FE7055

Economics of International Trade Essay

The Impact of China and The United States

Trade Dispute on Japan’s Economy.

Module Leader: Students:

Mr. Ian Williams Agnes Gitau: 01024266

Greta Gamart: 19025724

Md Abdul Noor:04051496

Paula Botezatu: 15042287

Introduction.………………………..……………………………………………… 3

I. The Genesis of The Ongoing China and Us Trade Dispute.…………………...…6

What Tariffs Have Been Imposed?..................................................................9

II. Trade Dispute and Its Impact on Japan’s Economy ………………….…………14

a. Macro-Economic Factors ……………………….…………………...……14

b. Distraction Of International Trade Patterns……………..…………….…. 17

c. Trade Policy Spillovers ………………….…………………….…………19

d. Value Chains………………………………….….…………………..……21

e. Trading System Weakened (WTO)........................……….........…………22

Conclusion and Recommendations…………………………....…………………. 24

References.……………………………………………………………………..… 26

2
 Introduction

International Trade and its contribution to global economic growth and

development of nations remain indisputable. It is a lever that promotes productivity

and accelerates economic growth. As Franklin Benjamin in 1774 famously said, “No

nation has ever been ruined by trade, even the most disadvantageous,’’ A view

disputed by some early economic theories. (WTO, 2013). According to data from

the World Trade Organization, world merchandise exports grew from a meagre USD

$5.18 Trillion in 1995 to USD $19.5 Trillion in 2018, with the United States and

China leading in International Trade. This volume of trade has created social and

economic opportunities for trading nations, consumers and citizens. (WTO, 2018)

If the trade is a force for good therefore as most economists propose, why is

there a rise in protectionism and divergent views on trade? Some economists in

favour of trade like Ricardo in his comparative advantage theory assumes that trade

is mutually beneficial to those who engage in it, where one country produces goods

and services at a lower opportunity cost than the other (Free Trade). In contrast,

mercantilism theory advocates for the government’s regulation of international trade

to generate wealth and strengthen national power, growing domestic economy

(Pettinger, 2019). The theory contrasts free trade which advocates for tariff reduction

and free or fair trade. Mercantilists believed that without control, trade can be

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harmful, a view John Maynard Keynes seemed to support the theory, when he

cautioned against foreign trade being left to the vagaries of free trade without some

form of government control (Cammarosano, 2015). Can the new wave of growing

protectionism and hostility against International trade in the global economy be

linked to mercantilism?

China and the United States are the two world’s largest economies with Japan

ranked 3rd. Trade data from 2018 indicate that exports from the United States to

China were valued at $179.3bln and China’s exports to the United States valued at

$557.9bln (Investopedia,2018). In spite of this volume of trade between the two

countries, the United States in March 2018, imposed a series of unilateral restrictive

trade measures against China by imposing tariffs worth $360bln on China’s imports

to which China reiterated by imposing tariffs worth USD $110bln on Imports from

the United States. This action between the two countries sent shockwaves across the

globe with economists warning of dire impact with implications not only in the two

countries in dispute but in the wider global economy. ‘’For when it comes to trade,

nothing happens in isolation’’ (Meltzer and Shania, 2019).

Japan, a highly developed free-market economy, is the 3rd largest economy

in the world and a close trade ally of both China and the United States. Exports from

Japan accounted for $694bln with imports valued at $632bln in 2017. The largest

export markets for Japan in 2017 were China ($136bln) and the United States

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($125bln). Top import markets are China ($157bln) and the United States ($66bln).

(OEC, 2020).

Noting the close trade relations between Japan, China, and the United States,

the essay will examine the genesis of the trade dispute, and in the following chapters,

investigate the specific trade factors that arise from the dispute and how these impact

Japan’s economy. The essay concludes by providing a recommendation for

policymakers to consider in the face of rising hostility towards globalization and

international trade.

5
 The Genesis of The Ongoing China and US Trade Dispute

The trade deficit between US and China, which rose from USD $315 billion

in 2012 to USD $419 billion in 2018 has been one of the contributing factors to

notable trade hostility towards China by the United States. America’s trade policy

and its move towards protectionism were key themes during America’s presidential

elections in 2016 where the presidential candidate promised to make “America Great

Again”. This political message was in reference to China’s global trade influence at

the expense of America’s Corporates.

On the 22nd of March 2018, the US administration proposed tariffs on $50

billion of Chinese imports as an unprecedented response against globalization. The

dispute, which has simmered for nearly 18 months, has seen the US and China

impose further tariffs against each other worth of billions of dollars, which can be

observed in the table below.

