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Trade war will affect global growth

by Kerem Alkin

Jun 23, 2018 - 12:00 am GMT+3
by Kerem Alkin Jun 23, 2018 12:00 am

Since the global financial crisis of 2008, we have observed that some of the G7 countries, particularly the U.S. and France, have partially defended commercial protectionism and partially threatened others. Whereas Germany, Japan, Canada, and the U.K. have criticized the attitudes of the U.S. and France with regards to their contradiction against the rules of the World Trade Organization (WTO) and their negative affect on global trade.

In such instances then U.S. President Obama ended these discussions after a while, whereas Sarkozy had to lose elections against Holland for these discussions to end in France. At this point, the trade wars and the linked currency wars were topics to be refrained from and were ignored during G7 and G20 meetings for a while.

However, starting from the day he was nominated, U.S. President Trump - who said he would initially start a war against Chinese and Mexican goods - ignited the fuse of a trade war by stating on March 9 - one year after he officially gained office - that 25 percent and 10 percent customs, respectively, tariffs would be applied on imported steel and aluminum. While the U.S. imposed these tariffs on China and Turkey, who have suffered an injustice, Canada and Mexico, the European Union (EU), Australia, Argentina, Brazil and South Korea were given a temporary exemption until June 1.

Although the EU has been calling for exemption from customs duties, it has not gotten any results. To respond to this, the EU prepared a 10-page list on the products it plans to apply a 25 percent additional customs tax.

The EU tried to change the United States' mind with its list, including hundreds of goods such as corn, kidney beans, rice, corn flakes, peanut butter, blueberries, orange juice, whiskey, cigar, cigarettes, tobacco, lipstick, jeans, bed linen, shoes, sinks, ladders, ventilators, motorcycles, yachts, tubes, and steel; but failed.

This is why the EU has decided to launch the commercial reprieve starting June 22, against the U.S' additional customs duty.

At the same time, while the EU was taking these steps, it did not refrain from stating that these balancing customs taxes are fully in line with the WTO rules and that EU will introduce an additional $2.8 billion in customs tax on U.S. products in the first instance, and the decision on the remaining $3.6 billion will be taken in the future.

Japan also worried about China-U.S. tension

The trade war between the U.S. and China is constantly escalating. Global markets' concerns regarding the negative impact of the war between the Atlantic and the Pacific on global growth and trade are rising. Following the announcement that the U.S. will bring $50 billion of additional customs duties to China by the end of the previous week, the worries of China retaliating proceeded to a new level with Trump's order for an additional $200 billion in customs duties.

Capital Economics' Global Economist Simon MacAdam, who spoke to Turkey's Anadolu Agency (AA), stated that the risks related to the trade war between China and the U.S. have increased, pointing out that retaliation could lead to more negative consequences in the global economy. Highlighting that one of the most likely outcomes could be an agreement on reducing tariffs, MacAdam emphasized that it would be more difficult for the U.S. to expand the list on the products where the customs duties will be applied.

MacAdam stated that the trade war between China and the U.S., and the tariffs they apply against each other, could damage the global economy in the short term by affecting financial markets and business confidence, and can put pressure on global growth. Indeed, Haruhiko Kuroda, the President of the Bank of Japan (BOJ), mentioned that a trade dispute could affect the supply chain in the Asian region and that the U.S.-China trade dispute has become a major concern for Japan. He said he was sincerely hoping that the escalating trade dispute would be dissolved.

MacAdam, who noted that trade battles could also lead to a global recession, predicts that even if President Trump continues his threats, other countries would not retaliate at the same rate.

UBS Group AG believes that the first round of customs duties on the $50 billion Chinese goods will have a 0.1 percentage points negative effect on the Chinese economy's growth, the additional $100 billion will have 0.3 to 0.5 percentage points negative effect; Deutsche Bank stated that a $250 billion package in the first year will have 0.2 to 0.3 percentage points negative effect; Oxford Economics predicted a 0.3 percentage points loss in 2019-2020; and Tom Orlik and Fielding Chen from Bloomberg Economics think that there might be a 0.5 percentage point negative impact.

About the author
Kerem Alkin is an economist, professor at Istanbul Medipol University. He currently serves as the Turkish Permanent Representative to the Organisation for Economic Co-operation and Development (OECD).
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