Latin America and the China-U.S. Trade War

By Robert D. Atkinson, President, Information Technology and Innovation Foundation

Nowadays it’s almost impossible to write about trade policy without commenting on the rapidly evolving China-U.S. trade conflict. How and if China and the United States manage this conflict will have a significant impact on Latin American trade.

First, some background. Since the Clinton administration shepherded China’s accession to the World Trade Organization (WTO), China has consistently flouted its obligations to uphold even the most basic tenets of fair play in the global trading system. In violation of its WTO obligations, China bestows massive subsidies to fortify domestic tech companies; it demands that international competitors enter into joint ventures with Chinese firms at the price of doing business in China; it picks the pockets of foreign firms to acquire valuable trade secrets; and it favors Chinese companies in its domestic marketplace.

But it was only with the election of President Trump that the United States started to do more than voice complaint at bilateral dialogues. To get China’s attention and show that he was serious, in 2018 Trump imposed 10 percent tariffs on 200 billion of Chinese exports to the United States. In response, China imposed tariffs on U.S. imports. Recently, after the Chinese government reportedly walked back some of its prior commitments including to reduce state-sponsored intellectual property theft, the Trump administration escalated its response, increasing the tariff rate to 25 percent and announcing 25 percent tariffs on the rest of Chinese imports. On top of that, they announced a ban on certain technology imports from China and a ban on exports to the Chinese telecom firm Huawei.

A key question now is how will this play out for Latin America? The answer depends on whether the Chinese come to the table and make enough concessions for the Trump administration to walk back the tariffs, as well as the import and export limits. To be clear: what Trump is asking China is not a heavy lift. He’s asking China to stop stealing foreign technology, stop forcing foreign companies to give their technology to Chinese firms in exchange for selling in China, and stop massively subsidizing exporters. However, under the spur of the Chinese propaganda machine, China appears to be working itself up into a nationalist lather, portraying these fair requests as imperialist attempts to keep China down and unfairly intervening in domestic matters that are China’s to decide. Someone should remind China that when they chose to join the WTO–in order to keep nations from taking unilateral actions against their unfair trade practices while at the same time getting unfettered market access around the world–they also agreed to change their laws and regulations to comply with WTO rules. If China wants an unfettered hand in governing its own economy, it should withdraw from the WTO.

Assuming Chinese leaders act rationally, they will make a reasonable offer and the Trump administration will almost certainly remove the tariffs and trade limits. But even if the tariffs are lifted, it is likely that some level of decoupling will be permanent. Already it appears that many U.S. companies have either moved some production out of China to other low-cost locations or are planning to do so. This is a key reason why Vietnam’s trade surplus with the United States has increased 45 percent in the last year. So even if Trump removes the tariffs, many companies now believe that the risk of reimposition of tariffs or other restrictions is high and so, as a hedge, are expanding production in other nations. And if the Chinese refuse to make an adequate compromise, Trump will likely retain the tariffs.

Either way, this can be an opportunity for Latin America. Tariffs on Chinese imports to the United States and tariffs on U.S. imports to China make Latin American exports to both China and the United States more competitive. More importantly, shifts in global supply chains open opportunities for Latin American nations. But to take advantage of these opportunities, nations will need to make policy changes. To start, Latin American nations should join the Information Technology Agreement, a WTO agreement eliminating tariffs on a wide array of ICT goods. This is critical, because global ICT supply chains depend on both imports and exports. Further, as the Information Technology and Innovation Foundation (ITIF) has shown, nations with tariffs on ICT imports participate much less in these supply chains. Doing so would also have important productivity gains for nations by lowering the cost of ICT goods. For example, ITIF estimates that if Brazil were to join the ITA, it would add nearly a full percentage point to Brazil’s GDP by the 10th year after its ITA accession, with that expanded growth producing new tax revenues that would fully offset tariff losses. However, only nine nations (Colombia, Costa Rica, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Panama, and Peru) have joined the first ITA agreement and just three (Columbia, Costa Rica, and Guatemala) have joined the more expansive ITA2 agreement.

All this raises a key point: how should Latin American companies and policy makers view the trade war? In the short run, the old proverb that when two elephants fight, the grass gets hurt may not apply. As noted, Latin America will have better access to U.S. and Chinese markets. However, Latin American companies and policymakers need to focus on longer-term strategic issues. The U.S. government is confronting China not just to protect the U.S. economy but the entire global economy. Chinese mercantilism has had severe, negative consequences for Latin American economies. China’s severe currency manipulation has stifled the development of manufacturing jobs, and its “Made in China 2025” plan risks turning the region into a “hewer of wood and drawer of water” to supply insatiable Chinese input need, making Latin American efforts to develop their own technology economies stillborn. In short, Latin America has a key stake in America prevailing in this trade war. As such they should, at minimum, support the U.S. rhetorically, if not in action.

 

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