Emerging trade wars?
Interview with Bong Xin Ying (CNA - Singapore): responses from Warwick Powell
I provided comments on 5 September 2024 to written questions from Bong Xin Ying, a journalist with Singapore-based media group CNA. A small number of my remarks were reported in the full article. The complete story is available here. What follows are my full comments to each of the questions asked.
How ugly can this EU-China and China-Canada spat get, respectively, and why so?
There is always the possibility of relations deteriorating. The principal dynamics, however, are driven by fundamental structural problems in the Eurozone economies and the political dynamics of transatlantic Global North reactions to structural transformations in the international contours of economic interactions and productive capabilities. The Eurozone is in a deep funk, with cyclical and structural elements. Deindustrialisation and the effects of energy and food cost spikes will leave lasting scars. The principal cause has been energy shocks resulting from Eurozone decisions to sanction low cost Russian hydrocarbons. On high-tech matters, the main issue here relates to whether the Dutch firm ASML will further accede to US demands to restrict exports and services support to Chinese customers.
Canada - like the EU as it stands today - has a limited ‘agency envelope’. Despite temporary attempts to exercise autonomous and independent foreign policy, the pattern in recent times has been that they ultimately fall into line with the geopolitical interests of the US.
Therefore, should US trade relations with China deteriorate, then it’s entirely conceivable that EU-China and EU-Canada relations will follow suit. The main losers in this process will be households and many enterprises in Europe, Canada and the US. I touch on this again below.
With major past and ongoing trade wars that China is involved in, what are the costly and important lessons that China can glean from by being involved in possible new trade war with the EU? (and are they heading towards a trade war?)
Context matters. The US has the most WTO complaints as a respondent with 160 cases at present. The EU has 107. China has 49, of which 23 have been lodged by the US and 11 by the EU. The real question is why are the US and EU being challenged for breaches of WTO trade rules more extensively than anyone else? See WTO data here.
Tariffs will tend to harm buyers in the country or jurisdiction imposing the tariffs. Sellers (exporters) may - if the tariffs are high enough - be priced out of some or all of the markets. In this case, sellers will seek markets elsewhere. Meanwhile, the importing countries will lose the competitive forces from low cost imports, and cut off the pathway to import-assisted deflationary pressures to curb inflation. At the same time, European households and industry will be exposed to a market in which local supply constraints will lead to poor fulfilment cycles and higher prices.
The relocation of products from Europe to, say, Africa will enable African enterprises and households to benefit from access to high volumes of affordable products. Chinese exports therefore have the potential to price people in through abundance, whereas the transatlantic model aims to price people out through confected scarcity.
In any case, Chinese firms are establishing manufacturing and assembly facilities inside the Eurozone. These facilities will meet growing market needs, at EU established higher prices. This will benefit Chinese firms for whom the EU prices and profit margins are likely to be higher than those achieved in the highly competitive Chinese domestic market.
If a widespread ‘trade war’ breaks out (such as the Trump 60% / 100% tariffs, followed by the EU putting up the shutters) the effects on global trade will be very disruptive, of course. That’s what you’d expect from a significant shock to the rules of the game. The reactions and adaptations of the global system, countries and firms, is what’s key, however. And on this note, my sense is that those countries throwing up the barriers will ultimately cut themselves off from the rest of the world, and the rest of the world will work to find ways to progress trade and investment flows that enable industries and households to access to best goods possible, and for new investment in capacity to take place to distribute more evenly the productive infrastructure needed for ongoing economic development.
Taking examples from the past, what might China do this time, and will it be any different from what it has done in the past, and why?
China is likely to pursue action via the WTO in the first instance, and via WTO sanctioned processes. This is consistent with historic practice and consistent with participation in institutions sanctioned by international law.
Many countries have China as their top trading partners. What will that spillover impact be, should there be a trade war with the EU, and how will Southeast Asia be impacted?
Southeast Asia has a number of pathways to benefit. The first is to capture spillover volume at low prices. The second is that Chinese firms may expand their presence in SEA as a platform to export to the EU and North America. This has been the pattern already. This does not lead to savings for either the Europeans or North Americans; on the contrary, this pattern tends to add costs to the disadvantage of the EU and the US.
In a recent study by David Autor and co-authors, they showed that the Trump tariffs did not deliver any economic upsides as far as employment for the ‘heartland’ was concerned and that there were secondary effects that were adverse. There were, however, political benefits in terms of voter behaviour. Similar dynamics are more than likely to play out in the EU. Tariffs rarely ‘bring the jobs back’, but cause harm by denying the economy at large - and the vast majority of households - the opportunity to access the least cost products possible.
END