Caught between two rivalsThe prospect of a full-on trade war between the world’s first- and second-largest economies sent shivers down the spine of global capital markets this week. It also splashed cold water on the global economy’s lengthy recovery from the 2008 financial crisis.
U.S. President Donald Trump on Friday signed an executive order levying 25 percent tariffs on $50 billion worth of annual shipments from China and restricting Chinese capital investment in American assets. Beijing immediately struck back with tit-for-tat tariffs of up to 25 percent on 128 American products, including steel pipes, dried food, pork, and aluminum.
The casualties from the face-off between the two biggest economies are already evident. Wall Street shares all tumbled and the bourses in Korea, China, and Tokyo suffered drops of around 4 percent. Markets that stood firm against the U.S. Federal Reserve interest rate increase earlier in the week reacted nervously to the growing risk of a trade war. The friction is expected to dampen international commerce and corporate performance.
The worst scenario is now foreseeable. The Trump administration has been digging up all possible trade weapons in its legal jurisdiction. It is now flagging Section 301 of the 1974 Trade Act, which became demobilized after the launch of the World Trade Organization in 1995.
Also dubbed the Super 301, the section enables the U.S. president to take any retaliatory action necessary against a foreign country that harms domestic commerce. Trump claimed the trade action is one of many measures in the pipeline. Washington pressured Beijing to cut $100 billion from China’s surplus of $375 billion in annual trade with the United States. The Trump administration is also seeking barriers on the services trade, claiming that Chinese enterprises were misappropriating American intellectual property.
Korea could get caught in the crossfire. China exports finished goods based on Korean parts and intermediate materials. Korean producers will take a heavy toll.
Seoul is also in its own trade battle with Washington. The Trump administration is pressing for concessions on automobiles and other protected areas, using a temporary reprieve on steel tariffs as leverage. The Korean government must come up with a careful strategy to defend national interests from the trade war between the United States and China.
JoongAng Sunday, March 24, Page 34