An introductory lesson into international trade, the role of the US and China, and how Malaysia fits into it.
The Republic of China and The United States of America hold the two largest economic powers in the world. In 2019, President Donald Trump announced tariffs of 25% on $250 billion worth of imports from China, which created the largest trade war in history. Till today, US-China trade relations remain tense and continue to bring about much uncertainty to the world. But how did this start and how are ordinary Malaysians affected?
Key Term: Tariffs: a tax on imports.
Check out this article as we guide you on the story behind the world of international trade, how these ‘superpowers’ fit in and the effects on Malaysians at large.
Let’s Talk About the Two Largest Economic Powers Shaping the 21st Century.
The United States of America
The United States of America is the world’s leading economic power. For illustration, the US’s gross domestic product (GDP) in 2015 was $17.97 trillion, which was ¼ of the world’s wealth. The US also has the third-largest population in the world, at 325 million, and accounts for 41.16% of the world’s imports – the largest in the world.
The People’s Republic of China
Since the initiation of economic reforms and trade liberalization by President Deng Xiao Ping in 1978, China has been among the world’s fastest-growing economies with an average growth rate of 9.5% through 2018, a pace described by the World Bank as “the fastest sustained expansion by a major economy in history.”
China has become the world’s largest economy on a purchasing power parity basis (PPP). In simple terms, PPP is a theoretical exchange rate that allows the people to buy the same amount of goods and services in every country.
China is also the largest manufacturer, merchandise trader, and holder of foreign exchange reserves.
A story of globalization and economic capitalism: The creation of the WTO helps usher in the trading world.
The World Trade Organization (WTO) is a global trade rule-setting institution. It aims to promote freer trade by requiring all the member countries to adhere to certain principles and promotes low and predictable trade barriers. In exchange, members are guaranteed better deals with other WTO member countries.
In December 2001, upon the US’s approval of normalizing trade relations with China, China joined the WTO and committed to bind all import tariffs at an average of 9%.
Why a trade “arbiter” is important
It has been argued that the protectionist trade measures imposed by countries in 1930 have deepened the effects of the Great Depression, giving way to the rise of political extremism, like Adolf Hitler in Germany.
After the stock market crash of 1929, the Smoot-Hawley Tariff Act was proposed by the US in June 1930 to increase tariffs, which would protect US farmers and other industries from foreign competition, thereby securing the nation’s economy.
As a result, imports became largely unaffordable, and unemployed people could only afford to buy domestic products. Global trade declined by 65%. In addition, other countries responded to the US’s tariffs by setting up restrictions on international trade, making it harder for the US to pull out of the depression.
How did the US stand to benefit from increased trade?
With China’s entry to the WTO, the US manufacturing price index fell by 7.6% between 2000 and 2006.
With a lower tax, China was able to lower the cost of goods and therefore the price. US consumers were able to purchase goods, and US producers who use Chinese parts to make larger products also benefited from the lower cost.
How did China stand to benefit from increased trade?
WTO accession has led to an eight times increase in Chinese exports, resulting in greater economic growth.
From 2002 to 2007, the net exports as a share of GDP in China increased from 2.6% to 7.7%, becoming the largest exporter in 2009.
Trade in goods between the US and China increased from less than $100 billion in 1999 to $558 billion in 2019. China’s exports have primarily been labor-intensive manufactured goods due to China’s abundance of inexpensive labor. As more labor-intensive products are manufactured, there is a greater demand for labor to continue production.
Where It All Went Wrong?
In 2017, the Trump Administration launched a Section 301 investigation of China’s innovation and intellectual property policies, which were deemed harmful to U.S. economic interests.
It subsequently raised tariffs by 25% on $250 billion worth of imports from China.
China retaliated by increasing tariffs ranging from 5% to 25% on $110 billion worth of imports from the United States.
The Phase One Agreement signed in January 2020 between the two countries only led to minor reductions in the tariffs.
The trade conflict has caused a sizable reduction in trade between the US and China in 2019. Moreover, when products are hit with tariffs, it raises production costs and translates into higher prices for finished goods.
Therefore, it is accompanied by considerable trade diversion to imports from other regions, leading to a reorganisation of value chains in Asia.
Where is the US’s position now, under President Biden?
The Biden Administration is still holding the country to Trump’s Phase One Agreement and is considering taking other punitive measures as China has failed to meet prior commitments. In many ways, China has appeared to have doubled down on trade practices that the US deems unfair. This includes state support for Chinese companies in insensitive industries such as semiconductors and solar panels.
However, to provide some relief to the supply chain crisis, in November 2021, the Biden administration agreed to ease tariffs on European steel and aluminium. This lowered costs on goods like cars and washing machines and reduced carbon emissions
How is Malaysia impacted?
Malaysia is a small and open economy with a relatively high dependence on trade. On top of that, Malaysia has a high degree of exposure to the Chinese economy, with China being both its largest trading partner and a top source of tourists. As a result of the disruptions to the Chinese supply chain and softening global demand, the US-China trade war caused a significant decline in the output of key exports for Malaysia.
Based on Malaysia’s trade openness, tariffs could hike the costs of raw materials and intermediate goods.
Malaysia is an alternative to China when it comes to supplying the US with chemical products. Western exporters could turn to Malaysian producers as it is cheaper.
Southeast Asian countries (Malaysia, Thailand and Vietnam) are benefitting from US purchase of Solar Panels, as Chinese Solar Panels are subject to be more expensive due to the tariffs
Researcher(s): Jih Yih
Reviewer(s): Muhammad Bahari
Editor(s): Nadiah Mohd Sobri
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