Only One Step Away from a Global Trade War

(SCF) – The financial crisis of 2007-2009 effectively terminated the process of globalization. In 2015 world trade suddenly dropped by more than 10% for the first time since 2009. Nothing like this has been seen since the Great Depression of the 1930s. But some politicians, public figures, scholars, and journalists continue to talk about globalization as an «objective» and «progressive» process, even though it has already ended.

The world has embarked on a new era. One important hallmark of this era is the strengthening of protectionism in international trade and investment, the splintering of the global market into trade and economic zones, and even the move to regulating trade on a bilateral basis. According to the WTO, just in the period between October 2015 and May 2016 the G20 countries adopted 145 laws aimed at strengthening trade barriers, and over 1,500 such laws have been adopted since 2008. In total, according to estimates by the renowned British economist Simon Evenett, there are close to 4,000 protectionist laws and regulations on the books around the world. And the countries of the G20 – where over 90% of global trade originates – are responsible for 80 % of those trade barriers.

Donald Trump jumped nimbly onto this bandwagon with campaign slogans promising to revitalize America’s weakened position in world trade – mostly by relying on protectionist measures:

First – he would halt the negotiations to draft the Transatlantic Partnership Agreement between the US and the EU and refuse to ratify the already-signed Trans-Pacific Partnership Agreement.

Second, he would either find a way out of NAFTA or would completely revise the terms of that treaty with the other parties (Canada and particularly Mexico).

Third, he would use bilateral agreements to frame American trade and economic relations with the rest of the world, while simultaneously moving away from a policy of multilateral or even global regulation of world trade (to the extent that the US is ready to refuse to take part in the work of the WTO).

Fourth, he would completely revise the terms of America’s trade and economic relations with China: increasing the typical level of import duties on Chinese goods to an average of 45% and adopting protectionist measures in connection with what is known as Beijing’s currency war (the artificially weak yuan compared to the US dollar).

Obviously the dogged and headlong pursuit of such a consistently protectionist program could not only strain relations with many of Washington’s trading partners, but could even trigger a trade war. In June the US president-elect thus described American-Chinese economic relations, «We already have a trade war and we’re losing badly». By the spring of 2017 we are likely to hear of his first practical steps to restructure or «adjust» Washington’s international trade policy.

Trump’s protectionist mantras are already being echoed around the world. America’s trading partners are considering retaliatory measures. These are primarily the countries with which the US has the largest trade deficits. In 2015 America’s biggest trade imbalances were with the following five trade partners (in billions of dollars): China – 365.7; Germany – 74.2; Japan – 68.6; Mexico – 58.4; and Vietnam – 30.9. China’s currently astronomical magnitude of foreign exchange reserves is the flip side of the active trade surplus with the US that China has been building up each year. During the 15 years of its membership in the WTO, China has stockpiled a favorable balance of $3.5 trillion from its trade with the US.

The flames of a global trade war could flare up even before Donald Trump moves into the Oval Office. A very important date is right around the corner – Dec. 11, 2016, memorable because that is when China became a full member of the WTO, precisely 15 years ago on Dec. 11, 2001. But many are awaiting Dec. 11, 2016 with tension and fear. Why is that? Because in accordance with the terms of that 15-year-old agreement, China is to be granted the status of a «market economy» no later than Dec. 11, 2016. This is a title it still lacks. According to the WTO’s rules, the member states of this organization can take measures to protect their markets from products exported from countries that are not «market economies». The idea is that countries that have not been awarded the status of «market economies» are propping up their exporters, in one way or another. This includes different types of state subsidies, including surreptitious varieties such as tax breaks. The WTO views public-sector companies with the gravest suspicion. And that would describe a great many of China’s exporters. To protect themselves against exports from such countries, the «civilized» members of the WTO have the right to impose anti-dumping duties, which are sometimes several times higher than the customary tariffs. The WTO does not make the decision to recognize the «market» status of an economy in a centralized manner – that is determined by individual member countries or groups of countries. But Beijing believes that under the terms of China’s 2001 membership agreement with the WTO, after Dec. 11, 2016 all WTO members must adjust their relationships with China in order to take into account the fact that it is now a «market economy». In other words, a mechanism is in place to automatically enforce this provision.

