Trade wars between America and its major trade partners in 2018 ?
The United States (US) was a founding member of the General Agreement on Tariffs and Trade (GATT) that was enacted on January 1st 1948. Since then, the US had been advocating trade liberalisation and the removal of trade barriers to promote international commerce. Moreover, the US has also been part of negotiation for the creation of the World Trade Organisation (WTO) in 1995 under the Marrakesh Agreement made in 1994.
However, with Donald Trump as the current US President, America is changing its course on free trade agreements (FTA) and international trade. Not only Trump signed an executive order last year to withdraw the US from the Trans-Pacific Partnership FTA and urged his administration to review the major multilateral FTAs, but he is also focusing on the major American trade deficits with its trade partners.
" With Donald Trump as the current US President, America is changing its course on free trade agreements (FTA) and international trade. "
America and its top trading partners
According to the World Bank data, since 1960 till 2016, the global goods exports increased from $124.4 billion to $16.1 trillion - an increase of nearly 130 times. As the world largest economy, the United States benefited from global trade. According to statistics from the International Trade Centre (ITC), exports from the US increased from $729.1 billion in 2001 to $2.26 trillion in 2017. As for its imports, they increased from $1.14 trillion in 2001 to $2.41 trillion in 2017. Overall, the US global goods trade increased by 2.5 times over the last 17 years.
The top five main trade partners of the United States are China, Canada, Mexico, Japan and Germany. In 2017, trade with these five countries represent 55.3% of the US total trade, according to data from the US Census Bureau. Moreover, the US trade with its top ten trade partners represents 67% of its overall trade, while the top twenty represents 81.3%.
Within these top 20 trade partners, the US has the biggest trade relationship with Asia - China, Japan, South Korea, India, Taiwan, Vietnam, Malaysia, Singapore and Hong Kong ( 41.2% of the top 20 trade); then the American region - Canada, Mexico and Brazil (38.1%); and finally Europe - Germany, United Kingdom, France, Italy, Netherlands, Ireland, Switzerland and Belgium (20.7%). (Refer to United States Trade Charts)
America's Trade Balance with its partners
Despite the fact that the US trade with the world has been steadily increasing over the years, it maintains a chronic trade deficit, meaning that year on year, it is importing more than what it exports. Moreover, with low saving rate, America needs to fund its budget through debt. As a result, the US total national debt keeps on increasing and has reached $19.8 trillion by December 2017.
In 2017, with all the countries that America had a trade deficit, it accumulated a shortfall of $978.4 billion, while with those it had a surplus, it made $182.1 billion. Overall, for 2017, America had a trade deficit of $796.3 billion. Among the top 20 trade partners, the US had a trade deficit with 14 countries and surplus with 6 other countries. The top 5 countries with which America had the biggest deficit are China ($375.2 billion), Mexico ($71.1 billion), Japan ($68.8 billion), Germany ($64.3 billion) and Vietnam ($38.3 billion). These countries represent 77.6% of the overall US trade deficit in 2017. (Refer to United States Trade Charts)
During his presidential campaign, Donald Trump said that he would look into the US trade deficits and the trade practices of America's partners. Last year, he already fired warning shots in Europe and Asia about 'unfair trade practices', although so far, there was no concrete action taken to deal with the trade deficits. However there are increasing signs that Trump will take action on trade with its trade partners in 2018.
Protectionism and Trade Wars
Focusing on America's trade deficits, the US President Trump and his administration aim to use trade barriers and tariffs to make goods imported into the US more expensive. In doing so, Trump is trying to protect the American companies from foreign competition. Unlike last year, this January, he announced steep tariffs under Section 201 of the Trade Act of 1974 on foreign washing machines and solar panels.
These tariffs are the results of the investigation by the US International Trade Commission on the complaints by Whirlpool, a US-based maker of washing machines, as well as the solar firms Suniva and Solar World Americas to the US International Trade Commission (ITC). A 20% tariff will be imposed on the first 1.2 million imported residential washing machines and subsequently, a 50% tariff will be applied on any amount beyond. As for imported solar panels, for any amount beyond the first 2.5 gigawatt (GW) equivalent of solar cells, a 30% tariff will be imposed.
In addition, the Trump administration is preparing to use non-traditional tools to raise trade barriers. Last August, Trump instructed his US Trade Representative Robert Lighthizer to conduct an investigation on China's purported theft of US intellectual capital under Section 301 of Trade Act of 1974. The US Commerce Department under Wilbur Ross is also looking into the use of Section 232 to prevent the import of foreign steel and aluminum.
It will seem that in 2018, the Trump administration is taking a more aggressive and an increasingly confrontational approach towards its partners. With its chronic trade deficit, America is right to look at rectifying the situation. However Trump's confrontational approach may backfire with its trade partners responding in kind. In the worst case scenario, this may lead to a full blown trade war, that will sap the global economic recovery. Hopefully cooler heads will prevail and the various global leaders will come together to find constructive solutions, that will satisfy all parties.