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Trade War: China Unlikely To Retaliate On Equal Term – Analysis

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Fears for trade war loomed large after Trump administration slapped tariffs on steel and aluminum. On March 1, USA imposed a 25 percent tariff on imported steel and a 10 percent tariff on aluminum. Tension mounted with Trump’s furtherance of protectionism when the US administration was considering tariff slap on US$ 50 billion worth of sensitive products. The target was China. Reason, USA dipped into wide trade deficit due to Chinese dumping of goods. In 2017, China shared 47 percent ( US$ 374 billion) of USA ‘s global trade deficit in goods trade ( US$796 billion). Till now, China refrained from taking any retaliatory actions.

Arguments were levelled against the Chinese equivalent power to retaliate against Trump’s protectionism. According to Mr Gary Hufbaucer, Senior Fellow at Peterson Institute for International Economics in Washington, China is to loose more than USA , because China is more dependent on exports to USA than vice-versa and USA is in a better position to find alternative market than in China.

According to World Bank, China’s trade accounts for 37 percent of its GDP. China’s big reliance on trade suggests that it will face more damages if it adopts equal retaliatory measures against Trump’s tariff hikes.

Currently, Chinese President is besieged by big domestic challenges. The revision of Chinese Constitution, which will permit Mr Xi Jinping to be the perpetual head of Communist Party after the expiry of his second term and induction of new economic model to revitalize the economy based on domestic consumption, are posing big challenges to President Xi Jinping.

Interestingly, the paradox of the USA’s high tariff, which targeted China, is that both steel and aluminum were not the linchpin for wide trade deficit with USA. Chinese steel export accounts for merely 2 per cent of USA’s total imports of steel.

Why was then steel became the scapegoat for Trump’s salvo to China? The investigation shows that China was dumping steel through third country, Vietnam. Exports of steel from Vietnam to USA spurred 300 percent in 2016. USA investigation revealed that after anti-dumping duties and anti-subsidy duties were imposed on corrosion – resistant steel from China in 2015, China was rerouting steel exports through Vietnam to evade the duties. The Commerce Department said that after the anti-dumping duties in 2015, shipment of cold rolled sheets from Vietnam into USA shot up to US $ 295 million annually from US $ 11 million. The US Department argued that these exports were originated from China. It claimed that although the product was processed in Vietnam, as much as 90 percent of the value was originated in China.

Paranoid by the dumping of Chinese steel through Vietnam, the US Commerce Department slapped anti-dumping duty on steel exports from Vietnam in 2017, which were originated from China.

Currently, the USA imports 90 percent of primary aluminum used domestically. Aluminum are used to manufacture diverse products from beer cans to fighter jets. US government argued that there has been a dramatic fall in aluminum industry after China forayed in the world market at a price where US makers struggled to survive. The number of operational aluminum smelters in USA dropped from 23 in 1993 to 5 in 2016. There is only plant in Hawesville, Kentucky, which makes high purity aluminum, required for fighter jets. If this plant is shut, USA has to depend completely on imports, according to US Commerce.

Besides domestic challenges, the USA’s high tariff on steel and aluminum are unlikely to damage the Chinese industries. Even though China is world’s biggest producer of steel and alumina, rise in the domestic consumption will insulate the Chinese industries.

Over 90 percent of the steel produced in China is consumed domestically, according to Mr Wang Guoqing, a senior analyst at Beijing based Industry consultant. In 2017, China produced steel amounting 830 million tonne and exported 75 million tonne.

Similarly, export of aluminum does not hold a big stake in Chinese production . In 2017, export accounted for merely 7.5 percent of annual production. Of this export, USA accounted for only 12 percent. In a way, only 1 percent of Chinese exports of aluminum went to the USA.

Given this basket of export and production share, which suggests China’s reliance on export is minimal, China will be reticent to bear a major risk by retaliating USA’s protectionism on equal terms.

India too was abused for trade surplus with USA, despite its share in the total USA trade deficit was insignificant. India’s share in the USA’s total trade deficit was 2.7 percent.

Further, the basket of India’s major items of exports to USA are not prone to fuel up the USA’s trade deficit. India’s major items of exports to USA are gems and jewelry, textiles, ready made garments and drugs and pharmaceuticals. In 2016-17, together these four product groups accounted for 54 percent of India’s exports to USA. Steel and aluminum are not the major items of India’s export to the USA. India’s share in prime steel imports in USA is just 1.3 percent , while in aluminum, it is 1.1 percent, according to Chairman of Engineering Export Promotion Council.

The USA alleged that India’s export incentives are WTO non-compliant. It threatened to drag India into WTO for its export subsidies. Under the WTO rules, developing countries , who crossed the threshold of US $1000 per capita GNI per annum for three years in row, are not entitled to grant subsidies in exports. USA alleged that India surpassed this limit in 2013, 2014 and 2015. India asked for eight years periods to phase out the subsidies.

For India, major concern is non-tariff and not the tariff barriers. The USA accused China for IPR ( Intellectual Property Rights) theft and mandatory transfer of technology in the investment rules. India is already under the brickbats of IPR rules by developed nations for its pharmaceuticals products. If India is looped in the USA’s rage over IPR bungling, it will affect India in the long term, according to JP Morgan.

(Views are personal)


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Subrata Majumder

Subrata Majumder

Subrata Majumder is an adviser to Japan External Trade Organization (JETRO), New Delhi, and the author of “Exporting to Japan,” as well as various articles in Indian media, including Business Line, Echo of India, Indian Press Agency, and foreign media, such as Asia Times online and Eurasia Review .

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