Digging deep into Trump's tariff war

Editor's note: Swaran Singh is a professor at Jawaharlal Nehru University, New Delhi, and a visiting professor at the Research Institute for Indian Ocean Economies, Kunming. The article reflects the author's opinion, and not necessarily the views of China Plus.

The last few weeks have seen the world's media grappling to fathom the logic and consequences of President Donald Trump's tariff war against one and all. His rhetoric has been the sharpest and tariff impositions widest in the case of China which represents the world's second-largest economy and the unending tit-for-tat has serious systemic implications. Taking his protectionist heist further forward, Trump's CNBC interview on Friday saw him declare how he is "ready to go to 500" implying that he would continue to raise tariffs to cover all of China's exports to the US that amounted to over 500 billion US dollars in 2017.

Farmer Tim Novotny, of Wahoo, shreds male corn plants in a field of seed corn, in Wahoo, Neb., Tuesday, July 24, 2018. [Photo: IC]

But in Trump's tariffs war, his bark and bite seem too far apart from each other. So far Trump has imposed 25 percent tariffs on up to 50 billion US dollars worth of Chinese goods. Another plan for a similar rise is under consideration in case of a set of imports worth an additional 16 billion US dollars. Together this will be less than what China exports to India.

The fact that Trump has slapped such additional tariffs on several of his friends as well – indeed personally humiliated major world leaders like Angela Merkel, Justin Trudeau and Theresa May in just last one month – is already doing greater and irreparable damage to the US image as a world leader.

Trump indeed is doing no less damage to American institutions at home. Breaking from the long-respected tradition of protecting their independence by not commenting on their policies, Trump has criticized the monetary policies of his own Federal Reserve saying its repeated interest-hikes are making US exports less competitive.

He almost sees the Federal Reserve conniving with major trading partners of the US in exacerbating the existing situation and forcing him to continue with his protectionist tirades. This reminds of the situation after the first world war where such zeal to protect domestic economies had resulted in tariff wars resulting in the Great Depression of 1929.

But at home, as of now, Trump's populism with his core constituencies has not yet eroded his shine and this is likely to encourage him to further ratchet up his rhetoric as he moves closer to November's elections for the US Congress which already has a Republican majority.

As a recent survey by the Pew Research Center showed, over 70 percent of Republicans and Republican-leaning youth see Trump's tariff war as doing good to the American economy. This is despite several prominent Republican leaders having lately dissociated themselves from Trump's populist rhetoric against both his adversaries and allies.

Most studies by economists and financial experts are warning how Trump's tariffs war portends disruption in global manufacturing chains, raise input costs and thereby raise prices for consumers leading to slower economic growth across the world.

Multiple US Federal Reserve officials have gone public on how this trade war could hurt the US economy, especially on jobs and average earnings of the working class. Such policies, they believe, will end up raising tariffs and other kinds of non-tariff barriers on free trade thereby promoting protectionist impulses amongst major economies. Like Brexit, such trends will also face strong headwinds of an extremely globalized production and consumption patterns of goods and services.

In an increasingly intertwined world where multinationals produce parts of their products in multiple countries, the complex mix of their supply chains or "value-adding chains" has to be understood in order to appreciate the real value of China's exports to the US.

Recently, using IHS Markit data, Reuters identified the countries of origin for most iPhone X components. It showed that the real input cost for a 999-dollar iPhone X was 370.25 dollars of which China's combined value added was no more than 14 dollars. But, as the iPhone X crosses China's borders, US Customs assigns the entire gross value of the iPhone X to China's export kitty. This has created the myth of China holding 375 billion US dollars surplus against the US which explains the panic and populism that drives Trump's anti-China rhetoric.

China is known as the factory for the whole world and manufactures for all major US brands like iPhone, Nike and Dell as well as products like Sonos smart speakers and Fitbit's fitness trackers. All of these will become expensive as a result of these additional tariffs. As one commentator said, instead of iPhone box reading "designed in California and made in China," it should read designed in California and made in China as well as half a dozen other component provider countries.  Also, the popular rhetoric overlooks the fact that when it comes to trade in services, the US last year ran a surplus of 39 billion dollars against China.

President Trump's real concern seems to be one of eroding US leadership. The last decade of the global economic slowdown witnessed China's Belt and Road Initiative catapulting the country to a position where US sees it as a peer competitor as the US, with its expanding outreach, fails to sustain its lead. China's economic rise has resulted in making technology transfers an increasingly integral component of China-US joint ventures and joint research and development initiatives. There are sectors where China is even taking the lead. The growing acceptability and strength of the Chinese yuan remain pregnant with the undermining of the dollar as a global currency. These are trends that can potentially harm US global leadership that today lies in its huge lead over China in multisectoral innovation, education and designing blueprints for frontier technologies and explorations.

But instead of tightening regulations and compliance mechanisms at home, Trump has resorted to his favorite strategy of maximum pressure to strike the "deal" with Beijing to stop China from demanding technology transfers and to lower its import tariffs unilaterally. This makes his claims that China is stealing technologies and manipulating currency not just ineffective but also politically motivated to propitiate his constituencies of blue collar workers. This approach is clearly shortsighted in addressing US challenges rising from irreversible and expanding economic engagement between the world's largest and second-largest economies.