New UNCTAD Report Criticises “Tit-for-Tat” Bi-lateral Tariff Hikes
08 February 2019
A new report by the United Nations Conference on Trade and Development entitled Key Statistics and Trends in Trade Policy 2018 focuses on current trade tensions along with its traditional discussion of international trade trends. At a news conference held on 4 February in Geneva, Pamela Coke-Hamilton, new head of the international trade division at UNCTAD, expressed concern about the unintended consequences of new bi-lateral tariff increases, warning that “there’ll be currency wars and devaluation, stagflation leading to job losses and higher unemployment and more importantly, the possibility of a contagion effect, or what we call a reactionary effect, leading to a cascade of other trade distortionary measures.”
UNCTAD’s analysis raises doubts that the new bi-lateral tariffs will accomplish what certain politicians anticipate. The agency estimates that of the US$250 billion in mainland Chinese exports targeted by additional U.S. tariffs, about 82 percent of sales will be replaced by firms in other countries, about 12 percent will be retained by mainland Chinese firms, and only about six percent will be replaced by new production from U.S. firms. Similarly, of the approximately US$85 billion in U.S. exports subject to additional tariffs in mainland China, about 85 percent in sales will be captured by firms in other countries, U.S. firms will retain less than 10 percent, while mainland Chinese firms will net only about five percent. UNCTAD found these results to be consistent across different sectors, “from machinery to wood products and furniture, communication equipment, chemicals to precision instruments.”
The report’s authors believe the firms and countries that will benefit the most from the additional tariffs are those that are already most competitive and have the most capacity to increase exports, and these will most often be European Union firms. The study forecasts that EU exporters will capture about US$70 billion of U.S.-mainland China bi-lateral trade – US$50 billion in mainland Chinese exports to the United States as well as US$20 billion in U.S. exports to the mainland. While the EU is expected to be the biggest beneficiary of the bi-lateral tariff actions, certain larger developing countries may also profit. For instance, Brazilian soybean exports have replaced certain U.S. soybean shipments to mainland China. However, the uncertainty of the current trade policies limits the benefits, since businesses hesitate to invest when longer-term prospects are not clear. Brazilian soybean exporters may be hesitant to make large investments right now, as mainland China has just resumed purchasing soybeans from the United States; meanwhile, traditional Brazilian soybean purchasers are facing unexpectedly higher prices.
Overall, UNCTAD anticipates substantial unexpected effects from the bi-lateral tariffs (relative to the size of their exports) for Australia, Brazil, India, Philippines, Pakistan and Vietnam, in addition to the EU. However, exporters in smaller East Asian developing countries that subcontract for mainland Chinese exporters may become unintended victims of the on-going trade tensions. Depending on the anticipated duration of the increased tariffs, they could lose sales, investments or both.
The UNCTAD analysis expresses concern about the overall impact of trade disputes on the global economy. In looking at anticipated economic effects, UNCTAD economists observed that “confrontations in the area of international trade can have negative spill-overs to commodities and financial markets and increase the risk of a global economic downturn.” They also believe that “more directly, trade frictions weigh on global growth as they impose adjustment costs to international firms which would reflect upon investment decisions, profitability and productivity.” Equally concerning is “the increase in uncertainty about commitments to trade rules,” which “adds to the risk of investing abroad.” The UNCTAD economists believe these factors “will ultimately have negative repercussions for the growth prospects of many countries, especially small and low-income developing countries, as they are generally less resilient to unfavourable global conditions.”
The authors also expressed concern about the bi-lateral nature of the negotiations between the United States and mainland China because it could potentially weaken the significance of the WTO in the multi-lateral trading system. Another major concern for UNCTAD is the risk that trade tensions could spiral into currency wars, making the dollar-denominated debt of many developing countries around the world more difficult to service. All of these factors could hurt the developing countries that UNCTAD was established to help, and the agency concludes that “in an interconnected global economy, the tit for tat moves of the trade giants are likely to have a domino effect beyond the countries and sectors targeted.”
- North America
- Mainland China