Global trade war: the implications for developing economies

Global trade war: the implications for developing economies

In March 2018, the United States imposed trade taxes on steel and aluminum imported from China. As the US Department of Commerce had recommended tariff hikes on several other goods originating in China, it is believed the list of commodities facing increased trade taxes might expand. President Donald Trump made clear that such an act was in line with his America First agenda.

In April, China retaliated and imposed trade taxes on steel pipes, recycled aluminum, fruit, nuts, wine and pork from the US. Following this, the US threatened to impose another $50 billion of import tariffs on Chinese goods. The Office of the US Trade Representative, in response to an investigation into intellectual property theft, proposed an almost 25 percent tariff on 1300 Chinese goods from sectors including machinery, medical industries and aerospace. China in turn threatened another round of retaliatory tariffs on 106 products arriving from the US. This list includes goods from the aircraft, automobile, chemicals and soybean sectors.

As two of the largest global economies enter into a trade war, advanced economies have seen their markets rattle during the past few days. It is equally concerning for emerging and developing economies. Several countries with low levels of economic development are still partners in global trade through vertically or horizontally integrated industrial-supply chains. These economies might be suppliers of raw materials or intermediate goods to the US and China.

Trade analysts suggest four possible effects of a US-China trade war on developing economies. Firstly, slapping trade taxes onto commodities could in turn result in increases in producer and consumer prices. This in turn could cause inflationary pressures, particularly in countries using commodities such as iron, steel, aluminum and other metals as production inputs.

Secondly, the lower-income section of the population in developing countries could be hurt by higher prices and lower wages. The latter aspect is particularly important to understand: as commodity prices increase, this could dampen demand, in turn leading to lower output and employment. Ultimately this drags down wages, particularly for the poorest of the poor, who might also face layoffs.

As China retaliates, higher tariffs and para-tariffs on US goods could result in production cuts, and the diaspora from developing countries who are working in the US could face reduced hours of work and job losses.

Dr. Vaqar Ahmed

Thirdly, as China retaliates, higher tariffs and para-tariffs on US goods could result in production cuts, and the diaspora from developing countries who are working in the US could face reduced hours of work and job losses. This ultimately could result in lower levels of remittance to developing countries that rely heavily on such unilateral foreign currency inflows to support their balance of payments.

Finally, the moves by the US and China might open the doors for other advanced economies to step up protectionism and start making foreign imports more expensive through tariffs, para-tariffs and non-tariff barriers. This would be devastating for all and could put in danger the gains achieved through liberal trade and investment cooperation over the years. World Trade Organization director-general Roberto Azevêdo recently noted that such an escalation of trade disputes could affect the long-term investment decisions of corporate entities around the globe.

Maurice Obstfeld, the International Monetary Fund’s chief economist, noted that 2018 posted the strongest global economic growth since 2011. The world is starting to recover from the effects of the global financial crisis. According to the IMF, however, risks to global recovery and growth still remain, and a rise in trade barriers will harm financial markets. It could also lead to disruption of global supply chains and the diffusion of new technologies around the world.

Unfortunately all this is happening at a time when global investors are also closely watching the UK and EU trade negotiations as part of Brexit, the UK’s decision to leave the EU. Trade experts suggest that in the short term the UK is bound to experience lower levels of trade and growth as non-UK production facilities need to finalize their relocation, licensing and future investment decisions. Already the uncertainty surrounding Brexit has brought costs in terms of reduced business confidence and a hike in inflation in the UK and the region. It is expected that consumer prices in the UK will increase faster than wages, which could cause resentment across the board. This in turn will also apply economic pressure to the UK’s trading partners.

Going forward, it is now increasingly important that developing economies should revisit their national trade and industrial policies and direct their future production incentives and trade preferences towards products that are in demand in countries with lower trade barriers, higher consumer confidence, a stable economic-growth outlook, and the potential for supply-chain integration.

– Dr. Vaqar Ahmed is the joint executive director of the Sustainable Development Policy Institute, Pakistan (SDPI). His book ‘Pakistan’s Agenda for Economic Reforms’ was recently published by the Oxford University Press.