Trump’s trade war and its backlash

S. Sivadas

S. Sivadas

The trade war that Donald Trump has unleashed does not show any signs of slowing down. With China and the US introducing tariffs on the goods they traded with each other, the tremors are being felt in the neighbouring countries and elsewhere. The US started it all in April with imposing tariffs on steel and aluminium imports from China, as also Canada and the European Union, which made China respond with similar tariffs on US products. The US went ahead to publish a list of 200 billion dollars in Chinese products that would be subject to levies. China called it irrational but Trump said this was necessary to protect US national security.

This dispute certainly had its impact on the stock market and the dueling tariffs on billions of dollars worth of goods caused panic due to two weeks of consecutive losses. The US put a 25 per cent tax on 34 billion dollar worth of Chinese imports, including soya beans, pork and electric cars, calling it the ‘biggest trade war in economic history’, with Trump confident of an easy victory in this war.

This was not an easy victory and it was certainly not a war on consumer products alone. There is also a technology angle to it, a battle for technology dominance with the US having a slight edge because of its innovation potential and the Chinese companies hamstrung, having thrived under sheltered conditions. Ever suspicious, China has always kept foreign competitors at bay and prioritised data sharing over privacy concerns.

It is in this context that the steps the Reserve Bank of India had taken, in the directive it had given to Paytm to stop signing new customers because of concerns around Alibaba’s ownership of Paytm, has to be viewed. While Europe’s strict privacy laws require that customers’ consent is mandatory for data collection, China, though slow, has been quick to learn the lessons, but it still has to demonstrate that agility to match the US and have a crack at matching  their technology edge.

While the RBI has responded appropriately, other Southeast Asians nations, and many of them dependent on China, are mulling over many options and one of them is the devaluation as a form of retaliation. Will the bearish ‘animal spirits’ take over these nations to meet this cascading mutual tariff hikes is the question that is being asked across bourses of the Asian Tigers with the US threatening a further 200 billion dollar hike on Chinese products in September. The Singapore Foreign Minister, Mr. Wang Yi, has quickly called a meeting of the ASEAN Foreign Ministers and at the same time advised US officials to relax and ‘calm down’ even a Washington spokesman said the hike was an effort ‘to encourage China to change its harmful policies and behaviour.’

India has responded quickly to this tariff war by drawing list of goods it can export to China, replacing US exports that have become costlier in the light of the trade spat. It has identified more than 40 products, including fresh grapes, cotton linters, flue-cured tobacco and alloy steel seamless boiler, where it’s in a position of advantage to replace or capture the US trade market share with China, according to authoritative sources. These spurts in exports will also help India reduce the $63 billion trade deficit it runs with China, which is also New Delhi’s largest commercial partner.

According to a study India is strong in its capability to export about 20 products such as frozen bovine meat and almonds, but it faces market-access issues in China. Soon after the NDA government took over in 2014, it signed one of the biggest contracts with China for the export of, ironically, beef. Even the main Beijing Olympic Games stadium was built on the iron ore that was exported from Bellary in Karnataka. Apart from these legitimate activities, there have also been large-scale smuggling and illegal trade in items like red sanders from the Andhra forests and tiger body parts from the Northeast. Even through the ‘disputed’ borders there are regular caravans that carry yak and sheep products and the traditional silk weaving centres in India, like Kancheepuram and Varanasi, use synthetic yarn brought from China completely destroying the indigenous Indian craftspeople and their trade. Already the decline of the traditional fireworks industry in Sivakasi has helped in the import of Chinese firecrackers.

It is in the midst of these, Trump announced a trade pact with Mexico to replace the North American Free Trade Agreement (NAFTA) and attention immediately turned to Canada. Ironically Mexico was the country that Trump wanted to build a wall against to prevent immigrants from that country flooding the US. But it is in China – which wasn’t mentioned – that the greatest impact could be felt.

In abandoning NAFTA, the US appears to be moving toward a single trade bloc that might also embrace Canada. The Mexico accord tightens rules of origin on automobiles, so that 40 percent to 45 percent of their content must be made by domestic companies whose workers earn at least $16 an hour. This limits the scope for assembly in Mexico with Chinese components, favouring higher-value parts from manufacturers covered by the agreement.

