Session 12

China & Global Trade War

March 10 2021

Partha Ray
1
IIM Calcutta
 Schedule of Sessions: Post Mid term (March 5 – April 7)
No Broad Heading Date No Broad Heading Date

11 Asia: Emergence of China BPA Mar 5 12 China and Global Trade War PR Mar 10

13 Russia and the Second BPA Mar 12 14 Russia and the CIS Economies PR Mar 17
Cold War

15 Politics of the Middle East and BPA Mar 19 16 Middle East and Oil Prices PR Mar 24
North Africa (MENA)

17 India and its Neighbours BPA Mar 26 19 Emergence of India as an PR April 2

Economic Power

18 Globalization and New BPA March 31

Nationalism: Towards a New
Normal?

20 Summing -up BPA & PR April 7

End-term Exam ( Apr 8 – 10)

 EMs / EMDCs: Constituents
• The group of emerging market and developing
economies (154) includes all those that are not
classified as advanced economies.
• The regional breakdowns of Emerging Market and
Developing Economies as per the IMF are:
– Central and Eastern Europe (CEE, sometimes also
referred to as emerging Europe);
– Commonwealth of Independent States (CIS);
– Developing Asia,
– Latin America and the Caribbean (LAC);
– Middle East, North Africa, Afghanistan, and
Pakistan (MENAP);
– Sub-Saharan Africa (SSA).
• Developing Asia (29):
– Big - China, India, Indonesia, Malaysia,
Philippines
Developing Asia = Asia minus
– Small - Bangladesh, Bhutan, Brunei Darussalam,
Cambodia, Fiji, Kiribati, Lao,, Maldives, Marshall Japan, Korea, Hong Kong,
Islands, Micronesia, Mongolia, Myanmar, Nepal,
Palau, Papua New Guinea, Samoa, Solomon Singapore, Taiwan
Islands, Sri Lanka, Thailand, Timor-Leste, Tonga,
Tuvalu, Vanuatu, and Vietnam.

3
 Global Share of Developing Asia (%)
Country 1980 1990 2000 2010 2020
China 2.315 4.107 7.411 13.873 18.560
India 2.891 3.620 4.163 5.941 6.668
Indonesia 1.396 1.895 1.920 2.241 2.557
Thailand 0.565 0.880 0.919 0.993 0.969
Malaysia 0.347 0.453 0.602 0.650 0.692
Philippines 0.683 0.589 0.523 0.575 0.717
Bangladesh 0.311 0.334 0.361 0.438 0.664
Vietnam 0.179 0.230 0.320 0.427 0.804
Myanmar n/a n/a 0.111 0.204 0.212
Sri Lanka 0.125 0.138 0.166 0.189 0.221
Nepal 0.046 0.053 0.058 0.059 0.079
Cambodia n/a 0.020 0.026 0.040 0.057
Lao P.D.R. 0.014 0.018 0.021 0.030 0.046
Mongolia 0.022 0.027 0.018 0.023 0.032
Brunei Darussalam n/a 0.052 0.043 0.034 0.022
Papua New Guinea 0.024 0.020 0.021 0.022 0.026
Fiji 0.011 0.010 0.009 0.007 0.008
Bhutan 0.001 0.003 0.003 0.005 0.007
Maldives 0.002 0.003 0.004 0.005 0.007
Timor-Leste n/a n/a 0.004 0.008 0.004
Samoa 0.002 0.001 0.001 0.001 0.001
Solomon Islands 0.001 0.001 0.001 0.001 0.001
Vanuatu 0.001 0.001 0.001 0.001 0.001
Others (viz., Micronesia; Nauru; Palau;
0.001 0.001 0.001 0.001 0.001
Tonga; Tuvalu)
Emerging & Developing Asia (Total) 8.937 12.458 16.710 25.767 32.356 4
Emergence
of
China

5
 Economic Reforms since 1978
• Following Mao's death in 1976, Deng
Xiaoping outmanoeuvred Mao’s chosen
successor Hua Guofeng in December 1978.
• The Chinese government in 1978 decided to
break with its Soviet-style economic policies.
• It gradually reformed the economy according
to free market principles and opened up
trade and investment with the West, in the
hope that this would significantly increase
economic growth and raise living standards.
• Chinese leader Deng Xiaoping, the architect
of China’s economic reforms, put it:
“Black cat, white cat, what does it matter
what color the cat is as long as it catches
mice?” 6
 Why are we interested in China?
“Today’s China is a land of superlatives. It is home to the
world’s fastest supercomputer., the biggest wind-power
base, the longest sea bridge. It produces and uses nearly
half of the world’s coal, cement, iron ore, and steel; it
consumes 40 percent of aluminum and copper. By one
estimate, China will soon account for nearly half of all the
new buildings under construction on earth. Forty years ago
most Americans wouldn’t have imagined owing China one
red cent. Now it is the U.S’s biggest creditor, owning just
under $ 1.3 trillion of U.S government debt. It’s enough to
make the head spin – or for Americans to wonder how the
world got upside down so fast.”

