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U.S.-China Trade War

#Key Business Issue l 2019-05-20

Business Watch


U.S.-China trade talks held earlier this month ended without a deal. Following the U.S. decision to raise tariffs on Chinese imports, Beijing has also decided to impose retaliatory tariffs on U.S. products. The leaders of the two countries could hold talks during the Group of 20 summit next month, but the U.S.-China conflict has entered a new phase of the ongoing trade war. We discuss the potential impact on Korea with professor of global trade at Soongsil University, Han Jae-pil.

The U.S. raised tariffs on Chinese goods such as computer parts, mobile phones, communication equipment and furniture, while  negotiations were underway with China. It wasn't an abrupt move by any means. Washington has repeatedly threatened to do so, and the timing suggests the U.S. may have wanted to use the tariff hike as leverage in the negotiations. It may be said that the U.S. was wielding its biggest weapon against China.

Expectations were high for the U.S.-China trade talks held on May 9th and 10th that the two sides would hopefully reach a dramatic deal. However as the talks were under way, the U.S. raised the tariff rate on 200 billion dollars worth of Chinese imports from ten to 25 percent. The U.S. calculation was to secure an upper hand in the negotiations, but the talks on the following day ended without an agreement. Since then, the trade war appears to have escalated. The Chinese government has retaliated, announcing higher tariffs on 60 billion dollars worth of U.S. goods.

Chinese President Xi Jinping does not have a strong political grip in his country. So to be seen as being strung along and dragged out by the U.S. could seriously weaken his ruling power at home. It's necessary to make a stand against Washington which explains the retaliatory tariffs of 25 percent taking effect from June first. Around 25-hundred U.S. items will face 25 percent import tariffs. But China also gave some leeway considering that some time is left until June. If a deal can be reached with the U.S. before that time, the tariff hike could possibly be withdrawn.

China decided to slap tariffs on 60 billion dollars worth of U.S. imports from June first. The measure was announced right after President Donald Trump warned Beijing not to retaliate. China's counter move is seen more as directed for its domestic audience. However, the US was quick to up the ante. The U.S. Trade Representative announced tariffs on an additional 300 billion dollars worth of Chinese imports. The tit-for-tat retaliation between the world's two largest economies has plunged global share prices. One trillion dollars in market capitalization evaporated in just one day on May 13th. It will be difficult for Korean exports to remain unscathed. 

What China imports from South Korea are not much so finished products but intermediary goods such as parts and materials which they use to make their finished products for shipments around the world. Therefore the Korean and Chinese economies are very much interlinked. If Chinese exports to the U.S. are restricted, Korean exports to China may also suffer. Some scholars say that as the U.S. is buying less from China, this can present an opportunity for Korea to export more to the U.S. In fact, shipments to the U.S. have slightly increased, but overall, Korea's export volume has declined over the past 6 months. And this likely reflects Korea’s heavy export dependency on China. If this situation continues, it can't be any good for the Korean economy as well.

The Korea International Trade Association predicts that Korean exports will drop by 870 million dollars due to the higher U.S. tariffs on Chinese imports. Semiconductors, steel and chemicals are expected to be the hardest hit. The Korea Customs Service also announced that exports fell 6.4 percent year-on-year between May first and the tenth. 

Korea’s credit default swap premium, an indicator of a country’s sovereign default risk, has also reached the highest level in 3 months. The won-dollar exchange rate is also fluctuating, with the value of the greenback surpassing one-thousand-190 won when trading began last Tuesday. Also the Korean economy posted minus growth in the first quarter. Against all this, the U.S.-China trade war will also greatly impact Korea, which is heavily reliant on trade. 

Fortunately the U.S. and China have left room for further negotiations. There is 2 to 3 weeks time before Chinese goods shipped by sea actually arrive in the U.S. China has also set a June first deadline for its tariff hike which provides more opportunity. President Trump also spoke of meeting President Xi at the G2O summit scheduled in late June. 

Economies are struggling on both sides due to the trade conflict. China is struggling with excess consumer goods and excess producers while it’s the opposite situation in the U.S. where there is consumer surplus and shortage of goods. These problems extend to other countries as well as financial markets around the world. And many states hope the two sides can resolve their trade issues sooner than later. After all, the U.S., as the world’s biggest economy, can pull the levers in such as a way as to effect global politics as well as positively impact Trump himself. 

The best scenario is for the two sides to reach a deal before the announced tariffs kick in and for Presidents Trump and Xi to showcase to the world genuine reconciliation during the G20 summit in Japan scheduled on June 28th and 29th

But this remains hopeful thinking as the two sides need to sort out a plethora of issues, including intellectual property rights, cyber security, technology transfer and tariff and nontariff barriers, to name a few. All said, Korea needs to prepare preemptive measures assuming the worst case scenario. 

If the Korean economy takes a hit from the U.S.-China trade conflict, share prices will become volatile. There may be concerns regarding the stock market but the government says the real economy will not sustain any major impact. But I don’t think this is necessarily the case given the export decline that has continued for 6 consecutive months. In the short term, Korea needs to prepare preemptive, preventive measures should financial markets tumble. Also exporters are seriously struggling these days. I believe the government is looking for ways to help export firms, such as through trade financing. 

Pundits say the global economy remains unpredictable for the time being. Repercussions from the U.S.-China trade war may not be avoidable, but can be mitigated with the necessary wisdom and preparation.

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