THE escalating trade war initiated by United States President Donald Trump is a major threat to world trade and the global economy. The developing countries will be among those most affected. It is time for them to respond and speak out.
The country most directly affected by the US trade attack is China. But it is not just a tit-for-tat fight between two giants, the US and China.
The US has also increased tariffs against European countries, Mexico, Canada and others with regards to steel and aluminium. Additional US tariffs on automobiles and their components are now imminent, and if implemented this will take the conflict to a much higher level, with US versus Europe as the centre. But many countries that are integrated in the regional and global supply chains will also be affected. Some could even suffer more damage than the direct protagonists.
For example, many Asian countries like South Korea, Vietnam and Malaysia export components to China, such as electronics. The components are used to make products such as mobile phones and computers, some of which are exported to the US. If the extra US tariffs reduce Chinese production, there will be less demand for components exported by these countries to China.
Moreover, a decline in economic growth in China and the US will depress their demand for commodities and other products, thus affecting many developing countries including in Africa and Latin America.
A study by Pictet Asset Management of 45 countries shows that many developing countries are among the most vulnerable to a trade war. Taiwan, Korea, Singapore, Hungary, Malaysia, Thailand, Vietnam, Chile, and the Philippines are among the most dependent on global supply chains and would thus be susceptible to a breakdown in trade. For example, Malaysian exports are about 60 per cent dependent on global supply chains, while the rates are about 48 per cent for China and 40 per cent for the US.
A Reuters report using OECD data to calculate value-added embodied in Chinese exports by its source countries shows that the most exposed Asian countries to a reduction of Chinese exports would be Taiwan (eight per cent of its gross domestic product value is embodied in Chinese exports), Malaysia (six per cent), South Korea, Hong Kong and Singapore (between four and five per cent).
Another study by the Development Bank of Singapore found that in Asia — South Korea, Malaysia, Taiwan and Singapore are most at risk from a trade war, based on trade openness and exposure to supply chains. A trade war would reduce economic growth in 2018 by 0.4 per cent for Korea, Malaysia and Taiwan (0.6 per cent), and Singapore (0.8 per cent). The rates could double next year.
These are significant losses indeed. Developing countries cannot afford to be mere spectators of a US-China trade war. They should assess how their countries will be affected, and prepare for the effects. More importantly, they should examine who is at fault, speak out and act.
It is clear that the US is the initiator and provocateur of the trade conflict. Its tariff hikes are unilateral actions, against the rules of the World Trade Organisation and the global trading system. Complaints have been filed against the US at WTO, including by China, the EU, Russia and India. Other countries should join in as complainants.
The US actions threaten the very survival of the trade system. If moves and counter-moves keep taking place, there will no longer be any predictability for any country’s exports. The EU remarked at the WTO recently that the trading system is now facing acute “stress and uncertainty”. The uncertainty would certainly affect export-dependent countries.
This is also the worst time for a trade war. It comes on top of the increasing shakiness of the world financial system, now on the verge of a new crisis. Already foreign funds are moving out of developing economies, and their currencies are weakening, thus increasing inflationary pressures and making it more expensive to service external loans.
Trump and his advisers have been planning a trade war for some time and now they are putting it into action. It started in January with an extra 30 per cent tariff on solar panels and components, and 20 per cent tariff on washing machines.
Then came 25 per cent tariffs on steel and 10 per cent on aluminium on all countries, except some that are exempted. The US used Section 232 of its Trade Expansion Act 1962, which allows the president to impose extra tariffs to counter threats to national security. This section has been rarely used and until now never invoked since the WTO was established in 1995.
Using “national security” as a reason is clearly a disguise for what is a commercially-motivated move, as the imported metals are hardly a security threat, and most countries affected are close US allies.
There are well-founded concerns that the use of the “national security” factor by the US will undermine the world trading order, since it will also open the door for other countries to cite the same reason to take similar unilateral actions.
In short, the world is on the brink of a Trump-induced global trade crisis. It will have spill-over effects on exports and the gross national product growth in developing countries, and secondary effects on policies of banks (which may increase the price and volume of credit) and on the financial markets (with effects on stock prices and the outward flow of funds).
The developing countries should now strongly speak up against the unilateral measures of the US at many venues, and take or join other initiatives to stop the trade war from escalating. IPS