- Henry Paulson, Jr (Former US Treasury Secretary) – Dealing with China, 2015

7
 0
5
10
15
25

20
1980
1981
1982
1983
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1989
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1991
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1998

China
1999
2000
2001

US
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Global Share: US vis-à-vis China (% of lobal GDP at PPP)

2017
2018
2019
8
 0
5000
10000
15000
20000
25000
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998

China
1999
2000
2001

US
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
GDP at MER: US vis-à-vis China (USD Billion)

2015
2016
2017
2018
2019
9
 China Macro Map

Govt net Current

Unemploymen lending/borro account
GDP Growth Global Share Investment Savings Inflation Import Growth Export Growth t rate wing balance
1980 7.9 2.3 35.5 32.4 n/a 4.9 n/a n/a
1981 5.1 2.4 33.5 31.8 2.5 3.8 n/a n/a
1982 9.0 2.6 32.4 34.8 2.0 3.2 0.2 n/a
1983 10.8 2.8 32.4 34.9 2.0 2.3 0.0 n/a
1984 15.2 3.1 34.9 34.9 2.7 1.9 0.1 n/a
1985 13.5 3.4 39.5 34.0 9.3 1.8 0.9 n/a
1986 8.9 3.6 38.2 35.3 6.5 2.0 -0.3 n/a
1987 11.7 3.8 37.8 36.4 7.3 2.0 -0.7 n/a
1988 11.3 4.1 39.5 36.3 18.8 2.0 -1.0 n/a
1989 4.2 4.1 37.5 35.5 18.0 2.6 -0.9 n/a
1990 3.9 4.1 34.4 38.4 3.1 2.5 -0.7 n/a
1991 9.2 4.4 35.7 38.8 3.4 2.3 -1.0 n/a
1992 14.3 4.5 39.6 38.2 6.4 2.3 -1.2 n/a
1993 13.9 5.0 44.0 41.9 14.7 2.6 -0.9 n/a
1994 13.1 5.5 40.8 43.0 24.1 2.8 -1.7 n/a
1995 11.0 5.9 39.6 41.6 17.1 2.9 -0.9 n/a
1996 9.9 6.3 38.2 40.8 8.3 3.0 -0.7 n/a
1997 9.2 6.6 36.2 40.0 2.8 3.1 -0.7 3.8
1998 7.8 6.9 35.6 38.6 -0.8 9.4 8.9 3.1 -1.1 3.0
1999 7.6 7.2 34.9 36.8 -1.4 13.8 5.7 3.1 -2.3 1.9
2000 8.4 7.4 34.3 36.0 0.4 26.5 27.1 3.1 -2.8 10 1.7
 China Macro Map

Govt net Current

Import Export Unemployment lending/ account
GDP Growth Global Share Investment Savings Inflation Growth Growth rate borrowing balance
2000 8.4 7.4 34.3 36.0 0.4 26.5 27.1 3.1 -2.8 1.7
2001 8.3 7.8 36.3 37.6 0.7 14.8 11.3 3.6 -2.6 1.3
2002 9.1 8.3 36.9 39.3 -0.8 21.7 24.8 4.0 -2.9 2.4
2003 10.0 8.8 40.4 42.9 1.2 33.2 31.6 4.3 -2.4 2.6
2004 10.1 9.2 42.7 46.2 3.9 21.5 27.2 4.2 -1.5 3.5
2005 11.3 9.8 41.0 46.7 1.8 13.4 24.1 4.2 -1.4 5.7
2006 12.7 10.4 40.6 49.0 1.5 17.7 26.0 4.1 -1.1 8.4
2007 14.2 11.3 41.2 51.1 4.8 14.8 20.9 4.0 0.1 9.9
2008 9.6 12.0 43.2 52.3 5.9 7.4 10.6 4.2 0.0 9.1
2009 9.2 13.2 46.3 51.1 -0.7 2.2 -11.3 4.3 -1.7 4.8
2010 10.6 13.9 47.9 51.8 3.3 19.9 25.6 4.1 -0.4 3.9
2011 9.5 14.6 48.0 49.8 5.4 17.7 14.6 4.1 -0.1 1.8
2012 7.9 15.3 47.2 49.7 2.6 6.6 5.9 4.1 -0.3 2.5
2013 7.8 15.9 47.3 48.8 2.6 10.6 8.8 4.1 -0.8 1.5
2014 7.3 16.5 46.8 49.0 2.0 7.8 4.3 4.1 -0.9 2.2
2015 6.9 16.1 43.0 45.8 1.4 -0.4 -2.2 4.1 -2.8 2.7
2016 6.8 16.2 42.7 44.5 2.0 4.4 0.7 4.0 -3.7 1.8
2017 6.9 16.3 43.2 44.8 1.6 7.3 8.2 3.9 -3.8 1.6
2018 6.8 16.8 44.0 44.1 2.1 7.6 4.2 3.8 -4.7 0.2
2019 6.1 17.4 43.1 44.0 2.9 -0.9 2.6 3.6 -6.3 1.0
11
2020 1.9 18.6 43.9 45.2 2.9 -2.7 0.0 3.8 -11.9 1.3
 Deng’s Contribution - 1
• Poverty plummeted
• Incomes skyrocketed
• Production Structure Changed
• People moved to the Cities
• Economy turned outward

