummet by 50 percent after it raised prices to cope with its elevated steel costs, and that it laid off 60 of its 500 workers in June and planned to downsize by another 200. Mid-Continent's problems have already spread downstream. For example, Semo Packaging has started to shed its workforce as a result of fewer orders from Mid-Continent and similar customers.6 PIIE also projected that raising tariffs on imported automobiles would cause 195,000 US workers to lose their jobs. If other countries retaliate in kind, 624,000 US jobs would be lost.7
It will drive up prices in the US and harm consumers. Consumer goods account for a considerable share in the US imports from China. The figure (excluding food and automobiles) stood at 46.6 percent in 2017, according to the Bureau of Economic Analysis of the US Department of Commerce. For many years, the import of inexpensive yet quality products from China has been key to low inflation in the US. The US Association of Equipment Manufacturers has urged the administration not to levy economy-damaging tariffs, as they will only boomerang and increase the tax burden on US consumers. The US National Taxpayers Union warned in an open letter to Congress and President Trump on May 3, 2018 that higher protective duties would increase the prices which domestic consumers would have to pay and few people could hope to gain from such a change.8 The US Alliance of Automobile Manufacturers concluded in a June report to the government that based on its analysis of 2017 automobile sales figures, a 25 percent tariff on imported automobiles would drive up the average price by US$5,800, thus increasing the cost for US consumers by nearly US$45 billion every year.9
It triggers countermeasures from trading partners and will in turn hurt the US economy. The trade war waged by the US administration against China and many other important trading partners has led to countermeasures, and will cause huge losses to some regions, industries and firms in the US. As of the end of July 2018, major US trading partners including China, Canada, Mexico, Russia, the EU and Turkey had all announced countermeasures against US trade protectionism, and had filed lawsuits at the WTO. For example, the Canadian government announced on June 29 a tariff increase on US$12.6 billion of US goods, effective from July 1. The Russian Economy Ministry announced a 25 percent to 40 percent tariff hike on some US products on July 6. As a countermeasure to American duties on European steel and aluminum, the EU raised tariffs on US-made motorcycles from 6 percent to 31 percent.
The US Chamber of Commerce has pointed out that a trade war will hit some American states. For example, Texas could see US$3.9 billion worth of exports targeted by retaliatory tariffs; South Carolina, US$3 billion and Tennessee, US$1.4 billion.10 The Consumer Choice Center stated that the US government is actually "punishing" American voters with the tariffs it introduced, as over 150,000 jobs in North Carolina and 6,500 workers in South Carolina, both being heavily export-dependent states, will be directly affected11 by the retaliatory duties. Harley-Davidson Inc., a famous American motorcycle maker, estimated that the EU's retaliation will cost about US$2,200 per motorcycle shipped to Europe, forecasting US$30 million to US$45 million in costs linked to the EU tariffs for the remainder of 2018. As a response, the company is shifting the production of some bikes overseas.12
It erodes investors' confidence in the American economic environment and results in less net foreign direct investment (FDI) into the United States. As the trade friction escalates, companies feel less confident and more hesitant about investment. Adam S. Posen, President of the Peterson Institute for International Economics, argued that beyond the cost of the trade war, the US government's policy of "economic nationalism" has taken a toll in another important sphere: net inward investment into the US by multinational corporations – both foreign and American – has fallen almost to zero. This shift of corporate investment away from the US will decrease long-term US income growth, reduce the number of well-paid jobs available, and accelerate the shift of global commerce away from the US. Data from the Bureau of Economic Analysis of the US Department of Commerce show that in the first quarters of 2016 and 2017, the total net FDI inflow was US$146.5 billion and US$89.7 billion. For the same quarter in 2018, the figure was down to US$51.3 billion. This is a result of a general decline in the US attractiveness as a place to make long-term business commitments.13
1 CNN News (https://www.cnn.com), April 3, 2018.
2 Peterson Institute for International Economics (https://piie.com).
3 Peterson Institute for International Economics (https://piie.com), "Trump, China, and Tariffs: From Soybeans to Semiconductors", June 18, 2018.
4 New York Times (https://nytimes.com), "What a Trade War With China Looks Like on the Front Lines".
5 Reuters, "Impact of US-China trade tariffs on US companies", July 30, 2018
6 Huffington Post (https://www.huffingtonpost.com), "Largest US Nail Manufacturer Could Soon Be Out of Business Because of Trump Tariffs", June 29, 2018.
7 Peterson Institute for International Economics (https://piie.com), "Trump's Proposed Auto Tariffs Would Throw US Automakers and Workers Under the Bus", May 31, 2018.
8 The US National Taxpayers Union (https://www.ntu.org), May 3, 2018.
9 The Alliance of Automobile Manufacturers (https://autoalliance.org), "Comments of the Alliance of Automobile Manufacturers on the Section 232 National Security Investigation of Imports of Automobiles, Including Cars, SUVs, Vans and Light Trucks, and Automotive Parts", June 27, 2018.
10 NBC News (https://www.nbc.com), July 2, 2018.
11 The Charlotte Observer (https://www.charlotteobserver.com), "How the Carolinas Could Suffer from Trump's Tariffs", June 21, 2018.
12 Bloomberg (https://www.bloombergquint.com), June 25, 2018.
13 Adam S. Posen, "The Cost of Trump's Economic Nationalism: A Loss of Foreign Investment in the United States", July 24, 2018.