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US-China: Trade War or Trade Skirmish?

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11 May US-China: Trade War or Trade Skirmish?

The US and China are currently engaged in trade negotiations, but can a deal be struck before the first round of tariffs take effect? On 10 May 2018, we held an evening talk with Amb. Michael W. Michalak, Former US Ambassador to Vietnam and Senior Vice President and Regional Managing Director, US-ASEAN Business Council, and Mr. Toh Boon Ho, Deputy Director – Trade, Enterprise Singapore. The session was moderated by SIIA Chairman Simon Tay. Here’s some highlights from the discussion.

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What is the likelihood of a US-China Trade War?

It is not clear whether the US and China are headed towards a full trade war, but there is likely to be a trade skirmish. Last week, a delegation led by US Treasury Secretary Steve Mnuchin visited Beijing, presenting a list of strong demands, including reduction of the US-China trade deficit, reduction of Chinese tariffs and subsidies, and China agreeing not to retaliate in the event of any American punitive action. China’s Vice-Premier Liu He is making a return visit to Washington D.C., but it is unlikely China will agree to the US requests as presented.

Beijing cannot afford to show weakness, especially in front of their domestic audience.  However, US President Donald Trump is equally unlikely to back down, for similar reasons. If neither side can back down without losing face, the first round of US tariffs will go into effect, affecting US$50 billion in goods, prompting retaliation from China.

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What will happen?

There has been much debate about which side will be affected more by the tariffs, the US or China. However, to some extent this does not matter, as ultimately both economies will be impacted. It is possible that the US may start to see slowing growth and job losses by the 2018 midterm elections, thus affecting the electoral outcome.  It remains to be seen if the second round of US tariffs, affecting another US$100 billion in Chinese imports, will go into effect. It is possible some tariffs may be imposed, but full implementation is unlikely if there is domestic opposition from the US.

If no deal between the US and China is reached, the consultation China has raised via the World Trade Organization will continue, but the WTO dispute settlement process will take a minimum of two to three years.

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Impact on Singapore and ASEAN

ASEAN will feel some impact, due to the supply chains that pass through the region. However, there may be opportunities as well, such as firms and investors shifting to ASEAN.

If a US-China trade war breaks out, will Singapore and ASEAN be forced to choose sides? Given that Singapore and others rely on the rule-based system, if push comes to shove, countries will likely choose the side that will continue to safeguard the rules-based system. There have been no exemptions for ASEAN under the US steel and aluminium tariffs; some ASEAN countries, such as Vietnam, are steel exporters.

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Global Implications of US Trade Policy, Regional FTAs

 The US-China trade talks are not the only high-profile discussions that the US is engaged in. The temporary exemption for steel and aluminium tariffs has been extended another month for the EU, Canada, and Mexico, but the EU is not happy with this uncertainty. The US is also re-examining the North American Free Trade Agreement (NAFTA) with Canada and Mexico.

While the Trump administration has raised the possibility of rejoining the TPP (or CPTPP), this seems unlikely. However, the current trade climate may rejuvenate trilateral FTA talks between China, Japan, and South Korea, which are now re-emerging after a two-year hiatus. A deal between China, Japan, and South Korea could further lead to closer trade ties between the three countries and ASEAN, even if the full RCEP deal between ASEAN and its FTA partners does not materialise.

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