The Trump administration’s ‘America First’ policies come at a critical time in the global economy. These bad policies will have adverse consequences in international trade. In the absence of countervailing forces, they could unsettle the post-2008 global recovery and undermine postwar globalization.
This summer, the Trump administration’s tariff war penalized $50 billion worth of goods traded between the US and China.
The next stage of White House escalation will impact up to $200 billion of Chinese imports, and result in proportionate Chinese retaliation.
If the White House opts to expand its tariff wars even further, collateral damage is likely to spread from goods to services and advanced technologies.
Damage Spreading from Goods to Services
Not so long ago, there was still serious talk about the US-China Bilateral Investment Treaty (BIT). Chinese foreign direct investment in the US soared to a record $46 billion in 2016, creating American jobs and injecting capital into the US economy.
Yet, last year Trump threats caused Chinese investment in the US to plunge to $29 billion, due to deleveraging in China and stringent US regulatory reviews of inbound acquisitions. After months of trade wars and asset divestitures, China’s net US direct investment was negative in the first half of the year.
Historically, advanced economies have tended to enjoy service surpluses and goods deficits in trade. US-Chinese trade is no exception. Since 2001, US services surplus with China has increased nine-fold. Last year, US goods exports to China totaled $130 billion, whereas imports from China equaled $506 billion. However, US services exports to China amount to $58 billion, while services imports from China are $17 billion. Consequently, while the US runs a goods deficit of $375 billion with China, it runs a service surplus of $38 billion.
As China exports far more goods to US than vice versa, Chinese retaliations already cover more US goods (85%) than US tariffs cover Chinese imports (50%). Consequently, the ongoing trade war is shifting from goods tariffs to non-tariff actions in services. While China has tried to avoid escalation, US battle over services trade has already begun, but with Brussels. As German Chancellor Angela Merkel has noted, it is misleading to focus on goods trade, in which the US has deficit with the EU, when the US excels in services trade, in which it has a surplus with the EU. Together with other EU leaders, Merkel is backing a “digital tax” against US multinationals including Amazon, Facebook and Google – companies that have come under fire for shifting earnings around Europe to pay lower taxes.
Trump’s tariffs have potential to undermine America’s most important competitive advantage in the postwar era: high-value, high-margin services, which range from advanced technology to pharmaceuticals. As collateral damage spreads, so will the costs. As US metropolitan centers take severe hits, the stakes will be much higher for US states, particularly California.[i] And if trade wars continue to spread, neither Silicon Valley nor Hollywood will remain immune. Global economy does not thrive in insulated fortresses.
Chinese responses
For now, the full impact on Chinese banks and corporations is still likely to be limited. The US accounts for only 15% of China’s goods exports, and China’s domestic activity now fuels its economic growth, not its net exports as in the past. However, since there are no winners in trade wars, China, too, is beginning to feel the pain.[ii]