At the beginning of this decade the European Union made it clear to Beijing that China was still very far from a «market economy». And over the course of those years the EU – out of all China’s trading partners – held the record for the most frequent imposition of anti-dumping duties against Chinese goods, especially the products of China’s steel industry. In the past year, Brussels has repeatedly stated that the Chinese economy is still far from being «market-based», and therefore there can be no question of China automatically receiving its desired status. Currently the EU has 68 anti-dumping measures in effect, 51 of which are levied against Chinese goods. These duties can exceed 65% and are imposed on a wide range of products, ranging from steel to solar panels.

Thus, tensions are growing, not only in Beijing’s relationship with Washington, but also with Brussels. Last summer the European steel association Eurofer released a very emotional statement in which it once again demanded that European countries not recognize China as a market economy under any circumstances. That association claims that since 2008 the European steel industry has lost about 85,000 jobs, equal to over 20% of that workforce. According to Eurofer, over the past 18 months China has doubled its exports of rolled steel to the EU. The Eurofer report includes an assessment of not only the steel industry, but also the entire EU economy: due to increased imports of Chinese goods, the EU could lose up to 3.5 million jobs in 25 industries after December 2016.

But there is no consensus within the EU itself about how to proceed in relation to China. In particular, countries such as Spain and Italy are categorically opposed to awarding China the status of a «market economy». Germany is in favor, but has some reservations. The UK was also in favor (without any reservations), although no one in the EU is interested in its opinion any longer. Some EU bureaucrats are willing to accept China’s automatic transition to this new category after Dec. 11, but reserve the right to resort to anti-dumping duties against Chinese goods in «exceptional cases». Representatives of the EU’s ferrous metal industry will only agree to award China this new status if the latter accepts the requirement to eliminate its «excess capacity» for producing ferrous metals. The European Commission (EC) was willing to allow China to automatically be granted this new status on Dec. 11, but the European Parliament unexpectedly rose up in opposition to the EC last May when it passed a harsh anti-China resolution regarding the status of China’s economy.

Beijing, in turn, is trying to encourage the EU to make decisions that are favorable toward China. Sometimes it employs the carrot (for example, the reduction of «excess capacity» in the steel industry) and sometimes the stick («Europe should think twice before it makes a final decision regarding China’s market economy», warned the state-run Xinhua News Agency in the light of May’s European Parliament resolution).

Washington is also keeping its finger on the pulse of this argument. Currently China and the US are trading partners of roughly equal size for the European Union. So if the European Union does in fact recognize China’s market-economy status, that will remove the last hurdle for China’s expansion in Europe. And America’s trade position in the European market will take a corresponding turn for the worse.

China shipping

Image Source: PughPugh, Flickr, Creative Commons

This is currently a quiet time of the year for Washington politics. Europe has been left to face China single-handedly and it will have to make its own decision about the status of the Chinese economy. However, even if Brussels reaches its verdict with the political support of the American president (regardless of whether that is Obama or Trump), it will still be faced with a choice between a bad and a very bad option. Either one will trigger a major (global) trade war. Taking into account the mentality of EU bureaucrats, I suspect that they will drag their heels on this crucial decision for an indefinite period. Therefore, the European Union will most likely officially recognize the market economy status of China’s economy, but with the provision that in «exceptional cases» it will continue to resort to anti-dumping duties against Chinese goods.

I believe that by next summer, when Trump has begun to take practical actions on multiple fronts, including work to fundamentally restructure the rules governing global trade, this confusing timeout in the Chinese-European relationship will be over. It is likely to be followed by a sharp flare-up in the trade and economic relationship between the EU and China, which will intensify into an all-out trade war.

Isolated trade-war hot spots that are starting to smolder in different parts of the world could quickly converge into a single major, global, trade-war conflagration.

P.S. The US Congress created the US-China Economic and Security Review Commission to furnish itself with advice and research. On Nov. 16 that commission released its 550-page annual report. To briefly sum up the content of the report, its conclusion is clear: China does not yet qualify for the status of a «market economy».

This report prepared by VALENTIN KATASONOV for Strategic Culture Foundation.