Economics & Finance
• 5 minute read

US-China Trade War: Who’s the Winner?

Makino, Shige(牧野成史)

While the U.S. upholds protectionism, EU and Japan see the value of free trade

By Jaymee Ng, Principal Writer, CUHK Business School @ CUHK

Amid the raging trade war between the world’s two largest economies, others are quickly forming partnerships. The European Union and Japan recently signed a huge free trade deal that eliminates tariffs on nearly all goods on July 17.

“It is a statement by two likeminded partners that together represent nearly a third of the world’s GDP and reiterate their commitment to uphold the highest standards in areas such as labour, safety, environmental or consumer protection. And what we’re saying is that we believe in open, fair and rules-based trade. What we are saying is that a trade agreement is not a zero sum game, but a win-win for the involved parties,” Jean-Claude Juncker, President of the European Commission (EU), says in a press release.

Once in effect, the agreement will remove the massive tariffs totaling to €1 billion paid by EU companies annually and increase EU’s annual exports to Japan by 13.2 percent while in some sectors, such as dairy products and textiles, the growth could be more than 200 percent.

“Japan’s Prime Minister Shinzo Abe estimates that Japan’s GDP will be boosted by about 1 percent, as the agreement goes into effect, and that the employment of 290,000 people will be created,” says Prof. Shige Makino from the Department of Management at Chinese University of Hong Kong (CUHK) Business School.

And economic benefits are not the only things that Japan is getting out of the deal.

“EPA (Economic Partnership Agreement) will strengthen Japan’s bargaining power in international negotiation. It is particularly important for Japan, together with EU countries, to give strong pressures to North Korea to abandon nuclear and missile development,” Prof. Makino says.

Japan is EU’s second largest trading partner in Asia after China. The EU currently exports over €80 billion of goods and services to Japan every year and more than 600,000 jobs in the EU are tied to exports to Japan. Interestingly, the EU and Japan are both traditional allies of the U.S. While the U.S. is stepping backwards and increasingly embracing tariffs, the newly forged EU-Japan partnership certainly sends a strong message to the world now when protectionist moves are strengthening.

“The partnership shows a solid political intention that EU and Japan will strongly push forward a multilateral framework of free trade and eliminate the unilateral demand of the U.S,” says Prof. Makino.

“In Japan, the country’s participation in Trans-Pacific Partnership (TPP) was just approved in the Diet in June 2018. Japan is also proceeding with negotiations on Regional Comprehensive Economic Partnership (RCEP) to attain a comprehensive economic partnership in East Asia region with 16 Asia-Pacific countries including China and India.”

The trade war began in early July when the U.S. imposed a 25 percent tariff on US$34 billion of Chinese goods. China retaliated with equivalent tariffs on the same value of U.S. goods on the same day. Now that the U.S. is locked in a full-blown trade war with China (and potentially the rest of the world), Japan and the EU are seizing the opportunity to assert global leadership. Does it mean that the tables have turned in the global economy?

“It is the Trump administration that gave a threat to the value of free trade, which has been developed and embraced among major countries under the leadership of the U.S. over the past years. EPA symbolizes the turning point of the international order, which has been led by the U.S. for many years,” Prof. Makino says.

During his first week in office, President Donald Trump already pulled the country out of the Trans-Pacific Partnership (TPP) trade agreement. The deal included Japan and other countries from around the Pacific Rim, representing around 40 percent of the global economy. This June, the Trump administration introduced tariffs of 25 percent on steel and 10 percent on aluminum imported into the U.S., which affects the EU, Mexico, Canada and China.

“If China falls into a full-fledged U.S.-China trade war, it will not only lose its competitiveness in the U.S. market in some sectors but will also face many risks – such as instability of the renminbi market,” – Prof. Shige Makino

Prof. Makino believes that if President Trump wants to win the trade war with China, then perhaps he should be more careful in turning friends into “foes” – as he described EU in an interview with CBS this month.

“If President Trump wants to isolate China, cooperation with many allies is indispensable. So, he may eventually think that it would be better for the U.S. to give up its protectionist movement and maintain the leadership in developing the order of the world economy, say, by participating in EPA/TPP,” says Prof. Makino.

On July 25, President Trump agreed to ceasefire with the EU and the two leaders issued a joint statement, stating that the two economies, counting more than 830 million citizens and more than 50 percent of global GDP together, have entered a “phase of close friendship” by agreeing to to “work together toward zero tariffs, zero non-tariff barriers, and zero subsidies on non-auto industrial goods.”

However, the US-China trade war continues to escalate.

Regarding the fresh threat made by President Trump of imposing tariffs on US$500 billion worth of Chinese goods, Beijing has remained quiet and did not issue any statements so far. And this might be the right move as Prof. Makino notes: “If China falls into a full-fledged U.S.-China trade war, it will not only lose its competitiveness in the U.S. market in some sectors but will also face many risks – such as instability of the renminbi market.”

“In the long run, I do not believe that the trade war between the US and China will benefit anyone in the world. The U.S. and China are likely to review overly protectionist movement sooner or later, depending on the economic climate of the both countries and the result of the midterm election in the U.S,” he says.

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