Spill-over of Trump’s anti-China trade stance

Trump’s trade war with China had a global impact, affecting and benefiting countries. The United States (US)-China trade confrontation has been going on for years under different regimes and has become more aggressive since 2019. President-elect Trump made several attempts to contain China in international trade during his first term. It led to the imposition of tariffs and counter-tariffs, among other restrictions on trade from both sides, which is often described as a ‘trade war’.

The US-China trade conflict reflects the US’ protectionism from China’s inroads in its economy and the global economy, which it believes is detrimental to its local jobs, industries, industrial innovation, and national security. World Trade Organization (WTO) states that the US tariffs on Chinese imports aim to make tariffs more reciprocal, bring back manufacturing jobs, and address Chinese policies with negative spill-overs such as poor IP protection, subsidies of state-owned enterprises and forced technology transfer. Thus, the tit-for-tat trade moves resulted in raising import tariffs by the US worth $450-$350 billion in 2018-2019, followed by China for about $100 billion, according to the Centre for Economic Policy Research.

The UN Trade & Development 2019 report found that despite the 25% ($ 35 billion) export loss due to US substantial tariffs in the first half of 2019, the competitiveness of Chinese firms maintained 75% of their exports to the US market. The US imports from China were affected in several sectors, including office machinery and communication equipment, chemicals, furniture, and electrical machinery were affected.

The US-China trade war created trade diversion, which benefitted many countries from a share of Chinese export losses in the US market. Taiwan gained $ 4.2 billion in additional exports to the US in office machinery and communication equipment. Mexico gained $ 3.5 billion in agri-food, transport equipment and electrical machinery sectors. The European Union increased its exports by $2.7 billion in machineries. Vietnam’s exports to the US grew by $2.6 billion from an increased export in communication equipment and furniture. India, South Korea and Canada also gained from $0.9-1.5 billion in exports.

According to a WTO study 2020, it led to a reorganisation of value chains in East Asian countries of Japan, South Korea, Taiwan, and Vietnam. These countries export less to China and more to the US, particularly in the electrical equipment sector.

The UNCTAD report stated that the US consumers were at the receiving end of the associated costs of the trade war. The decoupling of the US-China trade relationship has resulted in a decline in the interdependence between the US and China by 2% in 2023, according to UNCTAD.

President-elect Trump’s anti-China rhetoric in the run-up campaigns to his election casts a shadow over the stability of international trade. During the election campaigns, he proposed significant tariffs on imports from China, including a 60-100% levy on specific goods and a 10-20% tariff on imports from other trading partners.

His America First agenda is back with the confidence of further reducing the US reliance on China in strategic sectors, particularly technology and manufacturing. He will likely bring measures to reduce the trade deficit with China, encouraging domestic manufacturing and countering China’s alleged trade practices, including intellectual property theft and unfair subsidies.

If this happens again, it is considered that third-country beneficiaries will be those alternatives to China’s supply chains and products in manufacturing, technology and trade logistics. Vietnam has a comparative advantage in electronics, textiles, and furniture manufacturing. Just like it benefited during the Trump 1.0, it could further exploit trade diversion. Given the growing strength of Malaysia in the semiconductor sector, the electronics sector could get a boost from the trade confrontation. Mexico’s proximity and growth in automotive, electronics, and machinery industries could be another beneficiary. South Korea and Taiwan are other potential beneficiaries to fulfil advanced semiconductors, consumer electronics, and machinery demands. The European Union may also increase their industrial machinery and agricultural product trade. India, known as the ‘pharmacy of the world’, could fill the demand gap for pharmaceuticals and IT services. There was a trade diversion in the textiles and garments sectors, which was directed away from China. Bangladesh and Pakistan provide alternatives in this regard.

The emerging markets are ready to fill in the gaps in US imports. The possible situation demands that these economies prepare for what might come in terms of ramping up their supply chains to sustain the growing demands.

The intensification of trade confrontation between the two biggest economies of the world will put significant stress on global trade, which is on the path to recovery after the Covid-19 shocks, the Ukraine-Russia war and the Gaza conflict. According to the WTO 2020 study, it led to a 0.1% decline in the global Gross Domestic Product (GDP). According to Bloomberg Economics, it would affect the global semiconductor supply chains, which could decrease the global GDP growth by 0.2% annually from the technology decoupling between the countries. An example is the ban on Chinese tech giants like Huawei or export restrictions on semiconductors.

The US-China trade conflict can become a factor for countries to push for strengthening regional trade. China and Asia-Pacific countries can enhance their cooperation within the Regional Comprehensive Economic Partnership (RCEP)

It is one of the instances of flouting international laws, showing a total disregard for the WTO’s Most Favoured Nations (MFN) regime and violating the principle of fair and transparent international trade. It undermines the multilateral trade governance in favour of protectionism, which has the potential to polarise economies.

This article is authored by Mehdi Hussain, research associate, Indian Council of World Affairs, New Delhi.