The U.S.-China Trade War: A New Cold War in Commerce

The trading scenario between the United States and China somewhat resembles the original cold war that transpired between the U.S. and the Soviet Union. Similar to how the two rivals battled through intermediaries during the cold war, a comparable situation manifests itself within today’s trade disagreements. Rather than trading blows through the implementation of tariffs directly against each other, currently, the U.S. is tactically employing third countries to indirectly carry out its strategy. The latest peaceable discussions in Geneva and London have steered both superpowers away from tariff escalations.

The U.S. seems to be strategizing its indirect combat via its recent deal with Vietnam and intimidating tariff threats towards numerous other countries. The intent behind these tactical maneuvers appears to be to diminish China’s influence within their supply chains. Distress is brewing in nations that yearned to sideline themselves from this conflict, as they’re now apprehensively realizing that they may be compelled to choose sides. By attempting to satisfy the U.S., the world’s largest marketplace, they inadvertently risk infuriating China, the world’s leading trading nation.

Actioned by the U.S. president, countries like Japan, South Korea, and numerous other partners received correspondences on July 7th that moved the deadlines for their trade talks from July 9th to August 1st. The communication also adjusted the penalties they would face if the discussions were unsuccessful. For instance, Japan and South Korea would be subjected to a 25% tariff, Cambodia would face a striking 36% tariff; Myanmar and Laos a daunting 40%. Stated in the letters was that any items ‘transshipped’ from anywhere else would confront the augmented tariffs they were trying to evade.

The president also expressed a threat to impose an additional 10% tariff on nations that align their interests with those of the BRICS nations, which were established by China in consort with Brazil, Russia, India, and later included South Africa. A prior warning from the president cautioned BRICS against challenging the U.S. dollar’s dominance as the global currency. There is strong implication that the ‘elsewhere’ referred to in the president’s letters pertains to China, though it wasn’t explicitly mentioned.

An agreement with Vietnam suggests that they will be hit with 20% tariffs on the majority of their goods, and an intimidating 40% tariff on any ‘transshipping’. This agreement seems to follow in the footsteps of a previous deal with the UK, which promised favourable treatment to specific British goods, conditional on the UK securing its supply chains to the Americans’ satisfaction. It is largely inferred that this infers less reliance on imports from China.

Trade negotiation tactics have evolved with the U.S. bestowing benefits on a country if penalties are imposed on another. China has staunchly expressed its disagreement against any country forming trade agreements detrimental to its interests, promising firm countermeasures. China hopes countries will ‘stay on the right side of history’, albeit it is still uncertain what it’s exactly dealing with in these commercial conflicts.

Dwindling exports to the U.S. and increased exports to countries such as Mexico and Vietnam were noticeable trends for China during the first trading war. This essentially led to these countries significantly increasing their exports to the U.S. in return. This year appears to be mirroring that trend after broad tariffs were imposed. Despite a striking over 34% plunge in China’s exports to America in May, the overall export numbers continued to rise.

Diversions in trade could hold the answer to understanding the trends. Countries possibly purchased unrelated goods even while they exported more to the U.S. For instance, Australia imported more lorries from China while it boosted exports of frozen beef to America. Thorough examination of the figures on a product-by-product basis is essential to understand the trend.

There’s another facet to consider – imports from countries that include Chinese parts, materials or components. Existing regulations do not categorize these items as Chinese as long as they undergo a ‘substantial transformation’ elsewhere. For instance, Chinese flour is said to be transformed when baked into a cake, while parts need to undergo ‘meaningful and complex’ assembly.

Both from China and post transformation elsewhere, there has been a significant increase in reliance for parts and components since the onset of the first trade wars. There’s been a significant surge in the value add from China to Vietnamese exports aimed at the American market for manufacturing. Authorities are hoping their focus on what they call ‘the China wash’ would engulf these items. ‘The China wash’ refers to Chinese goods being rebranded as ‘made in another country’ without any considerable changes.

An adviser speculates that a considerable proportion of Vietnamese exports destined for the U.S. falls under ‘the China wash’. However, more credible estimates suggest a peak of less than 8% in 2020, which has since dwindled. While rebranding might be exasperating, it’s also already illicit. Offenders not only risk being hit with a harsh 40% tariff, but also face sterner penalties.

Determined to eliminate such malpractice, Vietnam has promised to intensify its measures against this misrepresentation. America is similarly focussing on this matter. The Justice Department in May prioritised ‘trade and customs fraud, including tariff evasion’ as the second most important white-collar crime.

Of course, the ultimate solution to prevent misrepresentation of product origin is to eradicate the motivations driving such actions. Ideally, America should implement a uniform tariff on commodities irrespective of their origin, thus removing incentives for misreporting. Providing ‘Most Favored Nation’ status to every country on all goods could be a bold and effective countermeasure against waste, fraud, and abuse.