The Iron Bank Moves From Braavos To China

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The aim of ignorance is to gain strength, that of war is peace and trade wars’ is leverage. President Trump has set out ripples of unparalleled magnitudes towards the existing status quo of trade, society, military, environment and every other element of life in his 2 years of Presidency. Starting from the withdrawal from Paris Agreement to talks with the staunchest adversaries. One thing no one can forget about the Trump administration is the anti-status quo policies they have adopted. Some may like him, some may hate him; but surely, no one can ignore him.

The US is arguably the sole superpower of our world, not only in military capabilities but also economic sustenance, but with the growth of China in the last decade or so, this status has been challenged itself. With Chinese economy valued at $25 trillion, it is the largest in terms of GDP (PPP) while still second to US only in terms of Nominal GDP. It is not the robust size of both the economies which is the reason that we are at the juncture of the biggest trade wars since the Opium Wars which has the potential to turn into a political war very soon. In the era of globalisation, every economy is so connected to each other, that ramifications of the ongoing tussle can be felt across stock markets and product markets worldwide. To understand the reason behind these, first we must understand the nature of the economies involved. China is a export-driven economy with low labor costs and high-end mass production capabilities, it is like catnip for the manufacturing industries whereas the USA is a technology-driven economy with decades of technological supremacy, innovation and high R&D, it acts as the global engine for innovation, know-how and clouding services. Both the economies had their own merits which acted as complements for many years. With changing times though the problems started to surface. For example when we look at the US-China trade data, we see that the total volume of China-US trade has grown quickly, from $26. 555 dollars in 1991 to $597. 473 billion in 2016. The average annual growth rate has been 23. 07%. US imports and exports to China both grew from 1991 to 2016. US imports from China rose from $20. 2 billion in 1991 to $481. 7 billion in 2016, and the average annual growth rate was 23. 52%. US exports to China rose from $6. 278 billion in 1991 to $115. 755 billion in 2016, and the average annual growth rate was 21. 45%. This growth has been mutually beneficial to both the countries, where US consumers have been able to derive and get higher utility from cheaper Chinese goods, the Chinese economy and people have flourished and nearly 10 million jobs created from this kind of trade have lead to eradication of extreme poverty in China.

Till the problems started to surface in the USA, there are two major problems identified by the National Bureau of Economic Research

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a) Unemployment: As companies were not able to soak the surplus labor left behind after transfer of global manufacturing base to China, it lead to considerable surplus in US labor markets and even lower incentives in learning the vital skills necessary to compete with Chinese mass-production. This was further intensified by the disruption of intermediate supply chain when reallocation mechanism failed, many countries started to fill in not only US shelves of final product but also the intermediate product affecting both the downstream and upstream buyers. Negative shocks of trade to one industry can be transmitted to other industries because these industries are related. Intermediate inputs maybe affect the spread of trade shocks nationwide. In the case of the tire trade, for example, once the increase in tire imports from China leads to a reduction in US tire production, US demand for steel fibers and synthetic rubber, which are intermediate products for tire production, may also decline, eventually spreading to the entire production chain. As a result, the negative impact of trade on an industry may be spread to other sectors, depending on the input-output relationship.

b) Technology Transfer: Many questions have been raised by USA, EU, Japan and other countries to China on the questionable policy, Chinese state adopts when denying access to companies in its lucrative markets unless they agree to enter a Joint Venture with state owned enterprises, hence resulting in creation of what the West calls “Forced” Technology Transfer Rules. This has led to an almost potent threat to the global domination of US in the technological innovation and R&D sphere. States like Ohio which have been seriously hurt over decades of stagnating growth and losing jobs voted Trump in power on one of the major promises being revival of domestic US manufacturing sectors. Hence, starting from February 7, 2018 and March 22, 2018; President Trump announced 30% tariffs on solar panel imports and 25% tariffs on steel imports from many countries but directed majorly towards China as can be understood from the WTO case filed against them. On July 6, 2018 US implemented first China-specific tariffs valued at $34 billion. In next 3 months, the total US tariffs applied exclusively to China will be valued at US$250 billion in the name of “global safeguard tariffs”. In retaliation, total Chinese tariffs applied exclusively to US, $110 billion in order to fulfill the trade retaliation theories laid down in Economics. A major question which comes to everyone’s mind is that: When the Constitution says “It’s in Congress’s power “to lay and collect taxes, duties, Imposts and Excises, to pay the Debts and provide for the common defense and general Welfare of the United States, ” and regulate trade between the US and other countries. How can President Trump impose these tariffs without any approval?”

The answer is cleverly hiding in two reasons used by President Trump

a) Over the past century, Congress has shifted many of the powers to raise and lower tariffs to the executive branch.

b) There are many ways the president can impose tariffs without congressional approval. To name a few:

  • Trading With the Enemy Act of 1917, the president can impose a tariff during a time of war.
  • The Trade Act of 1974 allows the president to implement a 15 percent tariff for 150 days if there is “an adverse impact on national security from imports. ” After 150 days, the trade policy would need congressional approval.
  • There’s the International Emergency Economic Powers Act of 1977, which would allow the president to implement tariffs during a national emergency. Trump’s White House cited Section 232 of the Trade Expansion Act of 1962, a provision that gives the secretary of commerce the authority to investigate and determine the impacts of any import on the national security of the United States — and the president the power to adjust tariffs accordingly. This is a questionable use on moral grounds maybe, but not legal. A small glimmer of possibility of seizure of the trade war was seen when the Miscellaneous Tariff Bill Act, 2018 was passed by Congress and approved by the President which benefitted China and some other countries to export chemicals and finished-plastic products to US in a cost-effective way. This also created an atmosphere for talks but they were again cancelled on September 22, 2018 following List 3 of tariffs by USA.

In my opinion the Chinese government should move towards making trade between both the nation fairer and more vibrant in such a way that both the economies and world can move in a better prosperous world but this requires cooperation and similar goodwill by the Trump administration. As EU Comissoner George Schmitt said “Amazed by how little politicians seemed to have learned from history. No one is being benefitted from the Trade War. ” This could be understood clearly by this graph, that the deficit increase and American employment are nowhere going to be improved in such a way that it can benefit American citizens.

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