12
 Deng’s Contribution - 2
• Fewer Children
• More CO2 emission
• Inequality increased

13
14
Chronology of Chines Reforms-I

15
Chronology of Chines Reforms-II

16
Covid: China and India

17
 Number of Covid Cases: Top 84 Countries
No. Country Cases No. Country Cases No. Country Cases No. Country Cases
1 US 29,045,448 22 Canada 896,247 43 Panama 345,236 64 Slovenia 195,678
2 India 11,244,786 23 Chile 860,533 44 Slovakia 323786 65 Moldova 195,602
3 Brazil 11,051,665 24 Romania 830,563 45 Malaysia 316,269 66 Egypt 187,094
4 Russia 4,293,750 25 Portugal 810,459 46 Belarus 296,441 67 Guatemala 178,770
5 UK 4,235,989 26 Israel 806,841 47 Ecuador 294,618 68 Armenia 175,198
6 France 3,969,615 27 Belgium 789,008 48 Nepal 274,810 69 Honduras 174,243
7 Spain 3,160,970 28 Iraq 731,016 49 Georgia 273,137 70 Paraguay 169,860
8 Italy 3,081,368 29 Sweden 684,961 50 Kazakhstan 268,902 71 Qatar 167,417
9 Turkey 2,793,632 30 Philippines 600,428 51 Bulgaria 263,303 72 Ethiopia 167,133
10 Germany 2,515,159 31 Pakistan 593,453 52 Bolivia 254,736 73 Nigeria 158,906
11 Colombia 2,278,861 32 Switzerland 565,034 53 Croatia 246,608 74 Oman 144,831
Dominican
12 Argentina 2,154,694 33 Bangladesh 551,175 54 243,526 75 Venezuela 142,774
Republic
13 Mexico 2,130,477 34 Serbia 489,530 55 Tunisia 238,017 76 Burma 142,045
14 Poland 1,811,036 35 Morocco 486,325 56 Azerbaijan 236,963 77 Libya 140,688
15 Iran 1,698,005 36 Austria 479,391 57 Ireland 223,651 78 Bosnia 137,291
16 South Africa 1,521,706 37 Hungary 475,207 58 Denmark 215,955 79 Bahrain 127,255
17 Ukraine 1,458,785 38 Japan 441,015 59 Costa Rica 206,640 80 Algeria 114,382
18 Indonesia 1,386,556 39 Jordan 435,130 60 Greece 206,281 81 Albania 113,580
19 Peru 1,371,176 40 UAE 415,705 61 Lithuania 202,900 82 Kenya 109,164
20 Czechia 1,335,815 41 Lebanon 397,887 62 Kuwait 201,898 83 N Macedonia 107,479
West Bank &
21 Netherlands 1,139,102 42 Saudi Arabia 380,182 63 198,554 84 China 101,149
Gaza