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The US officials have long accused China of unfair trading practices and intellectual

property theft (The Japan Times, 2019). By taking protectionist measures (tariffs)

against China’s exports to the US, the president claimed his actions would bring

back control, create jobs for American people and grow the domestic market in the

United States. The United States officials believes that China’s economic model is

unfair and operates in favor of Chinese companies at the expense of all the other

global companies, which is against the World Trade Organization’s rules (Meltze

and Shinai, 2019). There are, however, ongoing negotiations between the two

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countries which unfortunately, for the moment, did not offer any lasting solutions.

In December, the two sides announced a preliminary deal; however, some of the

thorniest issues remain unresolved. Uncertainty surrounding the trade war has hurt

businesses and weighed on the global economy.

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 What Tariffs Have Been Imposed?

The US tariff strategy is intended to encourage consumers to buy American products

by increasing the cost of imported goods. Washington delivered three rounds of

tariffs in 2018, and a fourth one in September 2019 (BBC News, 2019).

The most recent round targeted Chinese imports, from meat to musical instruments,

with a 15% duty. Beijing has hit back with tariffs ranging from 5% to 25% on US

goods. Its latest tariff strike included a 5% levy on US crude oil, the first-time fuel

has been hit in the trade battle (Rushe, 2019). Although the oil industry was not the

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most affected, a breakdown of the most vulnerable industries will give us a better

picture of the damage.

Automobiles

The automotive industry was the biggest area affected by this dispute. In July

2018, China increased its tariffs on American automobiles from 15% to 40%, as a

response to the US measures. The brunt of the trade tensions was mostly taken by

the US automakers, as those companies are highly dependent on car parts imports, a

large number of them produced in China. In contrast, Chinese consumers prefer

locally made vehicles. That was the actual case with Tesla Inc. which, due to high

taxation, had to raise the price of its products with up to $20,000 per model

([Link], 2019). This increase made sales to go downhill rapidly, which

forced the firm to reassess its strategy and put down its price. However, the extra

costs had to be absorbed by the company, affecting its overall profit. China decreased

the tariff to 25% later on the same year, a gesture of goodwill and an attempt to

stabilize the conflict. Despite this, the overall market performance was already

affected, with sales decreasing considerably. Understandably, Japan, one of the

largest automobile manufacturing countries, took a big. The country was an

important exporter of car parts for both China and the US. However, as trade

relations degraded and the market took a hit, Japanese car parts manufacturers went

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through a decline in sales (Investopedia, 2019).

Tech and Telecoms

The China - US trade war also had an impact on the tech industry. The most

vulnerable in this trade war scenario are China-dependent chipmakers and computer

manufacturers, including NVIDIA Corp. (NVDA), Micron Technology (MU), and

Intel Corp. (INTC). According to Quinn Bolton, a senior semiconductor analyst for

Needham, said in a report from CNBC that "semiconductor suppliers have a

relatively high' ship-to' income exposure to China." "China is at greater risk to this

high exposure than many other segments of technology in the US-China trade war

to the semiconductor industry." Nevertheless, Apple has been able to escape most of

the negative effects of the hiking tariffs, although the actual announcement made by

the US President says it will equally affect their market (Investopedia, 2019). At a

global picture, it can be seen that not only the Chinese and the US Tech industry was

affected, but also Japan’s, as the country’s manufacturing basis is in high-tech and

robotics. The largest importer of Japanese robots in the last 40 years is China.

Nevertheless, the trade dispute affected this market, as Chinese companies were

reluctant to invest large sums of money due to uncertainty, which can be observed

in the graph below (South China Morning Post, 2019).

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 Agriculture

China is the fourth biggest importer of American’s agricultural products,

reaching a total of $9.3 billion in 2018 ([Link], 2019). In 2018, the Chinese

Government, in retaliation, imposed an added tariff on American soybeans, an

industry worth $3.1 billion. This was a shock for American farmers, which were left

with products valuing multi-million dollars. As a show of “good faith”, China bought

$180 million worth of soybeans in December 2018, still a fraction of the farmer’s

losses from that year. The graph below perfectly illustrates how the soybean US

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market crushed after the tariffs were imposed ([Link], 2019).

As a reaction to the trade deficit between the US and China, the American

Government and Japan agreed in September 2019, on an initial trade deal on

agricultural goods. Both countries accepted to lower or remove duties on a number

of agricultural products, with the intention of improving trade between them (BBC

News, 2019).

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 Trade Dispute and Its Impact on Japan’s Economy.

Due to the interconnectedness and trade dependency, trade war between China and

USA has both positive and negative impact on other world economies and the

world’s currency market. Japan, being the world's third largest economy, is the 2nd

biggest trading partner for China and 4th biggest trading partner for the USA. The

country has experienced slow economic growth even before the trade dispute began.

