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tralac’s Daily News Selection
Photo Credit: Xinhua

06 Nov 2019

Trade and trade diversion effects of US tariffs on China (UNCTAD) 

Tariffs imposed by the US on China are economically hurting both countries, UNCTAD warned in a paper released yesterday. The study, Trade and Trade Diversion Effects of United States Tariffs on China, shows that the ongoing US-China trade war has resulted in a sharp decline in bilateral trade, higher prices for consumers and trade diversion effects (increased imports from countries not directly involved in the trade war). By analysing recently released trade statistics, the study finds that consumers in the US are bearing the heaviest brunt of the US tariffs on China, as their associated costs have largely been passed down to them and importing firms in the form of higher prices. However, the study also finds that Chinese firms have recently started absorbing part of the costs of the tariffs by reducing the prices of their exports. “The results of the study serve as a global warning. A lose-lose trade war is not only harming the main contenders, it also compromises the stability of the global economy and future growth,” cautioned UNCTAD’s director of international trade and commodities, Pamela Coke Hamilton. “We hope a potential trade agreement between the US and China can de-escalate trade tensions.”

The analysis shows that US tariffs caused a 25% export loss, inflicting a $35bnblow to Chinese exports in the US market for tariffed goods in the first half of 2019. This figure also shows the competitiveness of Chinese firms which, despite the substantial tariffs, maintained 75% of their exports to the US. The office machinery and communication equipment sectors were hit the hardest, suffering a $15bn reduction of US imports from China as trade in tariffed goods in those sectors fell by an average of 55%. Trade of tariffed goods in sectors such as chemicals, furniture, and electrical machinery also dropped substantially according to the analysis.  Extract (pdf):

Trade diversion effects in favour of the Republic of Korea, Canada, and India were smaller [than Taiwan, Mexico and the EU] but still substantial (between $0.9 and $1.5bn). The remainder of the trade diversion effects was largely to the advantage of other South East Asian countries ($1.7bn). The rest of Latin America, Sub Saharan Africa and the rest of the world were only marginally able to benefit from trade diversion effects.

China International Import Expo: full text of President Xi Jinping's keynote speech  

What I want to say to you today is that the Chinese market is such a big one that you should all come and see what it has to offer. China will better leverage the fundamental role of domestic consumption in economic development and foster a more robust domestic market to boost growth at home and create more room for global growth. China will give greater importance to import. We will continue to lower tariffs and institutional transaction costs, develop demonstration zones to promote import trade by creative means, and import more high-quality goods and services from around the world. We will take steps to promote balanced development of both imports and exports, of trade in goods and services, of two-way trade and investment, and of trade and industry. This way, we will ensure a free yet orderly flow of both international and domestic factors of production, improve the efficient allocation of resources, and deepen integration of markets.

Second, China will continue to optimize its opening-up structure. China's opening-up is all-dimensional and all-sectoral. A new structure of all-out opening-up is quick in the making. China will continue to encourage bold trials and experiments in pilot free trade zones and quicken the development of the Hainan Free Trade Port as pacesetters of opening-up in China. China will continue to implement integrated regional development strategies for the Beijing-Tianjin-Hebei region, the Yangtze River Economic Belt, the Yangtze River Delta region, and the Guangdong-Hong Kong-Macao Greater Bay Area, and draw up a new national strategy for environmental protection and high-quality development in the Yellow River basin. The purpose is to seek greater synergy of opening-up among different parts of the country.  [China's Ambassador to ASEAN: Upgraded protocol of China-ASEAN Free Trade Area brings "visible and tangible" benefits]

China's Informal WTO Ministerial Meeting: 

(i)  Over 200 attendees, including ministers or representatives from 33 WTO members and WTO director-general Roberto Azevedo, were invited to the small-scale ministerial meeting in Shanghai. It was the second time China had held such an event since it joined the WTO in 2001. In the meeting, ministers or their representatives agreed that the rule-based multilateral trading system should be firmly supported, and international trade should play a role in driving economic growth, job creation and sustainable development, according to a statement from China's Ministry of Commerce. They also supported necessary WTO reforms and called for resolving the issue of appellate body appointments-which have been blocked by the United States-and working on issues such as fishery subsidies, the statement said.

(ii) Remarks by WTO DG Roberto Azevêdo on investment facilitation for development.  In July, you circulated a Working Document that reflects the areas of common ground and of common interest. This is progress. And I understand that these efforts have helped other WTO members better understand where participants are heading. I am pleased to hear that the discussions around the Working Document are progressing well, with a high level of engagement. This process has clearly demonstrated what can be achieved when members work together, with a clear sense of direction. I hope you will keep up this momentum. Facilitating investments for development is in everyone's interest. The joint ministerial statement today sends an important political message about your engagement. It also illustrates how the support for this initiative has grown significantly, with 92 members co-sponsoring the statement – up from 70 in Buenos Aires.

China risks overplaying its hand on trade (Bloomberg)

The US-China trade war has been driven by successive rounds of misunderstanding and overconfidence. Until the collapse of an initial hoped-for agreement in May, the Pollyannas were mainly in Washington. US Trade Representative Robert Lighthizer and his allies in the Trump administration were gunning for a wholesale remaking of the Chinese state’s relationship with the economy which was never likely to happen. Now it’s Beijing’s turn to come to the table with unrealistic expectations.