The origin requirement is clearly aimed at countries that either trans-ship or use Mexico as an assembly centre. The announcement says the ‘new rules will help ensure that only producers using sufficient and significant United States and Mexican parts and materials receive preferential tariff benefits.’ Taken with certification for local producers and particular rules for textiles, it does look as if the draft had China partly in mind.

Interestingly, if one considers the environment section, Mexico and the U.S. agreed to prohibit ‘shark-finning,’ the practice of cutting the fins from sharks and leaving them to die. China is a major consumer of shark fins and the two sides also agreed to prohibit illegal or unregulated fishing. The labour section, for instance, of the accord requires ‘worker representation in collective bargaining.’ While independent unions in Mexico and the U.S. have varied challenges, they don’t face the level of official intimidation of labour activists in China.

The Indian study shows at least 80 more items have potential for exports to China and the government has instructed its departments and industry bodies to work out strategies to ramp up production in sectors where India has a clear advantage. The Commerce Ministry has asked the embassy in China to be an enabler, while offering business-to-business meetings for Indian exporters interested in that market, a spokesman said.

‘One of the major impact of the trade war would be that there will be a lot of re-organisation and reconfiguration of supply chains,’ Dr. Amitendu Palit of the Institute of South Asian Studies at the  National University of Singapore, said. ‘There is a possibility that India may become part of some production chains.’

Meanwhile the geeks at Silicon Valley have not been quiet.  In July Facebook won approval to open a subsidiary in China and a day later its licence was revoked. Earlier this month, there were news that Google was working on censored versions of their products that comply with China’s Great Firewall, the system used to control internet access. The backlash from Google’s own employees has forced the company’s leadership to clarify that the project was exploratory.

The desperation of these behemoths to enter China is not driven by a hankering for growth alone. At stake is also the opportunity to control the global economy at a scale not previously possible. The US has always been at the centre of the technology universe and while there are examples of successful tech companies founded in other countries, American companies defined the technology direction and now the rise of China’s tech has challenged that position.

In 2018, among the leading internet-based companies globally, 9 were Chinese while the remaining 11 were American, highlighting the dominance of the two nations in technology leadership. Chinese giants even have their own acronyms, BAT (Baidu, Alibaba and Tencent) to rival the American FAANG (Facebook, Apple, Amazon, Netflix and Google).

Within these start-ups, China’s share of venture funding has grown from 6% of total funds in 2011 to ~22% today and it is today among the top three in the world for fundraising in high-growth sectors like virtual reality, AI, drones and autonomous vehicles. Last year, investors ploughed almost half of all AI-related funding into China and the country is also fast overtaking the US in AI and machine-learning (ML) R&D, as measured by patent filings.

This shift in China’s technology sector from low-cost manufacturer to innovation-leader is fuelled in part by the changing nature of the Chinese economy. Domestic consumption now accounts for almost 62% of its GDP growth and in e-commerce it outstrips the US, both in absolute numbers and in growth rates.

Never a passive spectator China has also limited competition by restricting entry to foreign firms. In the absence of any real competition from the Silicon Valley big boys, China spawned domestic alternatives. The government has set very aggressive targets to become an innovation driven economy by 2020 and its 13th five year plan seeks to double the number of patents issued, increase the share of high-tech in GDP and establish the country in the ‘top 15’ in innovative nations, among other targets. A large local market, high internet penetration, limited foreign competition and supportive government policies have all helped their tech companies flourish.

For almost a decade, the US and Chinese companies avoided any direct conflict. Chinese companies were focused on winning the local market while US tech companies, barred from China, expanded into other markets. But with China’s technology firms expanding globally, US tech faces its fiercest challenge as yet.

Finally, predictions of technology dominance rest on a country’s ability to attract the best talent. Despite the recent moves by the Trump administration, the US remains the preferred destination for talented developers. Getting developers to move to China is a lot harder due to cultural and language barriers. It is here that India, the laggard, might spring a surprise, because of its diversity, its resilience, and its myriad innovative possibilities, all of which have helped the country to survive and stay on course.