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US-China Trade War And Global Economy

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The ongoing US-China trade war is almost becoming a full-blown trade war. President of the United States of America (USA), Donald Trump has already threatened to impose a tariff on all Chinese imports, worth almost US$500 billion. The spillover effect of the trade war has already begun to hurt the global value chain that define the contemporary geo-economic architecture.

The US-China trade war began in earnest on July 6 when Trump’s administration’s 25 per cent tariff on $34 billion worth of Chinese goods went into effect. This was followed immediately by China’s 25 per cent levy on $34 billion worth of US-made products.

President Trump also wants to cut the trade deficit with China – a country he has accused of unfair trade practices.  A trade deficit is a term that refers to the difference between how much one country buys from another, compared with how much one country sells to the other. Trump is convinced the trade deficit in favour of China is hurting the US and has vowed to rectify it.

Last year, China exported goods and services worth roughly $500 billion to the U.S., and the U.S. sent back exports worth $130 billion. President Trumps calls the $370-billion deficit thievery. Services account for 90 per cent of the US economy. China, in contrast, doesn’t export nearly as many services as it does manufactured goods. So the president’s obsession with trade deficits is not always popular, with critics damning the administration’s moves as protectionism.

It is expected that the tariff regime would affect food, chemicals, steel and aluminium and consumer goods ranging from dog food, furniture and carpets to car tires, bicycles, baseball gloves and beauty products.

China has said it doesn’t want a trade war, but it is not afraid of it and will fight one when necessary. China also said when it comes to trade, imbalance does not mean unfairness, as the flow of trade is determined by the market and that having a trade deficit does not mean the U.S. is “losing”. China also maintained that it is an erroneous accusation that it had long been engaging in unfair trade practices which had benefited her and short-changed the United States.

Experts point out that tariffs often lead to higher costs for the consumer and are against the new tariff measures. Trump’s decision to take on China could lead to adverse effects for consumers not only in the US and China, but also worldwide. An economic showdown between the world’s biggest economies doesn’t look good for anyone.

Although China, as a developing country, has higher tariffs on U.S. goods than the U.S. does on Chinese goods, its tariffs are still lower than those of many other developing countries, including India. Since China’s accession to the World Trade Organisation in 2001, it has consistently lowered its trade barriers. China has been the fastest growing market for U.S. exports, and U.S. exporters are not stupid. They know a good deal when they see one. According to China’s Ministry of Commerce data published last year, 56 per cent of US soybeans, 26 per cent of Boeing airplanes and 17 per cent of American-made automobiles are sold in China.

China’s trade advantage lies in its cheaper labour costs, and the United States’ advantage lies in capital and land. China exports labour-intensive products to the US, while the US exports technology products and agricultural products to China.

This newspaper is concerned that if the trade war escalates, it will have effect on multilateral trading system especially in developing economies like Nigeria that do business with these two giants. Today, more than 60 per cent of world trade happens in intermediate goods, with China being a major trader interlinking the supply chain of large multinationals and other firms.  The trade dispute can affect export-led economies in several ways. Besides China and the US, some of the key export-led economies in East and Southeast Asia that have started feeling the heat include Hong Kong, Taiwan, South Korea, Japan and Singapore – all of which are participants in the electronic goods global value chain for components and semi-conductors.

In our view, as things degenerate, the spillover effect will become so intense that manufacturers may consider shifting their production lines outside China. This phenomenon, we note, was ongoing even before the dispute, but the number is now going up. The trade war’s impact on global production networks and global supply chain is expected to be devastating.

At home in Nigeria, like most emerging economies, the country relies on foreign investments for a lot of things, among which include keeping the exchange rate stable.

If the trade war takes a turn for the worse, then foreign investors will pull out from emerging markets like Nigeria and take flight to safer havens until the situation normalises. That will not be good enough for international business.



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