The China-US Trade War and South Asian Economies

Rahul Nath Choudhury, Rahul Nath Choudhury

• Publisher: Routledge
• Year: 2021
• ISBN:
  9781000352481
• Edition: 1
• Topic: Política y relaciones internacionales
• Subtopic: Comercio y aranceles

The USA and China, the world's largest economic powers, have been engaging in trade war since January 2018. The impact of this trade war is felt not only by US and China but also by other economies who have economic ties with them. This book provides insights into damages caused by this trade war.

The first section of the book looks at the impact of the trade war on the global economy. It goes deeper to examine the trade war impact on the South Asian region. It is well-known that any imposition of new tariffs or an increase in existing tariffs would make imports more costly and render the exported goods less competitive. Yet, the book posits that the trade war has provided a window of opportunity to other countries not caught in it. The South Asian region, with countries like Bangladesh, India and Sri Lanka, has actually reaped benefits from the widening trade dispute between the world's two biggest economies.

This book will be a useful reference to help policymakers to undertake informed decisions and initiate programs to minimise the trade war impact.

Part I

US–China trade war

Assessing the global economic implications

1

Global economic impact of US–China trade tensions

Badri Narayanan Gopalakrishnan and Lekshmi Nair

1 Introduction

Since early March 2018, the trade war between the USA and China has been through two rounds. In the first round, the US President Trump signed the order levying tariffs on Chinese steel and aluminum imports on 8 March, using Section 232 of a 1962 US law that allows safeguards based on ‘national security’. As a countermeasure, on 24 March 2018, the spokesperson of the Ministry of Commerce commented on China’s release of a list of discontinuation concessions against the US steel and aluminum imports under section 232. In the second round, on 4 April 2018, United States Trade Representative (USTR) published a proposed list of products in industries such as aerospace, information and communication technology, robotics, and machinery imported from China that could be subject to additional tariffs. As retaliation, China imposed tariffs on products such as soybeans and other agricultural products, automobiles, chemicals, and airplanes originating in the US at the rate of 25%, involving about $50 billion worth of China’s imports from the US in 2017. The trade changes between the two biggest economies in the world concern not only these two countries but also countries in other parts of the world. Countries that are interlinked with these large trading nations have significantly been affected. Although there exists a large set of studies in this area, most of these studies are about the economic impact of global trade tensions, and further focus on the impact of these tensions on government tax revenue from various sources, for different countries, while there is a lack of studies that tie these two strands together. In this chapter Section 2 reviews the literature; Section 3 explains the methodology, while Section 4 shows the results and concludes.

2 Literature review

In the literature review of the public finance implications of global trade tensions discussed below, we focus on studies that addressed the government revenue impacts of tariffs in different countries, experiences of other customs unions, and the legal aspects of customs unions.

Kowalski (2005) has addressed the tariff revenue concerns that some developing countries have been expressing in the context of the multilateral trade negotiations under the Doha Development Agenda. In the paper, the author discussed the methodological issues associated with estimating revenue impact and provided the impact estimates for a sample of developing countries. Kowalski found that the differences in impact are linked to cross-country differences in existing tariff regimes as well as the formulas for tariff cuts. Efficient tax replacement policies and past experiences are discussed in this study.

Vaillant and Lalanne (2007), in their study on tariff revenue-sharing rules in the customs unions, have presented two mechanisms that are prevalent in the existing customs unions. One is to share the revenue based on the size of some important measures of the country, like imports, consumption, population, etc., and the other is to source a common fund to carry out financing of common policies.

Vaillant (2008) has studied the possible changes in terms of movement of goods, the customs revenue collection, and sharing mechanisms that should be brought about to enhance the functionality of the customs union, MERCOSUR, which has Argentina, Brazil, Paraguay, Uruguay, and Venezuela as member nations. He has also analysed the implications of the above, given the asymmetries and disparities among the member nations. The study reveals the gradual evolution of the customs union and that, in the initial stages, only goods whose inclusion will have no fiscal effect were chosen. Focused on imparting a fiscal neutrality, the paper reveals three possible alternative routes to allocate the common revenue – an exact fiscal offset in which a charge is made in accordance with destinations of extra-regional imports; distribution in accordance with some general rule that approximates the scale of the countries and/or any other objective; capitalisation of a common fund to finance shared policies and integration institutions.

Cirera, Willenbockel, and Lakshman (2011) have examined the empirical evidence of the impact of reductions in tariffs on employment and fiscal revenue in developing countries, based on the review of quantitative studies that controlled for other factors affecting employment and tax revenue in these countries. Computable General Equilibrium studies are included and compared with the results of the econometric evidence. The results from the synthesis based on the clustering method show that the majority of CGE simulation studies that address the fiscal effects of trade reforms involving tariff reductions report negative total tax revenue impacts or the need for increases in other tax rates to compensate for lost tariff revenue. According to the results, CGE results allow us to look at the isolated impact on tax revenue from reducing tariffs selectively, while econometric evidence is likely to select the impact of simultaneous interventions affecting tax revenue. However, the assumption of a frictionless reallocation of labour and other factors across sectors is an oversimplification not always supported by the econometric evidence, and hence the CGE results need to be interpreted with caution.

