The US and China have called a temporary truce in their trade war that has roiled global financial markets and economies over the last six months. Last week, US president Donald Trump announced that he has put on hold a move to hike tariffs on $200 billion worth of goods imported from China to 25 per cent. The increased duties, on top of the 10 per cent already imposed on these goods in July (in addition to 25 per cent on imports of another $50 billion), were to come into effect from January 1. But following a meeting between Trump and his Chinese counterpart Xi Jinping on the sidelines of the G-20 Summit at Buenos Aires, the US has now decided to retain its tariffs on the said $200 billion of imports at 10 per cent for the next 90 days. During this period, both sides will undertake negotiations to resolve US concerns vis-à-vis China over intellectual property protection, forced technology transfer, cyber intrusions/thefts, non-tariff barriers, services and agriculture. In the event of no agreement being reached, the 10 per cent tariffs will automatically be raised to 25 per cent.
The ceasefire deal, if anything, reflects a welcome realisation that trade wars ultimately benefit nobody, including the world’s two largest economic powers. US tariffs on steel and aluminium may have been intended to help producers of these metals in Ohio and Pennsylvania. But the jobs created or protected in these plants would have been far less than those lost in the industries using steel and aluminium as inputs — from cars and washing machines to construction. Moreover, trade actions invite retribution. China, in 2017-18, imported over 95 million tonnes of soyabean, of which more than a third was from the US. Its tit-for-tat duties have only ended up hurting soyabean growers in Iowa, Illinois, Minnesota, Nebraska and Indiana. The biggest losers from trade wars are consumers. The gains from international trade arise from the fact that every country produces those goods and services in which it has a comparative advantage and imports things that are better left for others to supply at lower cost. The US has a structural merchandise trade deficit with China, which can be better addressed by making the latter open up its banking and financial services industries.
The one positive spinoff of the current trade tensions is that they will force structural reforms on China. US companies have reasons to complain about the Chinese government’s poor enforcement of intellectual property protection or use of foreign ownership restrictions to compel sharing of technology with local joint venture partners. China’s putting in place a more open and transparent trade system would also benefit India, which has found it near impossible to penetrate its markets for agricultural produce, pharmaceuticals and IT services due to non-tariff barriers.