GLOBAL TRADE PERTURBATIONS

An unprecedented confrontation between the two largest economies, the US and China is going on in the world. Both countries make up almost 40% of the global economy, hence it's appropriate to think about a full-scale trade war between them, which can seriously blow the entire global economy.

Recently, the US imposed 25 percent import duties on 818 goods ($34 billion) imported from China. Beijing reacted immediately, introducing 25 percent tariffs for 545 types of US products, also worth $34 billion.

President Trump motivates his decision to impose punitive tariffs on Chinese products by violation of the intellectual property rights of American companies by Beijing, primarily in the development of advanced technologies. In other words, the White House openly states that the struggle for excellence in high tech is at the heart of the trade war with China. The US is seriously concerned that advanced American technology, illegally trapped in the hands of Chinese companies, can then be used to develop new industries of the Chinese economy, which will ultimately lead to the defeat of the US in competition against China.

Meanwhile, problems can also begin in the US under the influence of the anti-China measures they have taken. After all, Chinese capital has created over a million new jobs in the US over the past few years.

It is no accident that the Automobile Industry Association of the US called the customs duties imposed by President Trump against China "the taxes that will hit US companies, jeopardize the number of jobs and have a negative impact on consumers." And the American Chamber of Commerce, in turn, accused the president of "choosing the wrong approach to regulating foreign trade."

Experts estimate the loss of American GDP from measures taken by Tramp at 0.5% (or almost a trillion dollars). If such a disappointing forecast for the US economy justifies itself, it will face such threats as rising inflation and the loss of thousands of jobs.

In fact, Trump's target, China will also have to face challenges. Immediately after the introduction of customs restrictions by Washington, the Chinese economy experienced the first shock: Chinese stock indexes suffered serious losses. In the long-term run, Beijing will have to solve the problem of filling the commodity gap, taking into account the fact that the main share of imports from the US is food. However, since the Chinese are traditionally accustomed to self-restraining policies, they expect relatively painless shift of suppliers of millions of tons of soybeans, pork, salmon, pipes, energy and other vital products to China's economy. At the same time, they place high hopes not only on their own strategic resources, but also on a number of foreign partners who are looking forward to the start of the trade war between the two giants of the global economy in order to get high profits. In particular, China can replace American oil and gas with those of Iranian and Russian companies.

Meanwhile, the actions taken by Beijing to counter American tariffs may imply that the Chinese leadership developed an advance plan in case of possible trade war. For example, in addition to reciprocal increase in duties, the People's Bank of China and its associated lending institutions devalued the yuan by about 10%. They estimate that the US Federal Reserve System will not take a similar step, as a 10 percent drop in the dollar's rate can shake the entire US financial system.

Another retaliatory measure assumed a reduction of import customs duties for 1,500 kinds of consumer goods, as well as 5-10% for cars and spare parts, as of July 1, 2008, a few days before Trump's historic decision. Furthermore, the Chinese State Committee for Development and Reforms announced its decision to lower obstacles for foreign investors starting from July 28. The share of foreign capital in companies operating in the stock market, in the automotive, agricultural and other industries, can now reach a controlling 51%. So, the Chinese authorities attempt to compensate for the possible outflow of investment due to depreciating yuan.

In this regard, it is noteworthy to mention a rather significant manifestation of the US-China trade war, which may result in the collision of the American free market system with the Chinese planned-market system based on impressive state regulation. Only time will show which of these systems will eventually win.

Trade war against everybody

The economic confrontation between the US and China is only part of the implications of the measures initiated by the Trump administration to ensure American interests in the global market. After all, Washington has earlier launched a trade war against the US-backed economic systems by imposing duties on steel (25%) and aluminum (10%) imported from the EU, Canada and Mexico. In response to strict conservative measures, the EU has introduced almost similar restrictions - about 20% on a number of American goods.

Russia joined the trade war against the US following China and the EU considering the anti-Russian sanctions implemented in recent years by Washington for "purely political reasons". Russia did not wait long and published a list of American goods subject to higher import duties as a reaction to similar American duties on European steel and aluminum (Russian exporters are estimated to lose $537.6 million annually). In particular, Russia will apply 25-40% duties to road construction equipment, oil and gas equipment, tools for metal processing, etc.

However, experts believe that Russian duties will affect less than 3% of US exports, so it will not be so noticeable for the US, not to mention the fact that the list of American goods for which Moscow imposes restrictions does not include consumer goods, and therefore does not affect the largest items of Russian imports from the US. Nevertheless, amidst the growing geopolitical confrontation between the two largest nuclear powers, the elements of economic confrontation between the US and Russia only add to the picture of growing tension in the world arena. Moreover, the latest American actions clearly manifest an intention to destroy the rules of the World Trade Organization (WTO), hence exacerbating the trade war.

Will the domino effect work?

In return for the WTO rules, the US actually imposes its own trade norms on the rest of the world. However, judging by the reaction of the US-backed European Union, the rest of the world is not willing to be guided by American trade policies. The main driver of the European economy, Germany, is a striking example of this counter-action. German Chancellor calls for adherence to the rules of the WTO and expresses solidarity with the position of China, which also does not hide its interest in unimpeded trade.

We should take into account yet another important aspect when considering the mutual blows of the main actors of the global trade confrontation, primarily American measures against China. Globalization of the economy intensifies the international division of labor. There are many American, European, Japanese companies operating in China. Chinese goods are delivered to the US not only from local enterprises, but also from plants owned by foreign capital. Therefore, anti-Chinese duties objectively strike also the interests of both the American companies and the companies of the US allies.

However, the main aspect of the trade war is that if the domino principle works and all countries adopt protectionist measures, then this will end the free trade system - one of the foundations of the modern world order. In particular, one of the principles of the free trade system will be upset: the consideration of all disputes in the WTO, created, incidentally, in due time, largely due to the efforts of the US as an economic superpower, for a long time was the mainstay of the free economy on a global scale.

It is no surprise that previous US administrations have criticised the closed nature of the Chinese market, but nevertheless called on Beijing to reform its domestic trade policy on the basis of WTO rules. Donald Trump with his slogan "America Above All", radically shook the situation, which is why the international trade system that has developed for decades is on the brink of destruction. Economic competitors of the US, primarily China and the European Union, will have to choose between satisfying American interests or a ruthless confrontation against the new global trade rules established by the States. The recent events are hinting about the likelihood of the second scenario.