Busser (2014), in his study, examines the tax policy of Arab countries, concludes that it is important for governments to build a fiscal space to promote social security. There is a huge diversity in the contribution of tax revenues to the total government revenues, varying from 1% in Kuwait to 89% in Palestine. GCC countries derive a significant share of their income from the export of oil-related products, and tax revenues contribute only a minuscule portion. Gradeva (2014) has studied VAT fraud in intra-EU trade, especially after the introduction of the EU single market in 1993. The single market has abolished all the customs procedures at the borders of member nations, and so VAT cannot be collected at the borders before goods enter the destination country. The study presents possible VAT fraud in the transitional VAT system that is in practice, and such evasions can be in any of the following forms: underreported sales, not registering the firm with the tax authorities, misclassification of products by firms that sell several products, and false claims for credit based on overstated VAT paid on inputs and imported products which are not brought into tax. It also reveals that there is a positive correlation between the level of VAT rate and trade gap, which is calculated as the difference between the value of the goods declared while exporting and the reported import value of the same set of products in the importing country.

ESCWA (2017) in its study on the impacts of the introduction of value-added tax in GCC countries has reported the fiscal implications of VAT. It reveals that, though VAT introduction in GCC has raised several questions on the cost of doing business, the fact that countries with VAT have lower variance in GDP favours the GCC countries, who are struggling with instabilities from fluctuating oil prices. The study reveals that the introduction of VAT will have no significant impact on the economy and that its implications on trade, sectoral production, and growth will depend on the government’s approach towards the collected revenue.

According to the estimates of York, Pomerleau, and Bellafiore (2019), the tariffs imposed by the Trump administration on imported solar panels, washing machines, steel, aluminum, and various products imported from China will amount to a total tax increase of $86.13 billion. At the same time, their estimates also show that the total revenue generated by the federal government will be lower than this. The reason is that tariffs function like an excise tax and reduce real income, which in turn offsets some of the tariffs’ generated revenue. Consequently, wages are reduced, which leads to less individual income, payroll tax revenue, and lower profits for businesses. This reduces corporate income tax revenues, as well as revenues from pass-through businesses under individual income tax. However, the effects of tariffs on government revenue need to be examined in detail based on economic modelling of such mechanisms.

Ovádek and Willemyns (2019) have examined the critical aspects of the WTO laws of customs union (CU), the issues inherent in the design of CUs around the world, and how they are being solved practically. By analysing the historical, economic, and current international legal scenarios, the study reveals that the elements vary between different CUs. The study points out how Article XXIV of GATT lacks clarity on joint negotiation of PTAs, customs revenue apportionment, and legal arrangements such as trade remedies and rules of origin. This lack of clarity has resulted in ambiguities and hence the diversity that is prevalent among the customs union designs today. Custom unions in existence are far from ‘Perfect CUs’, and this asynchronisation between the external and internal aspects has led to underperformance. To protect the customs unions from negatively impacting non-members, WTO should enforce Article XXIV more seriously, especially in dispute-settling proceedings.

The preliminary literature review found that, currently, the literature deals with general revenue implications of international trade policies or trade tensions and also with custom administration. Meanwhile, modelling of the economic welfare impacts of custom revenue collection mechanisms has been barely addressed in empirical studies. Therefore, the economic modelling features of the current study, which will add new variables and equations, to understand the allocation of tariff revenues and compensation mechanisms, are new contributions to the literature of customs unions.

3 Methodology

To assess the economic impact of tariffs, we employ the Global Trade Analysis Project (GTAP) CGE model that has been used extensively for the global-scale policy impact analysis since the early 1990s by governments, research institutes, and economists around the world. GTAP combines economic theory and empirical data to account for all trade flow interactions among industries, consumers, and countries globally. The model estimates total economic impacts from a specific set of policy changes. The economic losses or benefits estimated may not happen instantaneously. It may take some time for them to materialise, with the ultimate outcome influenced in practice by other policies and mitigation measures that affected economies may put in place. The model simulates the effects of trade policy changes on the endogenous variables – those whose values are allowed for by the model: prices, production, consumption, imports, exports, investment, and welfare. The baseline year is 2017, and the difference in the values of the endogenous variables between the projected baseline scenario and the simulated scenario represents the effects of the policy changes.

The policy changes are modelled as the following scenario: all tariffs implemented up to date as well as all ‘threatened tariffs’. The ‘implemented tariffs’ include current tariff hikes by the United States and retaliation that has either already occurred or been notified to WTO in 2018. In this scenario, Canada, China, the European Union, India, Indonesia, Japan, Mexico, the Republic of Korea, Turkey, and the United States raise their tariffs as per their official notifications to WTO. The additional tariff rates range from 10% to 140%. The threatened tariffs are those mentioned in the economies’ official communiqués, news, etc. but not yet notified to WTO or implemented. These include potential tariffs on cars and car parts (as a consequence of the United States Section 232 Auto Investigation – discussed earlier), as well as further escalating retaliatory tariffs between China and the United States.

4 Results and conclusions

As a result of the implemented tariffs so far, global GDP is estimated to fall by 0.16%, or nearly $150 billion. This is just $10 billion short of the total official development assistance (ODA) given by the developed economies in 2016. In Asia and the Pacific alone, the decline is 0.12% of GDP, or $43 billion. The United States experiences the largest decline, with an estimated decline of 0.65% of GDP, at more than $120 billion. The United States loses the most because it has engaged in trade conflicts not only with China but also with other significant trade partners, most of whom retaliated.

Figure 1.1 shows that global GDP losses reach $214 bil...