ELEPHANTS ON THE GRASS

By Tan Xingyu

A container yard at North Port in Port Klang outside Kuala Lumpur.

Recently, U.S.-China trade friction has drawn global attention.

Since taking office, the Trump administration has adopted an entirely different attitude from his predecessor on U.S.-China trade relations and actively provoked disputes. Beginning in January 2018, the Trump administration successively announced additional tariffs on large washing machines,photovoltaic products, cast iron sewer fittings, aluminum foil products and steel imported from China. On April 4, the U.S.administration published a list of 1,333 Chinese products, valued at US$50 billion, on which it intends to impose a 25 percent tariff on top of existing U.S.tariffs. China has indicated that it will not sit idly by; rather it will take retaliatory measures against U.S. sanctions.

The escalation of U.S.-China trade friction has been scrutinized closely around the world. Billions of lives today are highly dependent on free trade around the world. Many industrial chains are incomplete without cooperation of all countries. Should a trade war break out between the United States and China, neither would emerge as the winner, and the world at large would lose.

ASEAN is a leading trading partner of both the U.S. and China. Trade friction between the U.S. and China has a strong spillover effect on all ASEAN member states, which should not be underestimated.

Facts and Figures

The Trump administration has focused on the U.S.-China trade deficit, but it hasn’t analyzed the greater context. This flurry of U.S.-China trade frictions started with dissatisfaction from the Trump administration on the U.S. trade deficit with China,which was US$375.23 billion in 2017, accounting for 66 percent of the total trade deficit of the United States. This seemingly frightening figure has become Trump’s most powerful weapon in imposing a heavy round of sanctions against China.

Actually, the move is not justified. Although the U.S. trade deficit with China is staggering,it should be analyzed in detail.

A large part of China’s foreign trade involves processing—China imports spare parts from other countries which become assembled products for export to other parts of the world as“intermediate products.” As much as 44 percent of China’s exports to the United States are“intermediate products.” If the value of “intermediate products”are removed, the U.S. trade deficit with China would be reduced by 50 percent.

Another factor is services trade. The United States posted a trade surplus with China of US$37 billion in 2016, its largest services trade surplus in the world. According to statistics from China’s Ministry of Commerce, in 2016 Chinese tourists spent an average of about US$13,000 in the United States, far more than the sum spent by tourists from other countries. In education, 30,000 Chinese students in the U.S.contributed about US$15.9 billion to the U.S. in 2016. Thesefigures demonstrate that the United States is in fact the beneficiary of industrial upgrading of the global industrial chain layout.

U.S. companies have maintained high value-added links in aerospace, ordnance,software and other industries,while outsourcing low valueadded links such as processing and assembly to China and other countries with relatively cheap labor. Americans reap most of the pro fits, while American consumers enjoy high-quality and inexpensive commodities from other countries.

Therefore, the trade deficit figure does not paint an accurate picture of U.S.-China economic and trade cooperation.

Trade friction is not uncommon,and a mature mechanism already exists to solve the issue. However,the U.S. has frequently resorted to sanctions,ignoring WTO rules. Its unilateral protectionism destabilizes the existing world economic order.The entire world must stay on high alert against this practice,because how the U.S. treats China today could be how it deals with other countries and regions tomorrow. If a heavyweight ignores the rules of the game,there will definitely be more than one victim.

In 2000, ASEAN’s trade surplus with the United States reached US$25 billion and fell to US$14 billion in 2011. Although ASEAN-U.S. trade is relatively balanced, it would still be possible for the United States to launch a trade war against ASEAN using the shrinking surplus as an excuse. In 2001, the U.S. accused ASEAN countries of inadequately protecting U.S. intellectual property in its annual “Special 301 Report,” and has since kept Indonesia and Thailand on a priority watch list.

Most complaints from ASEAN countries to the World Trade Organization are directed against the U.S., especially its anti-dumping policies. It is reasonable for ASEAN countries to be highly concerned with ongoing U.S.-China trade friction.

If the United States and China really engage in a trade battle, it would be very difficult for ASEAN to remain unscathed.

Elephants on the Grass

Although U.S.-China trade friction is menacing, judging from the current situation, both the United States and China have a deep understanding of the serious consequences of a trade war. Both have remained restrained. Most announced tariff hikes are still on hold. Bilateral negotiations are ongoing. The situation can still change for the better. From the perspective of industrial substitution, most industries involved in the trade friction are not closely related to ASEAN countries. But many Chinese enterprises export intermediate products made from the raw materials imported from ASEAN to the United States.Sanctions on these enterprises will unavoidably affect ASEAN countries in the upstream industrial chain. As an old Chinese saying goes, a fire at the city gate is disastrous for thefish in the moat. The situation is something to be closely watched by the wider region.

Forbes.com reported on April 24 that if a trade war should break out between the United States and China, the world’s two largest economies, Malaysia and other countries and regions would suffer greatly.“This Southeast Asian country has historically depended on exports of crude and palm oil,” wrote the report, “But the US$341 billion economy rests now as well on exports of electronics, machinery and their parts to both China as well as the United States. Malaysia’s top export to both last year was electronics circuits and parts,according to data compiled by Moody’s. Those goods risk impacts from Sino-U.S. trade restrictions, says Joy Rankothge,a senior Moody’s analyst in credit strategy and research.Presumably Chinese or American firms would reduce orders or ask for price cuts.”

Furthermore, a trade war would hit thefinancial markets hard. Thefinancial markets of ASEAN countries remain badly damaged by thefinancial crisis in 2008. If the two elephants—the U.S. and China—really fight, the next financial tsunami would be inevitable. Singapore’s first Prime Minister Lee Kuan Yew once said:“When elephants fight, the grass suffers.” If the United States and China really engage in a trade battle, it would be very difficult for ASEAN to remain unscathed.Therefore, the international community including ASEAN should unite against the unilateral protectionism of the United States and deal with trade friction within the existing framework of world economic and trade mechanisms.