18
 How did China end up with such low infection?
• The Chinese Virus
– On Sept 22, 2020, US President Donald Trump SARS-CoV-2 as the “China virus”. He demanded that China was held accountable for
“unleashing this plague onto the world”.
– Chinese President Xi Jinping, who addressed the General Assembly after Trump, urged nations affected by COVID-19 to “follow the
guidance of science...and launch a joint international response to beat this pandemic”. He added that “any attempt of politicising
the issue or stigmatisation must be rejected”.
– 9 days later, Trump tested positive for SARS-CoV-2.
• How has China managed to wrest control of its pandemic?
• Memory: Most Chinese adults remember SARS-CoV and the high mortality rate that was associated with it.
• Speed: “The speed of China's response was the crucial factor. They moved very quickly to stop transmission. Other countries, even though
they had much longer to prepare for the arrival of the virus, delayed their response and that meant they lost control”
– Gregory Poland, director of the Vaccine Research Group at the Mayo Clinic (Rochester).
– The first reported cases of the disease that came to be known as COVID-19 occurred in Wuhan, Hubei province, in late December
2019. China released the genomic sequence of the virus on Jan 10, 2020, and began enacting a raft of rigorous countermeasures
later in the same month.
• Strict Lockdown
– Wuhan was placed under a strict lockdown that lasted 76 days. Public transport was suspended.
– Soon afterwards, similar measures were implemented in every city in Hubei province.
• Large-scale testing
– Within weeks, China had managed to test 9 million people for SARS-CoV-2 in Wuhan.
– It set up an effective national system of contact tracing. By contrast, the UK's capacity for contact tracing was overwhelmed soon
after the pandemic struck the country.
• No shortage of PPE & Masks
– As the world's largest manufacturer of personal protective equipment, it was relatively straightforward for China to ramp up
production of clinical gowns and surgical masks.
• High Compliance
– Moreover, the Chinese readily adopted mask wearing. “Compliance was very high”.
– Drones equipped with echoing loudspeakers rebuked Chinese citizens who were not following the rules.
• Effective Health care
• It has a centralised epidemic response system.
– On Feb 5, 2020, Wuhan opened three so-called Fangcang shelter hospitals.
– Another 13 would appear over the next few weeks.
– The hospitals were established within public venues such as stadiums and exhibition centres and were used to isolate patients with
mild-to-moderate symptoms of COVID-19.
– A modelling study calculated that the public health actions undertaken by China between Jan 29 and Feb 29 may have prevented 1·4
million infections and 56 000 deaths. 19
Evolution and Emergence of China:
The Growth Story

20
Average Annual Rates of Growth

21
 A Managerial Difference between the
Economies of USSR and China

• China was less controlled

– In 1979, number of commodities whose allocation was
controlled was around 4 thousand.
– In USSR, the similar number was 60 thousand.
• China was less centrally planned with smaller scale of
operation (relatively speaking)
– In 1979 USSR had 40,000 factories – most of which
were run from Moscow
– China, on the other hand, had 883,000 factories, of
which 800,000 were controlled by City and County
Governments.
22
 What does the Party mean for Business?
Richard McGregor in the Book “The Party”

“A Similar Department in the US … would oversee the appointment of

the entire US cabinet,
• state governors and their deputies,
• the mayors of major states,
• the heads of all federal regulatory agencies,
• the chief executive of GE, Exxon-Mobil, Wal-Mart and about fifty of
the remaining largest US companies,
• the justices of the Supreme Court,
• the editors of the New York Times, the Wall Street Journal and the
Washington Post,
• the bosses of the TV networks,
• the presidents of Yale and Harvard and other big universities, and
• the head of the think tanks like the Brookings Institution”.

23
24
Growth Drivers

25
 Reasons behind High Growth
• The Chinese economy has grown at an
average annual rate of around 10 per cent for
three decades.
• China’s rapid economic growth to two main
factors:
– large-scale capital investment (financed by
large domestic savings and foreign
investment) and
– rapid productivity growth.
26
 Sectoral Shares in GDP (%)
Item 2000 2010 2015
1. Agriculture, forestry, and fishing 15.0 9.9 9.3
2. Mining and quarrying, Manufacturing ,Electricity, gas,
steam, and air-conditioning supply 40.0 39.7 33.8
3. Construction 5.5 6.6 6.9
4. Wholesale and retail trade; repair of motor vehicles
and motorcycles 8.2 8.8 9.8
5. Accommodation and food service activities 2.2 1.9 1.8
6. Transportation and storage 6.2 4.6 4.5
7. Financial and insurance activities 4.8 6.3 8.5
8. Real estate activities 4.2 5.8 6.1
9. Other service activities 14.0 16.4 19.3
10. GDP 100.0 100.0 100.0

Source: Asian Development Bank

27
 Share of C, I, G, X & M in GDP (%)
Item 2010 2011 2012 2013 2014 2015

1. Household final consumption (C) 35.7 36.5 37.2 37.4 38.1 39.1

2. Gross capital formation (I) 47.0 47.0 46.5 46.6 46.2 44.9

3. Government final Consumption (G) 13.1 13.4 13.7 13.8 13.6 14.1

4. Exports (X) 26.5 26.8 25.7 24.8 24.4 22.4

5. Less: Imports (M) 22.9 24.4 23.0 22.3 21.8 18.8

6. Statistical discrepancy 0.6 0.7 -0.1 -0.3 -0.5 -1.6

7. Expenditure on GDP 100.0 100.0 100.0 100.0 100.0 100.0

28
Productivity Growth in China

29
China has invested heavily in science-based innovation: Quantity

30
China has invested heavily in science-based innovation: Quality

31
32
 Structural change over four decades
• China: “classic” pattern, moving from primary to
manufacturing sector, which has doubled its share of
workforce and tripled its share of output.