Its overall export shrank to more than 5% in September 2019 compared to December

2018(Dooley, 2020), exports to China having the biggest impact. The following

factors can be used to analyze the impact of the trade tension between the United

States and China on Japan’s economy.

a. Macroeconomic Factors

The friction of the US – China trade war has shaken the global trade impetus

that led to dampen the financial markets, hinder international trade and heightening

dilemma for business decision making. Neil Shearing, chief economist at Capital

Economics, blames these uncertainties over trade war for repression of business

investment and expansion (Romei, 2019). This ambiguity over international trade

has negative implications for the GDP growth of the world economy, including

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Japan. The growth of the Japans economy is near standstill at only 0.2% for the third

quarter of 2019, a sharp decline from 1.8% in the previous quarter.

Junya Inose, a senior economist at Mitsubishi Research Institute in Tokyo, suggested

that the actual threat does not belong to the tariffs itself, but to the potential spillover

effects of the trade war on monetary policy and currency market (Nagata, 2019).

This could be seen in the graph below as the US dollar depreciates against the Yen,

the currency of Japan, which made the Japanese products and services more

expensive compared to others and erode the chunk of the profit from MNC of Japan

(Dooley, 2020).

15
SOURCE : Bloomberg

The trade tension could bring stagflation to the Japan economy as the growth is

crawling, export is sluggish and reduction in income for MNC could lead to job

losses.

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 b. Distraction of International Trade Patterns

The trade war between the USA and China has intensified global trade and

geopolitical tension among world economy. Tariff imposition between two countries

could level competition for other supplier or absorb profit margin of supplier who

bears the increased costs of tariffs. Due to the conflict between the US and China,

Japan is exploring new markets sources for products and export markets, forging

new trade alliances and negotiating existing trade relations. (FT, 2018). Japan and

the United States signed a new limited trade agreement on the 7th of October 2019,

which came into effect on the 1st of January 2020. Tariffs on American agricultural

exports, such as cheese, beef and pork products, almonds and wheat, valued at $7

billion, will decrease, whereas tariffs on Japanese goods worth $40 million,

including food and digital trade, is also expected to lower ([Link], 2019).

Data from US trade numbers show a rise in trade between Japan and the USA to

$182.55 billion through the first 10 months of 2019, which is 2.01% above the same

period over the previous year (US TradeNumbers, 2019) and export from Japan to

the USA rose by 2.62%. However, as there are some points that this agreement does

not touch (as US tariffs on Japanese automobiles and Japanese-imposed tariffs on

American aircrafts), both countries have shown interest in developing the trade pact

in 2020 ([Link], 2019).

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Notable outcome from the trade dispute is a new wave of free trade negotiations

between countries, regions etc. A dispute seems to have created a pattern of new

negotiations, alignments and formation of regional free trade blocs. Japan and China

for example have formed an unusual friendship (BBC News, 2018). The two giant

economies agreed to maintain free trade principles and enhance co-operation

between their financial markets. In addition, Japan , China and South Korea signed

a regional trade agreed to continue pushing for free trade in the region despite the

ongoing trade dispute and in December 2019, the three countries met to negotiate a

wider regional economic partnership and a special trade zone linking up China,

Japan and South Korea. As it can be seen in the graph below, Japan’s total trade

volume has increased in the last three years as both the USA and China seek for

alternative supplier due to the aforementioned dispute. Hence, Japan’s trade volume

has increased with The USA and China steadily.

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SOURCE : Bloomberg

c. Trade Policy Spillovers - Tariffs

"There are considerable downside risks with an escalation of protectionism,''

argued by executive director of global economics, Sara Johnson at the research firm

IHS Markit (Press, 2019). "We're disrupting supply chains, and tariffs ultimately

lead to less efficient global production.'' Hence, The economic forecasters such as

the World Bank, the International Monetary Fund and other analysts have all

relegated their predictions for global growth this year. A senior economist at the

Daiwa Institute of Research, Shunsuke Kobayashi argued that spillovers effect from

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the China – USA trade war is sufficient enough to slow down the global economic

growth (Nagata, K., 2019). Daiwa Institute of Research suggested that Japan's

exports could be dropped by as much as ¥1.3 trillion due to the trade war.

As trade war intensified, total global trade contracted for the first seven months of

2019 which can be seen as the following graph. As both the Netherlands Bureau for

Economic Policy Analysis and CPB’s closely watched World Trade Monitor has

reported that the real value of world exports in July 2019 fell by 0.4% compared to

July 2018 (Romei, 2019).

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Another spillovers effect is taking cautionary protectionism measure to prevent

dumping. For example, several economies including the European Union, India,

Canada, Turkey and South Africa all have initiated to employ provisional tariffs

under the Treaty on Safeguards within the WTO framework to prevent the possibility

of dumping steel and aluminum products (UNCTAD., 2018).

d. Value Chains

The trade conflict between the two largest economies has upended supply

chains in Japan and undermined global trade flow. The product manufacturing in the

modern world does not happen in one country with the final product, as it developed

in various stages in different countries as an intermediate product to assemble the

final product. Hence, the US and China trade war does not only impact their

economy, but other economies also who were involved in the development of

product at various stages.

