Discussions

Could there be a Trade war between China and the United States?

Could there be a Trade war between China and the United States?

25 Aug 2017

Gerhard Erasmus, tralac Associate, discusses the possibility of a China-US trade war and what this would mean for African governments

There have been several recent media reports about the possibility of a trade war between China and the United States. Threats by the American President have given rise to these speculations.

What is a “trade war” and at what point do inter-state differences become a war? Can such a “war” be avoided; or be contained to prevent more serious political consequences and dangerous spillovers? What are the implications for African governments?

The term trade war has no defined meaning. States frequently differ about trade related measures. The rules-based system of the WTO provides them with a legitimate dispute settlement mechanism, which is regularly used. A trade war suggests comprehensive unilateral punitive measures not sanctioned by WTO rules or by bilateral trade agreements. (There is no bilateral trade agreement between the UA and China.) Such an extraordinary development (not seen since the establishment of the WTO in 1995) will occur when the deterioration of a relationship has reached such a low point that the multilateral rules for resolving differences between members of the WTO are by-passed. That would be a dangerous development.

How could a full-blown US-China trade war start? The Economist has sketched a possible scenario. The big fear is that Mr Trump decides to bypass WTO rules, or ditch them altogether after a decision does not go his way. A 45% tariff on Chinese imports would effectively act as a tax on electronics and clothes made in China. If prices rise domestically then American shoppers will feel the pinch – particularly poorer ones. American companies relying on imported inputs from China would suffer too. A blanket tariff of 45% on Chinese imports would clearly violate WTO rules, and the Chinese would not wait for an official ruling to retaliate.[1]

This will be a very unfortunate development with major implications for the global economy. There will be no clear winners. Retaliation will come in unpredictable ways and will snowball into dangerous territory.

There is also a time factor. Trade disputes are not settled overnight. Other WTO members with an interest can join the proceedings. Parties can appeal findings in Panel reports. There can also be disputes about compliance. By actively pursuing the formal dispute settlement route Mr. Trump could argue that he is honouring his campaign promises, while keeping his powder dry.

If there is a full-blown trade war what would the implications be for the South African economy and for other African states? It depends on the scale and suddenness of such a “war”. If things get really bad South Africa will not be a major player. And there will not be neat opportunities for working out responses unilaterally. If global chaos results, beggar-thy -neighbor consequences are likely. The stability and benefits of the global economy are unlikely to continue in the form of isolated pockets of normality.

Africa is a commodity exporter. In a worst-case scenario one cannot predict what commodities will then be required and by whom. China is a major importer of raw materials because it is such a big exporter of finished goods to the rest of the world; including the US and the EU. It will be more important to see what Brussels will do in order to prevent this scenario or how to deal with the consequences. The EU stands to be affected more directly and more seriously.

In case of a full-blown trade war South Africa would not have many options. The real challenge is about what to do in order to prevent such a scenario. Pretoria should punt for the predictable route of formal dispute settlement; and do so in conjunction with like-minded allies. It should join the club of the level-headed pragmatists. And it should not be forgotten that Pretoria faces its own challenges at home; some of which have resulted in safeguard measures being imposed on imported steel; inter alia from China.[2] But that is how the multilateral trade game is structured. South Africa’s measures must comply with the relevant WTO rules. It has duly notified its investigations and its safeguard measures.

Pretoria can join other governments in the same pursuit and by staying “neutral”. In December this year the next WTO Ministerial takes place in Argentina. The US-China issue will not be on the official agenda. However, there will be informal opportunities to work the diplomatic agenda. It will be sensible to join ranks with other African governments. The African Union certainly has its own concerns about the dangers for Africa of a US-China trade war.

It has to be hoped that cool heads in the US administration will prevail. The fact that Mr. Trump has just signed an order to investigate violations of Americans’ Intellectual Property (IP) rights in China, in terms of Section 301 of the US Trade Act of 1974, is a development in the right direction.[3] This investigation is to be conducted in terms of TRIPS (WTO Agreement on Trade Related Intellectual Property Rights) rules and is not a declaration of war. Chinese courts have also started to decide IP violation claims in favour of American trade mark owners.[4] These are positive and rules-based developments. They show that a trade war is avoidable.

There are safety valves in the multilateral trade system. Let us hope the essential point is grasped and utilized. A full-blown trade war can (and should) be avoided.

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[1] The Economist 5 February 2017.

[2] Engineering News 12 August 2017. http://www.engineeringnews.co.za/article/safeguard-duties-on-hot-rolled-steel-coil-and-plate-officially-come-into-force-2017-08-11

[3] http://www.businessinsider.com/us-begins-section-301-investigation-2017-8

[4] A Chinese court has just awarded the US sportswear firm New Balance more than 10 million yuan (£1.2m; $1.5m) in a Chinese trademark case after three local shoemakers were found to have infringed the brand’s “N” logo. BBC News 24 August 2017, at http://www.bbc.com/news/business-41020674?ocid=global_bbccom_email_23082017_business. There have been other similar rulings too.