by Mwanda Phiri and Shimukunku Manchishi
In what was seen to be part of his many usual controversies, in November 2018, President Donald Trump stirred the pot with a beggar-thy-neighbour policy against China that finally ignited what analysts had predicted would result in a new trade war with China.
That is, the US President sought to fix America’s economic problems, namely the loss of manufacturing jobs in steel industries, at the expense of China and other countries exporting steel and aluminium to the US. By invoking Section 232 of the Trade Expansion Act of 1962, the President essentially acquired carte blanche to take protectionist measures against imports that threatened to impair the US national security. He imposed a 25 percent and 10 percent tariff respectively, on imports of steel and aluminium from China, a move that was not taken lying down by China. China retaliated in kind with its own tariffs on US exports of goods to China namely soybeans, beef, whiskey and off-road vehicles.
Interestingly, the spat over aluminium and steel is not the genesis of the trade dispute between the US and China. The two countries have had a long-running economic competition with one another over control of the world order. In recent years, tensions have escalated due to America’s growing trade deficit with China which it accuses of artificially undervaluing its currency so that Chinese exports become cheaper and hence more competitive. Conflicts relating to Intellectual Property (IP) such as inventions, literary and artistic works and designs also lie at the root of the trade war between the two countries. The US has constantly accused China of IP theft, forced technology transfer and cyberhacking for commercial gain. The US Commerce Department estimates that the country loses US$600 billion annually to IP theft and China is the biggest culprit. Even before Trump, the US threatened to impose tariffs on China following IP violation during the Bush and Clinton administrations.
While known for his unpopular statements, one cannot help but ponder Trump’s rationale for the protectionist measure and associate it to the social divides on free trade. On the one hand economists unanimously advocate for free trade while the majority of the public on the other hand, are anti-free trade. In 2002, scholars Mayda and Rodrik found that more than half of over 20,000 individuals surveyed in 23 countries were in favour of trade restrictions.
And why is this so? These perceptions are premised on fears that wage inequality will rise and jobs will be lost as a result of free trade. However, in international trade, free trade is generally recognised as the gold standard that maximizes consumer welfare. And while some industries that open up to trade are affected by the increased competition and may be forced to lay off some workers, the underlying assumption is that these ‘laid-off workers’, will quickly adjust their skills and obtain employment in other sectors. However, this seldom happens that quickly if at all for some countries. Free trade thus generates losers and winners.
Which brings us back to Trump’s contention with imports. Although Trump’s approach is less than desirable, the argument may have some validity. Free trade tends to displace a country’s production and employment when the country in question opens up to fierce competition from other countries. However, the problem with Trump’s beggar-thy-neighbour move is that it triggers a series of tit-for-tat measures which eventually result in stalemate. Neither country benefits and in the process, bystanders are also adversely affected.
For instance, most US imports from China are manufactured by US firms in China while other imports are intermediate inputs in the manufacturing process. Hence, tariffs hurt America’s commercial interests. When President George W. Bush imposed similar tariffs on selected steel products in 2002, imported steel became more expensive to the detriment of American companies that use steel to produce cars, trucks, buildings, highways, home appliances and many other goods in the US.
Further, the trade war between China and the US has a bearing on China’s demand for copper and consequently, Zambia’s balance of payments and economic performance more generally. This effect is channelled through the trade war’s effect on international market sentiments, investment decisions and overall, China’s economic performance. Being the world’s largest consumer of copper, such negative developments discourage investments and this dampens China’s demand for industrial metals such as copper and consequently, copper prices. And a fall in copper prices is detrimental for Zambia whose major export commodity is copper.
The trade war thus serves as a reminder to policy-makers. Certainly, free trade provides wider consumer choices and lower prices, access to cheaper inputs for production, innovation and improved efficiency and technology gains, competitiveness, and economic growth. But, it also comes with adjustment costs which should not be ignored so easily. Therefore, policy-makers need to give greater attention to trade redistributive policies that aim to compensate workers temporarily losing their jobs due to free trade. This will ensure a fairer and more equitable redistribution of the benefits from free trade and minimize tariff escalation.