Make Trade Not War

Trade wars put the world into a new orbit. While the main actors of the war are trying to curb each other with various instruments, the remaining countries are clear: More trade.

The Turkish Perspective

April 2019 Issue 69

Years are memorized in history lessons. And every year is identified with a war or conquest. 1853: Crimean War. 1871: Franco-Prussian War. 1914: World War I. 1939: World War II... Is histrory only history of wars? Economy has its own history. When we say 1929, the Great Economic Crisis comes to our mind. 2008 is identified with the Great Financial Crisis. How is 2018 going to go down in history? And of course 2019.

In 2018, the US President Trump fulfilled his election promises. He began to take a series of economic measures to “make America great again”. These measures, however hit the liberal international economic order, which the US had been the biggest sponsor of for a century, and even guarded by its Navy. New customs policies first for China, then the EU, Canada and even for Mexico, technology and industrial espionage accusations, refusing to recognize some of the World Trade Organization regulations based on national security justifications, even threats to withdraw completely from the WTO...

 We saw them all in 2018. Is this the beginning of a war? Will 2018 be remembered in the future as the year that the trade wars began?

Weird things happen in wars. Unexpected alliances are established. All equations get reconstructed. The world turn into a strange place. In 1939, the whole world was amazed by the alliance between Hitler and Stalin, and a year later Churchill was Stalin's greatest ally.

2018 was a strange year, too. Xi Jinping advocated globalization against Trump: “It is wrong to blame globalization and free trade for the problems of the world.”

10 years after the big financial crisis in 2008, the liberal US wants the liberal international economic order to be laid down and Communist China, on the other hand, takes on the role of the knight in defending globalization.

Trump: The War Did Not Start; We've Already Lost IT YEARS AGO

Trump refuses to accept that he initiated a trade war. The most important claim of the parties during any war is this: we are not aggressive. We're fighting to defend ourselves. In March 2018, the response of Donald Trump, who was accused of starting trade wars by introducing tough customs tariffs to protect the steel and aluminum industries of the United States, was similar: “that war was lost many years ago by the foolish, or incompetent, people who represented the U.S.” He added: “Now we have a trade deficit of $500 billion a year, with intellectual property (IP) theft of another $300 billion. We cannot let this continue.”

Is this rhetoric true? Can 25-years of globalization, liberalization and free trade order around the world be called a defeat or trap for the United States? Donald Trump claims that he does not oppose free and fair trade. On his favorite comunication channel Twitter, he stated that China applies 25% custom tax to US cars, while the U.S. applies only 2.5% to Chinese cars, and he added: “Does that sound like free or fair trade. No, it sounds like STUPID TRADE – going on for years!”

Interestingly, in the first decade of globalization, similar objections were asserted against US presidents George Bush and Bill Clinton. The US was making use of globalization and free trade, and the world turned into a free market for the US, while the rest of the world argued that the US market was not free for them. However, even if the quarter century of globalization was not stable, it can still be considered as the longest and most prolonged expansion of the world economy. This quarter revealed China as an economic giant. But it was a period of growth for the US, too. It can even be said that the miracle of globalization is a US-Chinese partnership, a story of cooperation. It was not a smooth period. 1997 Asian Financial Crisis. 1998 Russian Financial Crisis. These crises had been overcome as regional crises with global effects. In 2000-2002, the crisis that took place in history as the Dot Com Balloon Crisis. That crisis itself took place in the US at the heart of globalization.

According to some, this crisis was only deferred even if the crisis was over. This was a postponement that led to an even more severe and chronic crisis, the 2008 Financial Crisis. In short, the growth lasting from 1990 to 2019 was not at all smooth and uninterrupted. Was it sustainable? This is now open to discussion. The possibility of the US turning to isolationist policies raises new possibilities.

The President of the United States has declared the United States as defeated by the globalization and China as the winner. Although this is a propagandist, one-sided and exaggerated discourse, -the United States and China have grown together in the last 25 years, not despite of each other- it doesn't matter if it's wrong or right. If one of the partners of globalization says I'm no longer in this game, and this partner is the biggest partner, then a new situation and balance will emerge. What is important is not past economic data and truths, but who will do what after that?

Why is the US bothered? Is this just a Trump ISSUE?

