A summary of the US-China trade war and an exploration of the future possibilities for ASEAN and Australia.
By: Andrea Chan
“War does not determine who is right – only who is left.” – Bertrand Russell
It’s the battle of the ages in Avengers: Endgame, the fight against Thanos, a superhuman Titan mutant, who threatens to wipe out half the world’s population with a single snap of his fingers. Two of the strongest superhero leaders in the Marvel Cinematic Universe (MCU), Captain America and Ironman, have been part of a long standing battle for power and are known for disagreeing with each other. Their conflicting ideologies in Captain America: Civil War resulted in half of the Avengers having to escape an underwater prison.
Coming back down to Earth from the inter-galactic battles in Avengers: Endgame, we find ourselves caught in a comparably brutal battle for power between U.S and China, our own terrestrial equivalents of Captain America and Ironman. The ongoing conflict between the incumbent and emerging superpowers of the U.S. & China continues to have, far-reaching negative impact on the global economy, with the Association of Southeast Nations (ASEAN) countries at the epicenter. Countries that are heavily dependent on exports to the US and China, such as Malaysia and Vietnam, and countries that have manufacturing sectors integrated into global value chains, like Singapore and Thailand, are likely to be most exposed to the negative effects of the trade war (Reynolds, 2019).
While each of the individual countries, much like standalone Avengers, are strong and come with their unique strengths, together they are much stronger. But they needed the Captain America and Ironman, of the U.S & China, to put their differences and pride aside to bring the Avengers together. In the film’s denouement, we see Captain America and Ironman combining forces to draw on and harmonize the strengths of each of the Avengers, which ultimately leads to victory over the seemingly undefeatable superpower that Thanos is. Although not a new concept, the movie serves as a reminder of the power of putting aside one’s differences and individual glory. We are also reminded, like the Avengers, that by focusing on a common goal and working together to overcome the insurmountable, everyone wins.
Back on Earth, amidst all the trade war negativity, however, there is a hidden jewel of hope; the potential for countries in the Asia-Pacific (APAC) to leverage on growth opportunities and regional collaboration to hedge the effects of the trade war in APAC. Just as the Avengers banded together to stop the superpower Thanos from destroying half the world, perhaps the secret to survival lies in the regional cooperation of these APAC countries in establishing their own free-trade agreements and leveraging on each of their country’s strengths for the combined growth of the region.
While the impact of the US-China Trade War has been undeniably damaging, the following article will highlight the opportunities and gains of the trade war for ASEAN countries and Australia, as well as the history of the US-China trade war.
An Overview of the US-China Trade War
It is clear that the US-China Trade War is largely motivated by protectionism and competition, as both countries compete to establish themselves as the greater economic power.
The trade dispute first started back in April 2017 during the Mar-a-Lago summit where Chinese President Xi Jinping and US President Donald Trump agreed to implement a 100-day plan to resolve trade differences. In May 2017, as part of the 100-day plan, U.S and China agreed on a trade deal that would give certain U.S firms in agriculture, energy and financial industries increased access to China’s markets (Wong & Koty, 2019).
In response to the agreement, in August 2017, the United States Trade Representative (USTR) launched a formal investigation into China’s intellectual property (IP) policies in relation to counterfeit goods, pirated software and stolen trade secrets, which allegedly resulted in an estimated annual cost of $600 billion to the US economy. In March 2018, Trump signed a memorandum to impose tariffs on Chinese products, as well as to restrict investments in key technology sectors (Wong & Koty, 2019), as penalties on China for their theft of U.S intellectual property, which allegedly affected billions in revenue and thousands of jobs in America (Landler & Rappeport, 2018). Following the USTR investigation, Trump also filed a World Trade Organisation (WTO) case against China for discriminatory technology licensing practices that resulted in unfair treatment for US companies in China due to less favorable contract terms for imported foreign technology (‘US drags China…’, 2018).
In late March of 2018, after both the U.S and China imposed retaliatory tariffs on products such as steel, aluminium, soybeans, sorghum and automobiles, the trade war began. In spite of two rounds of intensive trade talks hosted in Beijing, during May and June of that year, the U.S and China failed to come to a mutually satisfactory agreement. Throughout August and July of 2018, the U.S announced China-specific tariffs worth an approximated $200 billion, wherein China retaliated with an additional $60 billion worth of tariffs on US products. China also filed a WTO claim against the U.S, on the premise that U.S tariffs obstructed China’s trade interests. (Wong & Koty, 2019).
After almost 4 months of failed negotiations, cancelled trade talks and retaliatory tariffs, a temporary truce was agreed upon in December 2018; with China agreeing to purchase more U.S products and to temporarily lower tariffs on US auto parts for three months, and the U.S agreeing not to impose additional tariffs on Chinese goods (Wong & Koty, 2019).