• India: Move has been mainly from agriculture to services in

share of output, with no substantial increase in
manufacturing, and the structure of employment has not
changed much. Share of the primary sector in GDP fell from
60 per cent to 25 per cent in four decades, but share in
employment still more than 60 per cent.

33
Foreign Trade: A Key Driver

34
 Table : China’s Share of Global Exports and Imports (percent)
China's Share of Global Exports (%)
Archetype Sector name
High level of integration Computer, electronic, and
optical products
Electrical equipment
Other machinery and equipment
High exposure to Chinese Textiles, apparel, and leather
exports
Furniture, safety, fire, other
Other non-metallic mineral
products
Rubber and plastics
Basic metals
High exposure to Chinese Mining and quarrying
imports
Chemicals
Paper and paper products
Global chains with little Other transport equipment
trade exposure to China
Pharmaceuticals
Motor vehicles and trailers
Coke and refined petroleum
products
Local production for local Food, beverages, and tobacco
consumption
Fabricated metal products
Wood and wood products
Printing and media
Agriculture, forestry, and fishing
Source: McKinsey (2019)
China's Share of Global Imports (%)
2003-07 2013-17 2003-07 2013-17
15 28 12 16
16 27 7 9
7 17 8 9
26 40 5 5
17 26 2 4
11 22 5 8
10 19 5 7
8 13 8 8
1 1 7 21
4 9 9 12
3 9 6 12
3 6 3 5
2 4 1 3
1 3 2 7
2 4 4 6
3 4 3 6
14 23 3 5
11 22 2 3
8 18 2 4
5 5 7 19
35
 Trade Strategy of China – 1980s
• Before 1978, China conducted minimal trade with the rest of the world, exporting
just enough raw materials and simple manufactured goods to cover payments for
imports of strategic minerals and other production materials not available at
home.
• This inward-looking, planned economic development strategy was reversed with
the policy of reform and opening-up beginning at the end of 1978.
• Through most of the 1980s, both imports and exports rose steadily under an
import substitution strategy.
• Exports grew faster than imports from 1980 to 1983, leading to trade surpluses in
those years.
• Over the next six years, however, imports surged due to large purchases of foreign
plant and equipment for domestic industries.
• In order to reduce the resulting trade deficits, a series of policies were introduced,
including an import and export licensing system, stricter controls on foreign
exchange expenditures, and the gradual devaluation of the renminbi by over 60 %
over the decade.
• Overall, foreign trade reforms in the 1980s focused on transforming China’s highly
centralised system to incorporate elements of a market-based economy.
• By the end of the 1980s, Chinese trade totalled $115.4 billion, representing 24 %
of China’s GDP and 3 % of total world trade and catapulting China to catapulting
China to the 16th largest trader in the world.

36
 Trade Strategy of China – Post 1980
• With major reforms in taxation, banking,
exchange rates and foreign exchange
management that took place in the 1990s,
China’s trade volume continued to grow as
Beijing gradually moved toward an export-
led development strategy.
• Two aspects that contributed significantly to
the expansion in exports and imports during
this period are worth highlighting.
• First, China abolished the dual-track
exchange rate system in 1994 and created a
unified rate pegged to the US dollar,
depreciating the renminbi by 44 % from the
previous year. The renminbi exchange rate
remained stable for the next 11 years,
granting a competitive edge to China’s
already cheap exports and, at the same time,
fuelling foreign criticism of currency
manipulation.
• Second, to pave way for China’s bid to join
the World Trade Organisation (WTO),
Beijing engaged in a series of voluntary tariff
cuts on over 5,000 products, driving down
the simple average of tariffs from 47.2% in 37
1990 to 15.8% in 1999.
38
SEZs in China
• Various types of SEZs have
mushroomed across China,
• Economic and Technological
Development Zones (ETDZs),
• High and New Technology
Industrial Development Zones,
• Export-oriented Manufacturing
Zones,
• Bonded Areas,
• Cross Border Economic
Cooperation Zones (CBEZs),
• Tourism and Leisure Zones and
others.
• Today China has:
• five SEZs,
• 131 national-level ETDZs,
• 105 national-level High and New
Technology Industrial
Development Zones,
• 15 national-level Bonded Areas,
• 14 national-level CBEZs,
• 15 national-level Export-oriented
Manufacturing Zones and
• 29 other types of national-level
zones.
39
40
Chinese Banking Sector