Now let's look at the last 10 years, not the last 25 years. Both the US and China may have benefited from this quarter-century industrial, financial and commercial partnership, but the US claims now that it gave up most of what it earned. According to the PPP calculation, the Chinese economy first outperformed the US economy in 2014. If the growth performance of the two countries continues at this rate, in 2032, nominally, China's GDP is expected to surpass the United States and China will be the world's largest economy. The issue is not that the United States does not benefit from globalization, but China benefits more. This phenomenon became clearer after the 2008 Crisis.

On the other hand, in terms of trade balance, the US experiences a bigger deficit every year compared to China. The US trade deficit with China, which was 12.6 billion US $ in 1991, rose to 83.8 billion US $ in 2000. While Bill Clinton discussed trade sanctions against China under the pretext of human rights abuses, The paradigm that, a more liberal China will lead to a more democratic China, dominated politically. Or rather, the profit of partnership with China was much more attractive. Bill Clinton left China aside its isolationist policies and ensured the US to lead China as a member of the WTO. George Bush continued this policy. According to Trump, the main problem is that China, as a member of the WTO, exploits the advantages of free trade to the fullest but does not fulfill its requirements. In terms of US-Chinese trade, figures at first sight seem to confirm it.

In the US-China trade in 2001, the US had a $83.1 billion deficit, but in 2002 it was $103.1 billion, when China became a member of the WTO. And by 2017, it increased to $375.6 billion.

In 2018, the US launched mutual customs wars with China. And even this year, the US trade deficit with China has not decreased yet! It rose to $382.3 billion.

According to Trump, as a result of an unfair trade, which does not fulfill the requirements of free trade, the United States has transferred a fortune of $300 billion to China every year. The accusation isn't all that. An official investigation launched on the Trump's order revealed that there was a fortune transfer ranging from $225 billion to $600 billion, from the US to China each year through industrial espionage and cyber espionage.

Trump proposes three solutions. Either the WTO imposes China the necessary sanctions or the WTO membership of China is dropped or the US withdraws from the WTO. All three suggestions may result in the collapse of the WTO system.

However, the figures are misleading when taken unilaterally. Even if we accept China's membership of WTO in 2002 as a turning point, we have to discuss the performance of the US against the EU also, not only against China.

Trade deficit of the US with the EU in 2001 was US $64.6 billion, but in 2018 it was $154.2 billion. In other words, while the US trade deficit with China was 4.6 times higher in 17 years, the deficit with the EU increased by 2.4 times.

Total trade deficit of the US also increased rapidly in these 17 years. In 2001, foreign trade deficit of the US was $411.9 billion, but it rose $789.8 billion in 2018. That is, in 17 years, while the US trade deficit with China was 4.6 times higher and the deficit with the EU increased by 2.4 times, trade deficit with the whole world increased by a rate of 1.9.

In short, the issue is not only a Trump issue. It's an issue of the US. Foreign trade deficit of the US is constantly increasing. And not only Republicans, but also the Democrats, argue that the United States should take a precaution. Trump's spurts about the trade problem with China are some of the few issues which both parties support.

The leader of the Democrats in the House of Representatives, Nancy Pelosi, who is in conflict with Trump in all matters, supports Trump's policies against China's “unfair business”  practices and even wants these policies to go further: “human rights are also integral to a fair trading relationship in countries like China that exploit prison labor, engage in other unfair labor practices, and stifle free speech and dissent.”

In other words, those who think that the phenomenon of trade wars are something unique to Trump is wrong. Democrats and Republicans in the United States are on the same page in this issue.  It's an issue of the US. The US sees the fall back and is preparing to take the initiative.

Truce and the Result of the First Conflict

On December 1, the US administration announced the first truce in the Customs Wars. It has been announced by the US administraion that if the US cannot get the requested compromises over China, it will continue with new customs tariffs on March 1, 2019. But by February 28 global markets were eased off by the news that the truce was prolonged at least for now. Donald Trump has extended the deadline to raise tariffs on Chinese goods beyond this week's initial deadline, saying that progress had been made in the latest round of talks. China has promised to buy more American goods, including soybeans and energy products.  

Now that the truce has been extended, let's look at the outcome of the storm-like customs wars in a year. China raised the customs tariffs on items covering $110 billion from the United States. China's imports from the US is $111 billion. In other words, China has run out of bullets.

The US has applied a tariff of 25% on $250 billion of imports from China. The US imports from China $493 billion in total. In other words, as the US has not run out of bullets, if there will no agreement with China until March 1, 2019, 25% customs tariff will be put into use in $200 billion of new products.