India and the RCEP: selected updates, commentaries

(i) As it sits out of RCEP, New Delhi gets time to kick-start reforms.  Modi seems to have delivered a strong statement vis-à-vis China, say analysts. India has been at a disadvantage vis-à-vis China with a trade deficit of $53bn in 2018-19. The worry was that joining RCEP could have meant Chinese goods entering India through a third RCEP country. There are, however, implications for remaining a hold out. “Everything these days has geopolitical and geostrategic consequences. India’s heft is because of its economic potential. Looking protectionist has its consequences," said Sachin Chaturvedi, director general at New Delhi-based Research and Information System for Developing Countries think tank. If India is looking at forging a free trade agreement with Africa, for example, it would be better to negotiate as part of RCEP (or an economic bloc). “If you negotiate as a bloc, there are some distinct advantages because you are negotiating as a group, there are numbers with you.”

According to former foreign secretary Kanwal Sibal, India opting out of RCEP would slow down its “Act East" and “Indo-Pacific" policies. “We now have all the more reason to work for an FTA with the European Union and resolve our trade differences with the US"—the single-largest market and the largest economy in the world respectively, Sibal said. In terms of technology that will help India leapfrog into the $5 trillion economy bracket that it wants to, it is Europe that India should look at partnering, he said. “If you look at IT, it is the US that is your biggest market. So these are the areas India should be looking at.”

(ii)  Pradeep S. Mehta, Amol Kulkarni: Why India shouldn't view its refusal to join RCEP as a victory. The RCEP negotiation still offers a few important lessons for India. The assumption that the world will bend to our demands given the size of our market doesn’t hold good any more. We need to put our house in order to take on global competition and benefit from export opportunities that external markets offer, and such multilateral agreements create. No country has grown without strong export performance and thus it is important for India to understand this simple fact. This is also vital for our aspirations to become a $5-trillion economy by 2024.  The refusal to join RCEP is an acknowledgment to ourselves and the world that our house is not in order. Acknowledgment of a problem is the first step in addressing it. At the same time though, the refusal is not enough to boost domestic productivity, and needs to be complemented with reforms to reduce input costs such as finance, power and logistics, remove bureaucratic hindrances and encourage active cooperative federalism. Only then will we be able to overcome our limitations, confidently enter into such multilateral agreements, compete effectively in global markets and realise our potential.

(iii)  RCEP didn’t make much sense for India. There were at least two reasons why Indian entities were worried about their future if the government had signed on to RCEP. The first is that the three FTAs, with ASEAN, Japan and Korea, implemented from the beginning of the current decade, have not served India well. In every case, the trade deficit with the FTA partners has ballooned, owing to a double whammy, namely, increasing imports, but more importantly, the lack of momentum in exports. In fact, the trade deficit with ASEAN had seen a spike recently, rising from about $13bn in 2017-18 to nearly $22bn in 2018-19. No wonder then that the prime minister has called for a review of the India-ASEAN FTA. The second factor is the large footprint of Chinese products in the Indian economy. But more significant than the sheer size of the trade deficit, once again caused by India’s inability to penetrate China’s market, is the fact that India exports raw materials and intermediates to its northern neighbour and imports finished products, not to speak of critical electronic items. This almost resembles the colonial pattern of trade, which we thought was behind us seven decades ago.

(iv)   China's Vice-commerce minister Wang Shouwen, speaking at a news briefing in Beijing, said he understood those concerns, but the deal could benefit Indian exporters and help create more local jobs. “We understand that some industries in India will have some concerns, but RCEP will also bring huge export opportunities to the Indian industry“,  adding that the deal includes a protection mechanism that can be used to put the tariffs back on if India does find the deal damaging to its domestic industries.

(v) India's trade minister Piyush Goyal: “For the present, it is the final decision that we are not joining RCEP. The doors are not shut for anybody. If the 15 RCEP nations make a sincere effort to resolve our concerns, to give us confidence and help us to balance the trade inequality which Prime Minister has raised, then every nation should talk to their friends. We have not become enemies of each other."

(vi)  India should hold talks with the European Union for a free trade agreement, the government said on Tuesday, a day after it refused to join a China-backed regional trade pact for fear of a flood of cheap Chinese imports. Trade Minister Piyush Goyal said sectors such as gems, textiles and agriculture have pushed for a trade pact with the EU. German Chancellor Angela Merkel has also called for talks to restart to finalize an agreement. [In strategic shift, India mulls a trade agreement with US]

(vii ) Peter Drysdale, Adam Triggs: Asia pushes back against global protectionism with big trade and cooperation agreement.  In signing RCEP, Asia has chosen openness over protectionism, regionalism over nationalism, cooperation over confrontation, and solidarity over suspicion. They have sent a clear and unambiguous signal to the world: that Asia remains very much open for business, committed to the open regionalism that has seen East Asia’s share of global GDP soar from 15 to 30 per cent since 1980, while South Asia’s remains stubbornly has not budged, stuck around 3 to 4 per cent. RCEP was hard fought, but a choice made easier by the calculation that Asia needed to push back against protectionism even as the United States chose that path. For countries seeking new sources of growth, increased living standards and fresh productivity growth, regional cooperation was the answer. Analysis by Australia’s Productivity Commission presented the options in stark detail: choose protectionism, and ASEAN+6 GDP would fall by more than 8%.  Choose openness, and ASEAN+6 GDP would rise by up to 4%.  Asia has made the right choice. The path of protectionism is costly. Almost 100% of President Trump’s tariffs have been paid for by American citizens, plunging the poorest Americans into an even deeper poverty. President Trump’s misguided desire to reduce the US trade deficit has seen the deficit blow-out by more than a third. His trade war has forced the US Federal Reserve to cut rates in a desperate effort to ward off what the yield curve and financial markets are overwhelmingly predicting: a looming US recession. [East Asia Forum editorial board: Straining to achieve potential at the East Asian Summit in Bangkok]

New Zealand's trade minister: Absence of RCEP will lead to uncertainty, would want India to be in final pact

Bloomberg Quint Debates: Was India right to quit RCEP?

14th East Asia Summit: chairman's statement

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