Amidst the global economic uncertainty, the first phase of the trade deal concluded between the US and China brings a deep sigh of relief. Although widely seen as a welcome move, it would be overplaying to state that the deal is a panacea for all economic stumbling blocks, which are structural in nature.
Growing inequalities within and among the nations and dissatisfaction amongst the middle-class in terms of socio-economic immobility need the critical attention of policymakers. The gushing up of the wealth from a broader fragmented base of workers to tiny but united corporates is one of the reasons for the economic slowdown. The widening gulf between the average middle-class and the rich provides the best hotbed for the so-called “populist leaders”.
US President Donald Trump had used this time-tested political card successfully as a possible leverage to appease the disenchanted sections of American society. In the race for the 2020 presidential elections, Trump has started his re-election campaign with national security in the pretext of the ongoing tussle with Iran and recently concluded phase one of the trade deal with China as bargaining chips to address his core constituency.
The neo-liberal policies blended with domestic characteristics played out well in the case of China, which transformed itself into a global manufacturing hub. As an export-led economy, China had started flexing its economic and military muscles. Availability of cheap labour and a desire to enhance further profits have pushed the American capital base towards the Asian giant.
The US, once a frontrunner in promoting globalisation, reversed its idea of global market integration sensing the hullabaloo of have-nots. It is widely believed that the protectionism — what is considered as neo-normal — is ascending newer heights in Trump’s America. It remains to be seen whether the parties of the trade deal will adhere to the commitments and help the global economic chain caught in a trade war.
The American administration has been at odds with the Chinese over the apprehension of undue support given to Chinese state-owned companies in the form of subsidies, intellectual property theft, trade and forceful technology transfer from the American firms operating in China. Trump slammed Huawei allegedly for spying on American citizens and banned its business operations in the US.
Viewed as a probable winner in the 5G race, Huawei, is the first player to develop high-end infrastructure, which supports seamless flow of information in the upcoming 5G world. The R&D expenditure of Chinese firms like Huawei, ZTE, surpasses the spending of US-based Amazon and Apple. The US, considered as an unchallenged technological leader of the world, wants to maintain its tech hegemony and any sort of competition is a major irritant.
As a part of ‘Made in China-2025’ plan, China wants to untag the label of low-cost manufacturing hub and aims to attain the status of high-tech power centre of the world. It is true that China aspires to occupy the top seat in the technological spectrum, coupled with domination in the geo-political arena through ambitious projects like One Belt, One Road. This strategy reflects its struggle to position itself as an equivalent to the US and not second.
During the 2016 presidential election campaign, Trump accused Beijing of stealing US jobs, currency devaluation, theft of trade secrets and burgeoning trade deficit, to which the previous American administrations had turned a blind eye. There was no momentum gap in rhetoric to action in the imposition of import tariffs, and retaliatory measures from the Chinese side soon followed with a similar pace.
The two sides had been at loggerheads with neither side budging. The US initiated the trade war to curtail its trade deficit, by slapping tariffs on $250 billion worth of Chinese imports. China retaliated with increasing tariffs on a wide range of products — from chemicals to agriculture. But China is not the only country which Trump had targeted to advance his version of ‘Swadeshi’.
Trump has imposed tariffs on imports originating from Mexico, Canada and other European nations to encourage Americans to buy more and more American goods. It is not only the global value chain that has bore the brunt of this trade tussle but also the American middle-class, who rely heavily on imports from the Chinese side and US farmers who see China as a major destination for their farming exports. Of course, the core part of the trade deal centres around tariff cuts from both the sides, guarantees from the Chinese side to enhanced market access for American agricultural products and fintech firms. However, it is too early to say that commitments made under the deal would live in letter and spirit.
The Chinese side has assured the US administration on rigid laws related to forced technology transfers and protection of intellectual property rights. Under phase one, China has promised to increase US imports by $200 billion above the 2017 level. On return, the US pledged to cut tariffs within a band of 5-10%.
Some sections of the American conservative lobby are unhappy with the deal, which failed to address major concerns like indirect subsidies, which the Chinese government channelises towards state-owned enterprises. Amid trade war tensions, the US firms are planning to shift their manufacturing base from the nerve centre of Asia to its periphery. The fast-growing economies of Southeast Asia, which are yearning to be mini-Chinas, took advantage of the trade war to realise the catching-up effect.
While negotiations for the second phase of the trade deal are expected to begin soon, it is very early to comment on tariff cuts from the American side. Though everything is set for a comprehensive trade deal between China and the US, it may not materialise before the presidential elections.
It is important to address the core problem, which the global economy is facing for quite a long time. Globalisation accelerated the phenomenon of poor nations-rich corporates. The rousing scepticism on global integration in several parts of the world provides enough space to Trump-like “tariff guys” to aggravate the already ailing global economic health.
(The author is Director, Samudrala VK IAS Academy)