41
The Structure of the Banking
Sector
 Banking Structure
In 1983 the control on banking
business has been took over
• State-owned banks: ICBC, CCB,
by the “Big Four”
BOC, CAB
namely
• Joint stock banks: Bank of
Communication, China Merchants
 Bank of China (BOC) Bank, Guangdong Development
Bank, Minsheng Bank
 Industrial & Commercial
• City banks and credit unions:
Bank of China (ICBC) Bank of Shanghai, Bank of
 China Construction Nanjing, Ningbo Commercial
Bank
Bank (CCB)
• Foreign banks: HSBC, Citibank,
 Agricultural Bank of Standard Chartered,
China (ABC)
Global Financial Centres: 2020 (GFC Index 28)

44
Global Trade War: Illusions and Reality

45
 US Presidential Proclamation on Adjusting Imports of Steel into the United
States (March 8, 2018)

“The Secretary found and advised me of his opinion that steel articles are being
imported into the United States in such quantities and under such circumstances as to
threaten to impair the national security of the United States.
The Secretary found that the present quantities of steel articles imports and the
circumstances of global excess capacity for producing steel are “weakening our
internal economy,” resulting in the persistent threat of further closures of domestic
steel production facilities and the “shrinking [of our] ability to meet national security
production requirements in a national emergency.”
…..
In the exercise of these authorities, I have decided to adjust the imports of steel
articles by imposing a 25 per cent ad valorem tariff on steel articles, as defined
below, imported from all countries except Canada and Mexico.
In my judgment, this tariff is necessary and appropriate in light of the many factors I
have considered, including the Secretary’s report, updated import and production
numbers for 2017, the failure of countries to agree on measures to reduce global
excess capacity, the continued high level of imports since the beginning of the year,
and special circumstances that exist with respect to Canada and Mexico.

46
 Major US concerns
• Trade surplus
• Relatively ineffective record of enforcing
intellectual property rights (IPR)
• Discriminatory innovation policies
• Mixed record on implementing WTO
obligations.

47
 Instruments of Trade Policy
• Tariffs
• Subsidies
• Import quotas
• Voluntary export restraints
• Local content requirements
• Administrative policies
• Anti-dumping policies

48
 A Basic Model
• Let us consider a two-country example, viz., US (1) and China (2).
• By the standard national income accounting, GDP (Y) of each country can
be conceived as the sum of consumption (C), investment (I), Government
expenditure (G), and current account balance (i.e., the difference between
exports (X) and imports (M)).
• Thus, we have,
– Y1 = C1 + I1 + G1 +(X1 - M1), and
– Y2 = C2 + I2 + G2 +(X2 - M2).
• In a completely de-globalized world comprising self-reliant island
economies, the term (X-M) would not exist, but with the possibilities of
trade, X and M can vary.
• Since the world as a whole is a closed economy (after all, we cannot
import / export from / to moon), one should have
– (X1 - M1) + (X2 - M2) = 0.
• Thus, if (X1 - M1) > 0, (X2 - M2) < 0.
• That is to say, in this imaginary two-country world, a current account
deficit of the US has to be matched by Chinese current account surplus.
49
 Table 1: Global Current Account Balance (% of Global GDP)
Current Account Surplus Economies Current Account Deficit Economies
European China Japan Advance Oil Total United Europea Other Latin Emergin Central Africa and Total Discrepancy
creditors d Asia exporters Surplus States n advance America g Asia & Middle Deficit
debtors d Eastern East
Europe