When Trade Talks Turn into Threats
“In war, whichever side may call itself the victor, there are no winners, but all are losers.” – Arthur Neville Chamberlain
The initial trade disputes of 2017 began as a result of the U.S’s response to China’s IP policies, that it claimed were unfair to US companies operating in China. Consequently, one of the U.S’s most insistent demands during trade negotiations has been for Beijing to strengthen the protection of foreign companies’ IP rights, and to remove the forced transfer of technology requirements for US firms wishing to undertake joint-ventures within China. However, Beijing remains reluctant to strengthen its IP laws according to professor David Ahlstrom at the Chinese University of Hong Kong,, due to concerns that it may slow economic growth (Yeung & Leng, 2019).
Following another 4 months of failed negotiations in early 2019, Trump threatened to further raise tariffs on $200 billion worth of Chinese products effective 10 May 2019. China then retaliated with additional tariffs on $60 billion worth of US products effective from 1 June 2019, with tensions escalating once more. Today, there exists a total of $250 billion US tariffs exclusively applied to Chinese goods, and a total of $110 billion Chinese tariffs exclusively applied to US goods (Wong & Koty, 2019).
With no resolution in sight, the trade war tensions continue to escalate between the World’s two largest economies, with China accusing the Trump administration of committing ‘economic terrorism’ and Chinese state media sending Washington an ominous “Don’t say we didn’t warn you” (Westcott, Wang & Picheta, 2019).
The Trade War’s Impact on ASEAN and Australia
Although the impact of the US-China trade war has a detrimental impact to the global economy, not all hope is lost. The trade war has created opportunities for ASEAN and Australian producers who are now being considered as alternatives to US and China products in the global market.
Import substitution opportunities
In the short-term, while the US and China implement tariffs on each other’s imports, they will quickly need to find more affordable substitutes from either domestic producers or neighbouring countries . Countries like Malaysia, Thailand and the Philippines stand to benefit, offering affordable substitutes in liquefied natural gas, automatic data processing units and electronic integrated circuits. (Subbaraman & Varma, 2019). Furthermore, with China and Hong Kong accounting for 40 percent of Australia’s fruit and nut exports, Australia stands to gain from growing demand as an affordable alternative compared to the increased prices of U.S. fruit exports into China. (Neuman, 2018).
In particular, being China’s largest trading partner (Neuman, 2018), Australia also sees opportunities in the wine industry with Australia’s wine exports to China totalling nearly 1 billion Australian dollars ($767 billion) in 2017, and an annual growth of more than 40%, according to Tony Battaglene, the CEO of the Winemakers Federation of Australia (Nakano & Matsumoto, 2018)
Production relocation opportunities
In the medium term, the trade war is likely to result in a realignment of global supply chains that may be beneficial to Southeast Asia, especially in the information technology equipment and electronics manufacturing sectors in Vietnam, Thailand and Malaysia who have much lower operating costs. (Tobin & Power, 2019)
Additionally, there are also increasing opportunities for countries in the ASEAN region as manufacturing of both high-tech goods, such as mobile phones and vehicles, and simple products, like bicycles, continues to move away from China to (Lauria, 2019)
Rare Earth Opportunities for Australia
In May, China threatened to withhold rare earth minerals, a key component in mobile phones, to the United States. This is significant because China holds 90% of global rare earth processing capacity and a quarter of the world’s reserves compared to Australia’s 2.8%. Although Australia accounts for more than half of the new projects in the global pipeline, these projects are slowed down by difficulty in securing financing due to China’s dominance in the rare earth industry (Burton, 2019).
However, alternative sources of financing have recently revived the commercial opportunity of such projects for Australia, including the Australian government’s Northern Australia Infrastructure Facility’s (NAIF) interest in providing funding support (Grigg & Ker, 2019).
More importantly, we have seen increasing efforts in APAC to work together to maintain regional order amidst the international repercussions of the trade war. The Southeast Asian countries have been working to streamline tariff rates and customs procedures across the region through the Regional Comprehensive Economic Partnership (RCEP) to strengthen positive regional trade initiatives. Australia has also signed an investment agreement with ASEAN in joint efforts to attract public and private investment by developing high-quality infrastructure projects. (Heydarian, 2018).
Looking into the Long-Term: A Multilateral Cooperation
Considering that the tariffs might remain, in order to benefit from the impacts of these changes in the global trade climate, ASEAN and Australia should take on a longer-term perspective in investing in production capacity. Michael Taylor, Chief Credit Officer for Asia at Moody’s in Singapore noted that “The factor which limits the extent to which countries can benefit from the trade tensions is infrastructure”, areas in which Vietnam, Thailand and Malaysia have made major investments in. (Tobin & Power, 2019)
Furthermore, as many of the benefits might take a long time to come into full-effect (Lauria, 2019), it is important that ASEAN and Australia takes measures to bolster against the lower trade volumes and lack of investor confidence in the shorter term. Perhaps the secret lies in the exact opposite of the U.S’s unilateralism and protectionism that is driving the US-China Trade War; the multilateral cooperation that China and many other nations have called for. Even if U.S remains protectionistic, ASEAN can still build their resilience against the negative effects of the trade war through strengthening economic cooperation in the region and multilateral trade agreements.
Does the battle of the superpowers in the US-China Trade War still mean a bleak economic outlook for the rest of the world? In the short-term, possibly. But even more possibly, the combined strength of countries in APAC might be enough to ensure its not the Endgame anymore.
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