Although the US seems to be stronger as a result of the first economic collision, the political situation is slightly different. On one side of the front, the Chairman of the Communist Party of China, Xi Jinping, declared himself as the “perpetuating for life” president of the party congress. Trump could lose his chair if trade wars will have a negative impact on the US economy.

In 2018, the Chinese economy remained at the lowest growth rate of the last 28 years with 6.4 percent. All the economic indicators of the US tended to improve. Unemployment reached the lowest level of the last 18 years with 4.1%. Trump's most prominent electoral pledge was to create new business opportunities. However, the year 2018 was also the year when the US trade deficit with China reached its highest level in history, interestingly. In short, trade wars did not de-escalte the international trade, but aggravated on the contrary. However, it increased the anxiety and risk perception in the markets.

War and Risk

In terms of game theory, it is clear that in a two player comparison, the trade battle results in a lose-lose situation for both of the players. But in real life this is a more complex game. In the US-EU, US-China, EU-China bilateral cases, the trade war can be profitable for some players. For example, in a three-player scenario where the US and the EU take a common stand against China, they may well be a result of win-win-lose. The EU's complaints over China's party-state audits over the economy exceed those of the United States. In 2016, the EU's direct investment in China remained at 8.5 billion euros, a record decrease of 23 percent.

Another scenario is that the US can negotiate with the EU on the bargaining table by using the customs wars that it is conducting against China as an excuse and bring up the trade deficit on this front.

It is a less likely scenario for China to build a bloc against the US with the EU or against the EU with the US. China is the status quo power that is currently trying to maintain the relations it has established with these two economic giants. So it wants to avoid trade wars by making minimum concessions.

All of these different possibilities weaken the claim that a trade war causes all sides to lose and the belief “unshakableness of the free trade order”. Yes, the battle causes everyone lose, but if there will be a winner at the end, the long-term gains can cover short-term losses. That's Trump's promise.

War and Opportunity

War creates risk and danger. But doesn't it create an opportunity? Trade war may also result in the opposite of what is claimed. Trade wars can expand the world trade or it can shrink it. In the long run both outcomes are possible.

This war, which Turkey isn't in it but will directly feel the side-effects, may reveal many opportunities.

It seems like it's impossible for Turkey to be blind-folded in the face of these developments. Even though China's membership of the WTO in 2002 caused a great acceleration for world trade, it did not reduce the contradictions and polarizations in the system but enhanced. These polarizations led to customs wars between the US and China today. A similar war can be experienced between the US- the EU and the EU-China. Some argue that the customs war can lead to more aggressive trade wars, trade wars can lead to economic wars and even a new Cold War and armament race.

It's clear that it's not just Trump's issue. Trade war can also evolve into an economic war. Volkswagen was fined $ 23 billion by the US due to the emission scandal in 2015, which was an early signal. Cases filed against Apple and Google in the EU was another signal. And finally the US has had Huwaei's CFO arrested in Canada this year on charges of cyber espionage. Can all these be indicators of the war spilling over from trade to economic area?

WHAT ABOUT TURKEY?

Since 2002, the year of China's membership of the WTO, Turkey's trade balance with China, the US and the EU has been effected negatively. While our trade deficit with China was 1 billion 100 million dollars in 2002, this deficit increased to 20 billion 434 million dollars in 2017. This is an increase of almost 20 times. Turkey's trade deficit with the US and the EU did not increase at the same rate, but have increased in this period and remained more stable.

Turkey did not only increase the trade partnership with the EU region by the Customs Union Agreement between the EU and Turkey, but attracted more foreign direct investment from the EU just in 17 years more than the whole history of Republic. But China's foreign direct investment in Turkey was very limited during this period, which its exports to Turkey increased 16 times since 2002 thanks to the Customs Union Agreement between Turkey and the EU. China failed to enter even the top 20 countries that made foreign direct investment in Turkey. China grabbed the leadership in industrial production in the global arena with a 25-year uninterrupted US and EU cooperation. But the US and the EU are now questioning this cooperation. China does not intend to give up on the leadership. Turkey may initiate a new commercial partnership strategy with China, which as a country is compressed in the EU-US front, in more advantageous conditions and on a more stronger ground.

Turkey is the fifth among the countries that recovered its economy rapidly after 2008 Crisis. Trade Wars offer Turkey risks as far as creating new opportunities as a reliable trading partner to maintain this performance.