Asian countries participated in supplying parts and intermediary products to China

and the US will experience the severity of trade dispute suggested by analysts.

Steven Schwartz, senior director of sovereign ratings for Asia at Fitch Ratings

argued that South Korea, Taiwan, Vietnam and Malaysia are vulnerable, because

21
all of them export intermediary goods – such as machine parts and components for

communications equipment – which is used in China for the production of final

products to exports to the US (Zheng, 2018).

Japans big exporters had already hurt hard by the trade dispute. According to

BLOOMBERG (2019) report, electronic giant Panasonic Corp. stated a 12% dip in

its second-quarter operating profit caused by plunging sales of electric components

to factory owners in China and the USA. On the other hand, according to Shinichiro

Kobayashi, Mitsubishi UFJ’s Research and Consulting economist, the impact of

China-US trade dispute was somewhat limited, as Beijing implemented a series of

stimulus to stabilize internal growth. The brunt of the impact was taken by the

Japanese machinery sector, as fear of an escalating trade dispute made Chinese

companies reluctant about capital investment. This view is additionally consolidated

through the reality that Japan’s economy has come to be much less reliant on exports

for sustained GDP increase (Sato, 2019).

e. Trading System Weakened (WTO).

The trade conflict between China and the USA has not only damaged the

growth of the world economy, but also hampers the governing of world trade

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organization WTO with the escalation of protectionism sentiment. These

developments are impeding business predictability and normalcy as well as losing

trust on world trade policies by Multinational-corporation (MNC). For that reason,

a former White House economic adviser and chair of Berkeley Research Group's

emerging markets practice, Harry Broadman claimed that "Once you lose economic

confidence, it takes a very long time to build it back up'' (Press, A., 2019).

Since the ongoing trade negotiations between China and the USA are happening at

bilateral level by overlooking WTO, which undermines the credibility of multilateral

trading system. Consequently, free trade arrangements are in the danger and WTO

losing its integrity to operate normally claimed by Hiroyuki Ishige, the Chairman

and CEO of Japan External Trade Organization (JETRO) at the 60th Anniversary

Symposium (Ishige, 2018). This provides the cautionary sign for less developed and

weaker government (Economic Power) who are less leveraged to negotiate on the

terms of trade.

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 Conclusion and Recommendations.

The ongoing trade dispute between the two largest exporters in the world cast doubt

into the future of global trade. Based on the available data, this essay concludes that

the trade dispute has wider implications on other economies like (Japan) even though

not directly involved. Interestingly, despite the initial concern on the dire impact on

wider economies, Japan’s trade volume rose following the dispute. Japan perhaps as

a cautionary measure sought new markets and worked on renewing existing and new

trade relations. A good example is an agreement on Soybeans between Japan and the

United States which was agreed upon after China and the United States dispute as

discussed in the chapter on Agriculture. China and Japan, on the other hand, have

been forced into an unusual friendship agreeing to cooperate not only in trade but

also in the currency market. (BBC, 2018). Global economic uncertainty contributed

to in some parts by the rising wave of protectionism has provided an opportunity for

countries to diversify their markets. A study by Trade20 confirms ongoing measures

by economies in Asia, Africa, Europe, and the Middle East to further develop and

grow their trade potential. The measures include opening up their markets for greater

access, export and market diversification, diversified supply chains, investment in

physical and digital infrastructure to attract trade flows and Investment. From Africa,

Europe to Asia, economies are outpacing each other, agreeing on new free trade

agreements e.g. the Africa Free Trade Agreement (AcFta), Association of Southeast

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Asia Nations plus three (ASEAN). The three being Japan, China, and South Korea.

Other new trade agreements include the Comprehensive and progressive agreement

for Trans-Pacific Partnership (CPTPP) ([Link], 2020)

Other attempts by Japan aimed at cushioning the economy from future trade disputes

and new tariffs include; Japan and the United Kingdom meeting late last year to

discuss new bilateral trade agreements post Brexit.

In conclusion, therefore, the essay finds that: despite the uncertainty created by the

trade dispute, the disruption to global trade though unfortunate provides an

opportunity for trading nations to assess their existing trade agreements and

negotiate new trade terms. In recommendation, the essay points to the evidence that

supports the positive contribution of international trade to the global economy,

however, the study by UNCTAD posits, liberalized trade deals should mutually

beneficial in the long run. The future of global trade lies in stakeholders’ ability to

develop economic and trade policies that are inclusive, sustainable and

environmentally friendly. For, in the long run, trade is presumed to be mutually

beneficial (FT, 2018).

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