2002 0.422 0.102 0.314 0.155 0.196 1.190 -1.298 -0.146 -0.041 -0.045 0.060 -0.049 -0.008 -1.528 -0.349
2003 0.488 0.110 0.358 0.203 0.279 1.438 -1.331 -0.177 -0.084 0.011 0.075 -0.078 -0.009 -1.592 -0.144
2004 0.745 0.157 0.415 0.192 0.428 1.938 -1.439 -0.221 -0.126 0.025 0.017 -0.106 -0.024 -1.876 0.076
2005 0.712 0.278 0.358 0.162 0.710 2.220 -1.567 -0.316 -0.157 0.026 -0.034 -0.114 -0.036 -2.199 0.122
2006 0.815 0.450 0.339 0.169 0.784 2.557 -1.565 -0.407 -0.218 0.045 0.008 -0.166 -0.054 -2.357 0.350
2007 0.793 0.608 0.365 0.201 0.595 2.561 -1.223 -0.453 -0.299 -0.001 0.001 -0.230 -0.054 -2.259 0.398
2008 0.643 0.660 0.224 0.137 0.766 2.429 -1.069 -0.514 -0.325 -0.095 -0.081 -0.247 -0.068 -2.400 0.126
2009 0.626 0.403 0.241 0.211 0.237 1.716 -0.617 -0.299 -0.316 -0.048 -0.022 -0.102 -0.069 -1.472 0.256
2010 0.701 0.360 0.335 0.206 0.423 2.026 -0.653 -0.286 -0.315 -0.144 -0.049 -0.156 -0.057 -1.660 0.421
2011 0.658 0.186 0.177 0.175 0.767 1.963 -0.608 -0.224 -0.243 -0.152 -0.083 -0.184 -0.071 -1.565 0.459
2012 0.707 0.289 0.080 0.196 0.711 1.983 -0.572 -0.038 -0.358 -0.179 -0.137 -0.123 -0.112 -1.519 0.498
2013 0.694 0.193 0.060 0.236 0.578 1.760 -0.454 0.057 -0.354 -0.208 -0.065 -0.116 -0.107 -1.248 0.503
2014 0.688 0.299 0.047 0.259 0.406 1.699 -0.463 0.070 -0.343 -0.216 -0.028 -0.078 -0.091 -1.149 0.523
2015 0.677 0.407 0.183 0.324 -0.037 1.554 -0.546 0.071 -0.359 -0.183 -0.004 -0.043 -0.094 -1.159 0.308
2016 0.648 0.267 0.257 0.316 -0.044 1.444 -0.572 0.080 -0.331 -0.111 0.022 -0.041 -0.096 -1.048 0.332
2017 0.629 0.206 0.245 0.284 0.102 1.466 -0.560 0.130 -0.237 -0.096 -0.028 -0.058 -0.086 -0.934 0.517
2018 0.631 0.058 0.205 0.261 0.311 1.467 -0.553 0.112 -0.253 -0.106 -0.097 -0.053 -0.077 -1.027 0.409
Source: Calculated from the World Economic Outlook, IMF, April 2019. P: Provisional
Note: (1) Advanced Asia: Hong Kong SAR, Korea, Singapore, Taiwan Province of China; (2) Africa and Middle East: Democratic Republic of the Congo, Egypt, Ethiopia, Ghana, Jordan,
Kenya, Lebanon, Morocco, South Africa, Sudan, Tanzania, Tunisia; (3) Central and eastern Europe: Belarus, Bulgaria, Croatia, Czech Republic, Hungary, Poland, Romania, Slovak Republic,
Turkey, Ukraine; (4) Emerging Asia: India, Indonesia, Pakistan, Philippines, Thailand, Vietnam; (5) European creditors: Austria, Belgium, Denmark, Finland, Germany, Luxembourg,
Netherlands, Norway, Sweden, Switzerland; (6) European debtors: Cyprus, Greece, Ireland, Italy, Portugal, Spain, Slovenia; (7) Latin America: Argentina, Brazil, Chile, Colombia, Mexico,
Peru, Uruguay; (8) Oil exporters: Algeria, Azerbaijan, Iran, Kazakhstan, Kuwait, Nigeria, Oman, Qatar, Russia, Saudi Arabia, United Arab Emirates, Venezuela; (9) Other advanced
economies: Australia, Canada, France, Iceland, New Zealand, United Kingdom
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 Table : Major Foreign Trading Partners of the US: Evaluation Criteria : 2020
Bilateral Trade Current Account Foreign Exchange (FX) Intervention
Goods Surplus Balance 3 Year Balance (USD Net Purchases Net Purchases Net Purchases Net Purchases
with the U S (% of GDP, Change in Billion, (% of GDP, (USD Billion, (USD Billion, (6 out of 12
(USD billion Trailing 4 Balance Trailing 4 Trailing 4 Trailing 4 Trailing 2 months) †
Trailing 4 quarters) (% of GDP) quarters) quarters) quarters) quarters)
quarters)
(1) (2) (3a) (3b) (3c) (4a) (4b) (4c) (4d)
China 310 1.1 -0.3 157 -0.1 -10 -8 No
Mexico 96 -0.2 1.9 -2 0.0 0 0 No
Germany 62 6.8 -0.9 253 .. .. .. ..
Vietnam 58 4.6 6.5 15 5.1 17 5 Yes
Japan 57 3.1 -0.8 158 0.0 0 0 No
Ireland 55 -5.5 6.4 -22 .. .. .. ..
Switzerland 49 8.8 -0.3 64 14.2 103 93 Yes
Italy 30 3.0 0.4 55 .. .. .. ..
Malaysia 29 2.5 -0.2 9 1.1 4 4 Yes
Taiwan 25 10.9 -1.5 68 1.7 11 4 Yes
Canada 24 -1.9 0.7 -31 0.0 0 .. No
Thailand 22 6.3 -3.1 33 1.8** 10 4 Yes
India 22 0.4 1.6 10 2.4 64 33 Yes
Korea 20 3.5 -1.3 57 -0.6 -9 -6 Yes
France 15 -1.6 -0.7 -41 .. .. .. ..
16. Singapore -1 16.1 -1.1 56 21.3 74 44 Yes
17. UK -8 -2.8 1.9 -76 0.0 0 .. No
18. Belgium -11 0.6 0.9 3 .. .. .. ..
19. Brazil -13 -2.8 -1.9 -47 -2.3 -39 -37 Yes
20. Netherlands -18 9.4 -0.2 83 .. .. .. ..
Euro Area 152 2.1 -0.5 271 0.0 0 0 No
Source: US Treasury
56
57
 International Negotiations and Trade Policy: Krugman’s Model
The Problem of Trade Warfare

