Expert View

Donald Trump raises the stakes in economic US-China Economic confrontation

A number of significant events affecting the relationship between the two largest economies of the world, namely the USA and the PRC, happened in March 2018.
On March 8, the White House announced that in order to protect national security, the United States imposed taxes on steel and aluminum import with rate of 25 per cent and 10 per cent respectively. The measures were critically met by a number of steel and aluminum supplying countries. These states required exemptions for their national producers. To date, American officials stressed that the new tax would not be imposed on steel and aluminum produced in the European Union, the Republic of Korea, Canada, Mexico, Brazil, Argentina and Australia. Thus, the new burden has not affected two-thirds of the US steel and aluminum imports. Nevertheless, the measures may cause significant damage to China's metallurgical industry.
On March 22, the tensions rose. Commenting on unconfirmed information about the new restrictive measures of Washington against Chinese economy, Foreign Ministry Spokesperson Hua Chunying stated that the PRC "firmly opposed the US' acts of unilateralism and trade protectionism".

Later on Thursday White House confirmed, that Donald Trump had signed a memorandum aimed at countering the "Chinese economic aggression". The new measures implied introducing additional import tariffs on a number of Chinese goods, which totaled for about US$60 billion. In addition to that, control over Chinese investors acquiring assets in the industries deemed important to the United States would be strengthened. The American party explained these steps as a response to the violation of intellectual property rights and substantial restrictions on the activities of foreign investors in China. President Trump instructed Robert Lighthizer, the US Trade Representative, to publish a preliminary list of products and intended tariff increases within 15 days of the date of the memorandum.
On March 23, two messages appeared on the website of the State Council of the People's Republic of China, which can be interpreted as Beijing’s statement on readiness for economic confrontation with the United States. The first message announced the introduction of tariffs to be imposed on goods imported from the United States; the second contained a statement made by the Ministry of Commerce of the PRC emphasizing that China was ready to "protect its legitimate rights and interests".
It should be mentioned, that the tariffs set by China are defined as a reciprocal step following the oppression of Chinese steel and aluminum by the United States. This list tentatively contains 128 tax products across 7 categories. According to the Ministry of Commerce, it involves U.S. exports to China of some US$3 billion. The first part covers a total of 120 taxes involving US$977 million in U.S. exports to China, which is expected to impose a tariff of 15 percent. And the second part covers a total of 8 taxes involving US$1.992 billion of US exports to China, with a proposed tariff of 25 percent.
Chinese response may cause the most significant damage to the US exporters of agricultural products, cars and airplanes. For example, nearly 62 per cent of American soybeans are supplied to the PRC. Chinese People’s Daily official news agency stated that China would shift towards South American soybean suppliers. Besides, China is a key market for Boeing. A forecast published in 2017 said that the company would supply more than 7200 new planes to China by the year of 2036.
Considering the abovementioned events, we can draw two conclusions. Firstly, China is ready to defend its positions in the global market and protect the interests of exporting companies. Secondly, the measures taken by the Chinese party can be described as equivalent in form, but not equivalent in content.
On the one hand, China's steps confirm that the PRC government is ready to demonstrate firm approach to coping with the problem. On the other hand, Chinese authorities leave space for “peaceful settlement” of the conflict, trying to avoid a full-scale trade war. Nevertheless, we can expect further escalation of tensions, during which the US, as the initiator, will introduce new destructive measures. At the same time, it can be assumed that China will seek to minimize damage over a certain period of time, however, in case such an approach fails to moderate the position of the Trump Administration, the response of the PRC authorities will be much tougher. The result of such course of events may be a large-scale trade conflict and significant hardships for global economy.
The United States’ policy undoubtedly affects Russian economic agents. The issue is, above all, the additional taxes on steel and aluminum, which came into force on March 23. Trump's decision generates risks for TMK Group, Novolipetsk Steel and Evraz. On March 26, Severstal was reported to file an action against the US government for the new duties through its subsidiaries Severstal Export Miami Corp and Severstal Export GmbH. The companies demand to withdraw the tariffs imposed on the goods they supply. However, the success of Russian metallurgists in the trial is unlikely.
Simultaneously, the WTO combined the lawsuits of Russia and China for unlawful duties on steel and aluminum introduced by Trump. The joint efforts of Moscow and Beijing can be effective, but investigation and litigation may last 3-4 years. Consequently, significant losses of Russian and Chinese metallurgists will be inevitable in short run. Russia and China are also interested in Japan and the UAE to join the lawsuit. The US increased duties on steel and aluminum imports from these countries, although their market shares are small.
Furthermore, Russia may experience the outcome of a plausible full-scale trade war between the US and China. The shift in economic globalization trend and a renaissance of protectionism will cause damage to the production chains and the division of labor system. In this regard, Russia is among the most vulnerable countries, since its external trade policy is based on comparative advantages and raw materials export. In case the precedent set by Trump for imposing protective duties on low-value-added products becomes role model for states with a developed industrial sector, Russian economy may face significant problems.
Nevertheless, the rising tension between the US and China paves the way for Russian exporters of soybeans, pork, wine, steel pipes, aluminum, ethanol and other commodity items. Russian goods may substitute those produced in the USA in Chinese market. Besides, Russian automotive and aircraft industries will have a chance to meet the demand of Chinese customers.

Authored by Andrey Kroupsky