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Could Trump's tariff race shift te global economic balcance?

Xinhua Financein The Guardian
2018-07-11 15:22

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While it has sizeable risks, the US battle with China could open the door to a new era

The latest round of tit-for-tat tariffs by the United States and China has intensified the global debate about whether the world is facing a mere trade skirmish or heading rapidly toward a full-blown trade war. But what is really at stake may be even more fundamental. Either accidentally or by design, Donald Trump’s administration may have paved the way for a “Reagan moment” for the international trade regime.

In the 1980s, Ronald Reagan initiated a military spending race with the Soviet Union that ended up altering the global balance of power in ways that affected many countries worldwide. Today, Trump has launched a tariff race with China, an economic superpower, perhaps with similarly far-reaching potential consequences. Like under Reagan, the US is better placed to win the current competition with China – but the risks are sizeable.

In the latest escalation of the trade dispute, the US imposed levies on $34bn (£26bn) worth of Chinese imports. China immediately implemented retaliatory tariffs, spurring the US to threaten even more protectionist measures.

Many existing trade agreements would benefit from modernisation. And most economists agree that the US has genuine trade grievances against China, including intellectual property theft, asymmetrical technology transfers and non-tariff barriers, such as the requirement that foreign companies enter joint-venture agreements with domestic firms to access the Chinese market.

But most economists also agree that competitive tariffs are a risky way to address these grievances. Because tariffs transmit stagflationary pressures (that is, they encourage simultaneous economic contraction and inflation), they risk undermining a global recovery that is already facing challenges. And they complicate long-overdue monetary-policy normalisation, while increasing the likelihood of global financial instability. 

Today, a trade war would damage all economies. But the US – which is relatively less dependent on foreign markets, possesses deeper domestic markets and is generally more economically resilient than other countries – would do better than most others in a contracting world economy. Already, Chinese financial markets have suffered, while those in the US have held their own.

Game theory suggests that rational actors, recognising how damaging a trade war would be for them, would see the merit of abandoning a retaliatory strategy, and instead accede to many US demands.

But the success of this approach is far from guaranteed. Its execution will require more mutual trust than is currently on offer. 

Furthermore, the Trump administration will need to avoid actually pushing other countries (especially China) too hard too soon, thereby threatening the entire global economy with a possible recession and markets with disorderly declines. Already, the US Federal Reserve has warned that corporate investment plans could be “scaled back or postponed” because of uncertainty over global trade relations. And let us not forget that China holds a massive volume of US Treasury bonds which, if pushed too hard, it could use to try to destabilise the US government bond market, which is essential to the health of the global financial system.

It is too early to say whether a “Reagan moment” on trade will play out and deliver more than a fairer system. After all, such an approach would require careful strategic design and skilful implementation – not to mention plenty of good luck – guided by a nuanced understanding of economic, political, and geopolitical factors. That is why we must move beyond the question of whether this is a trade skirmish or a trade war to develop real strategies for the “Trump trade moment”, should it arrive.

Source: The Guardian 
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