Trump’s trade war: the wrong tool to tackle Chinese overcapacity

The latest round of US-Chinese trade negotiations wrapped up in Beijing on Friday, ostensibly with positive result as both sides reported progress towards inking a deal to end the trade war. After months of protracted negotiations, Beijing will likely agree to buy hundreds of billions of dollars of American goods, after apparently signalling willingness to ditch the retaliatory tariffs introduced in response to Trump’s levies on $250 billion of imports last year. It has also pledged to provide US businesses with greater access to its markets, and to revise regulations to offer improved protection for foreign intellectual property.

While the concessions are a welcome sign of progress, the potential end to the friction has left analysts and economists questioning what – if anything – the trade dispute has accomplished. The jury is still out, but it’s becoming clear that Chinese dumping and illegal state aid would be better tackled through other methods, notably multilateral action.

Why? Because among the myriad issues sparked by the tit-for-tat tariffs enacted by the Trump administration is the accusation that the strategy hasn’t hit the right targets. The tariffs on imported goods have “almost completely passed through into U.S. domestic prices”, reducing American incomes by almost $7 billion and costing consumers and importers almost $4.5 billion a month by the end of 2018. As details of the supposed trade deal begin to emerge, some concessions resemble vague promises that could be kicked down the road indefinitely.

Tariffs have failed to address Chinese aluminium overcapacity

Central to the bilateral trade feud have been the Section 232 tariffs which Trump slapped on steel and aluminium imports in March 2018. The U.S. was right to call China out on its longstanding over prodution of these metals, which has severely distorted global markets. The aluminium industry is especially worried: as many reports and investigations revealed, Beijing is propping up aluminium smelters that would otherwise go bankrupt with excessive government subsidies that allows them to dramatically overproduce the metal. It’s estimated, for example, that Chinese smelters produce nearly 11 million more metric tons of primary aluminium than the country actually consumes – a quantity almost equivalent to the entirety of American aluminium demand.

Next, as a recent report by the OECD determined, Chinese overcapacity “is depressing global aluminium prices and threatening the viability of producers worldwide”. As smelters from Spain to Tennessee have shuttered, unable to compete with cut-rate Chinese products, rancour has spread amongst Beijing’s trade partners.

Properly applied, Trump’s trade actions could have coaxed China into ditching its industrial subsidies and become a more responsible global actor in the process. In concrete terms, however, Trump’s tariffs have hit aluminium shipments from Europe, Mexico, and Canada the hardest—countries who had until then considered themselves to be among America’s most valued political allies and trading partners.

As for China, far from being hurt by the Section 232 tariffs, the country actually benefited from the regime by securing valuable exemptions from the duties, while other aluminium exporters like Canada lost out. The divergence in the scale of permitted imports was often staggering: while China receive 108 exclusions to export a total of 550,000 tonnes of aluminium to the United States, close to 2017 figures, Canada – one of Washington’s long-standing allies and strategic suppliers – managed to win just 3 exclusions, for less than 5,000 tonnes. Thriving under an instrument that was supposed to be coercive in nature, Chinese aluminium production and exports have reached record levels in recent months.

An issue better addressed in a global forum?

The tariffs, then, not only failed to serve as an effective deterrent to China’s overproducing metals industries but even allowed its producers to gain more market share as their natural competitors from Canada and Europe were side-lined. Making matters worse, the duties have garnered international criticism on the grounds that they are a poorly-disguised protectionist measure; a group of countries including China and the EU are challenging their national security justification through the World Trade Organisation.

Trump’s aggressive policy may yet return dividends, if Washington can make a deal that at least gives U.S. businesses fair access to the Chinese market and cuts down on Beijing’s dumping. But the current agreement is more likely to fall well short of the substantial changes required to redress the pattern of economic behaviour that has underpinned U.S.-China relations to date.

Any deal that does not imprint upon China the need to execute structural changes will be a failed one. While the Chinese leadership acknowledged earlier this month the plethora or tariffs are starting to bite and lowered their growth targets for 2019, so has the U.S. Jobs growth stalled in February while the trade deficit ballooned to 10-year highs.

Obtaining a radical rethink of bilateral trade relations would require, first and foremost, multilateral action. The U.S. would likely have more success levelling the playing field if, rather than antagonising its trading partners with ineffectively-applied tariffs, it worked with them to put pressure on China to ramp down production. A number of national aluminium associations have called for the G20 to create a global forum on excess aluminium capacity, similar to the steel forum agreed to in September 2016.

Unless the administration takes heed of these developments, the trade war would have been for nought.

This article does not necessarily reflect the opinions of the editors or management of EconoTimes.