China
U.S. Free trade Protection
10 20

Free trade 10 -10

-10 -5

Protection 20 -5
• Each country has a dominant strategy: Protection.
• Even though each country acting individually would be better off with protection, they would both be better off if both
chose free trade.
– In game theory, this situation is known as a Prisoner’s dilemma.
Slide 9-58
– Japan and the U.S. can establish a binding agreement to maintain free trade.
 US-China trade war
• Total US tariffs applied exclusively
to China: US$250 billion
• Total Chinese tariffs applied
exclusively to US: US$110 billion

59
Sources of Trade Surplus for Any
Economy
High Productivity

Cheap Input Cost

Protectionist Measure

Manipulated Exchange Rate

60
 How the US-China Trade War has changed the world?

• https://www.bbc.com/news/av/business-
50889740/how-the-us-china-trade-war-has-
changed-the-world

61
But Things have changed in China…

62
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To Conclude…….

66
 Three major problems with the
American demands – Anne Krueger
• The demand that China eliminate its bilateral trade surplus with the US is misguided.
– There is no reason why merchandise trade balances should matter at all.
– Services trade is equally important.
– Exporting financial services is almost certainly more economically rewarding than exporting coal.
• The US demand regarding currency manipulation reflects a similar fallacy.
– The apparent intent is to reduce America’s bilateral trade deficit with China, but until the US savings-
investment balance changes, that will not happen.
– US law stipulates three criteria for identifying currency manipulation by a trading partner:
• a global current-account surplus of more than 3% of GDP;
• persistent intervention to buy foreign exchange and sell domestic currency; and
• a bilateral trade surplus with the US of more than $20 billion.
– Because China currently meets only the third condition, it is not a currency manipulator under US
law
• The other US objectives – regarding IP theft, technology transfer, subsidies to SOEs, and investment
requirements – can satisfactorily be addressed only at the multilateral level.
– Like any WTO member, the US can bring a complaint when it believes that a trading partner has not
abided by WTO rules (which, admittedly, could be strengthened).
– But the Trump administration has filed only two cases against China, despite the fact that the US had
previously won 91% of the cases it brought to the WTO, and even though the Chinese authorities
have a good track record of amending their practices when WTO panels have ruled against them.
67
 Chinese Growth in 2020: Good Policy or Good Luck?

Growth Rate Across Major Economies

-7.5 South Africa

-3.2 Nigeria

-3.9 Saudi Arabia

-8.5 Mexico

-4.5 Brazil

-3.6 Russia

-8.0 India

2.3 China

-5.5 Canada

-10.0 United Kingdom

-5.1 Japan

-11.1 Spain

-9.2 Italy

-9.0 France

-5.4 Germany

-7.2 Euro Area

-3.4 United States

-12.0 -10.0 -8.0 -6.0 -4.0 -2.0 0.0 2.0 4.0

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 Way Ahead…..
• May be Foolhardy to forecast
• Global Trade war also depends on
compulsions of National Economic / Political
Interests
• Among the larger economies, China is least
affected by Covid

69
Thank You

70