US-China negotiations on trade war, ended last week, assured by Chinese honest intent for significant imports from USA. Chinese media hogged the headlines saying that the negotiation was a great success, as both sides had shown willingness to address the trade balance. Surprisingly, the fact is that there was no deal and no road map. The negotiation in fact only remained an exchange of sweet words of willingness to avert a trade war.
The underlying question is that can China substantiate its large imports from USA to avert the trade war? Submitting a suspense signal, the US treasury Secretary Steven Munchin said, “ We are putting the trade war on hold.”
Against the backdrop of historically inflicted adverse relations between the two countries and the yawning gap of trade deficits, it is doubtful that only the overwhelming intent will help to fulfill the desired results. Ahead of the talks, US side negotiators insisted for China’s pledge to reduce trade deficit by US $ 200 billion by 2020. The Joint Statement didn’t make any such reference. To this end, the genuineness of the aversion of trade war remained in dark.
Does it reflect a distant dream of the end of US – China trade war in near term? China is an export base economy and USA is the biggest importer of Chinese goods. China’s assertion for economic and political expansionism through BRI ( Belt and Road Initiative) to sustain its export base economy do not warrant the fidelity of the intents. Against this backdrop, a colorful negotiation without any roadmap does not sense much.
China is the biggest drag on the US trade deficit. USA dipped into yawning trade deficit after China emerged the biggest trade partner of it. Over 47 percent of the US trade deficit was attributed by Chinese dumping of goods in 2017. Trade deficit in goods surged year-after-year by hooping margin from US $ 318 billion in 2013 to US $ 375 billion in 2017 .
The crux of the matter is that how will the trade deficit be balanced. Will China increase imports of goods or curtail exports of goods voluntarily or invest more in USA to generate more employment, which was affected by large imports from China.
The USA’s major items of imports from China’s are electrical machinery, machinery, furniture and bedding, toys and sports and footwear. They accounted for 63.5 percent of USA’s imports from China in 2016 and in value terms , they were US $ 294 billion.
Against these, there were five major items of USA’s exports to China that accounted for 55 percent of USA’s exports to China in 2016 and in value terms, they were US $64 billion. Items were soybean, aircraft, electrical machinery, machinery and vehicles.
Given these wide disparity, if the trade deficit is to be reduced by US $ 200 billion by 2020, as demanded by US authority, China has to increase imports of these five major items from USA by three-fold by 2020. This is an uphill task for China.
Does China really have the appetite to absorb such large imports from USA within the stipulated time period? China is the hub for global workshop. It imports raw materials and intermediates and produce consumption goods for export. China’s major items of imports from the world are crude oil, electronic integrated circuits, iron ore, coal and vehicles. Crude oil import alone accounts for over ten percent of China’s total import, which is US $ 200 million worth. Will China import crude oil from USA to balance the trade? Certainly not. Given this basket of imports, it is almost an impossible task for China to avert the trade war by resorting to bulk imports, when the country is already reeling under over-capacity.
Failing this, the option remains for the USA is to entangle China in currency war. This brings to memory the USA’s currency war against Japan in the end-eighties, when Japan failed to curtail trade deficit with USA. To drub cheap Japanese exports, the coterie of five developed nations, initiated by USA, signed an agreement to appreciate Japanese yen in relation to US Dollar in Plaza Hotel in New York in September 1985. The agreement made the Japanese exports costlier.
Until 1985, Japan was the main lever to augment the USA trade deficit. It accounted for 37 percent of US trade deficit. To thwart the impact of Japanese yen appreciation and to sustain their exports, the benchmark for Japanese corporate growth, Japanese corporate shifted their plants to South East Asian countries. This led to a major hollow in investment in Japan.
What India should do in such circumstances. India is also engulfed by wide trade deficit , with China emerging the biggest trade partner. Despite using several WTO weapons, like anti-dumping duties, safeguard measures, China remains the main lever to drag India into wide trade deficit. Given the situation, should India take a lead in siding USA?
The point of the fact is that there is a turnaround in India- China economic relation since Modi regime, despite the border tiff. Business interests preceded the border tussle. Unlike his predecessors, Mr Modi tried to woo Chinese investment to uptick Make in India initiative and generate employment. Eventually, these yielded results. Chinese companies gushed with investment in India. Six top brand Chinese smartphone makers ( Xiaomi, Oppo, Oneplus, Gionee, Vivo, Huawei) established their manufacturing facilities in India.
Given the Chinese penchant to invest in India, Sino-India relation has made a strategic shift from politically dominated to business relation. In these perspectives, it is better for India to lie low in USA-China trade war.
Views expressed are personal