An escalation in the US-China trade war is becoming obvious, after two days of negotiations in Washington last week did not yield significant results. The US will likely continue its tough stance on China, as its healthy economy gives the White House room to escalate the dispute and policymakers look for gains with the US midterm congressional elections approaching in November. Meanwhile, China is unlikely to make substantial concessions, which would mean losing face and possibly experiencing a repeat of Japan’s economic plight after it gave in to US demands and signed the 1985 Plaza Accord.
What happened to Japan in the 1980s is precisely what China is determined to avoid today. Back then, the US protested against Japan’s alleged unfair trade practices, large trade surplus and currency manipulation, prompting trade investigations.
As a result of the tremendous pressure, Japan cut exports to the US, loosened its monetary policy to encourage more domestic consumption and was eventually forced to let its currency appreciate after the accord was signed in September 1985. The rapid and steep appreciation of the yen did not lower the US’ trade deficit with Japan, but created a bubble in Japan’s economy that was followed by a long deflationary period.
Considering the accord’s lessons, policymakers in Beijing would prefer to carefully manage any trade concerns and avoid serious consequences for the Chinese economy. The weakening yuan has somewhat cushioned the effects of US tariffs, which is another reason a protracted trade conflict is the most logical outcome of the tit-for-tat tariffs that began last month.
The two nations on Thursday continued their spat by imposing 25 percent tariffs on US$16 billion of each other’s goods, including automobiles and factory equipment. With the US and China being two of Taiwan’s major trade partners, the nation is sure to be caught up in their standoff.
Minister of Economic Affairs Shen Jong-chin (沈榮津) last week assured Taiwanese that the nation has no need to fear the choppy waters of global trade, saying that he expects the dispute to have a limited effect on Taiwan’s petrochemical, steel, aluminum, machinery and semiconductor industries. Striking an optimistic tone, Shen said the trade spat could even present opportunities for Taiwanese businesses, due to orders being diverted from China over the short term.
Even so, the government and business community must seek long-term solutions, as Chinese products might flood world markets after US tariffs are implemented, and trade tensions could weigh heavily on economies connected to Chinese supply chains.
The dispute means greater uncertainty for export growth in Taiwan. In the first seven months of the year, exports grew 10 percent year-on-year to US$192.19 billion — the highest level for that period — but no one knows if the strong showing is real, or partly due to a front-loading of orders by companies to avoid impending tariffs.
The heightened threat of US-China trade tensions, as well as intensified non-economic factors in China — where authorities can antagonize companies with measures such as workplace, food safety, environmental protection and public hygiene inspections — create a growing challenge for Taiwanese businesses with operations in China, highlighting the risk of putting all of their eggs in one basket.
The Ministry of Economic Affairs has said it is welcoming Taiwanese businesses that return from China, or guiding them to form industrial clusters in Southeast Asia, if moving their operations to Taiwan is not viable. However, the government must do more than pay lip service to the “welcome home” policy and should find ways to minimize the damage that would result from a full-scale trade war breaking out between the US and China.
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