In 2018, US President Donald Trump imposed tariffs on Chinese imports worth US$34 billion. A key reason for this was the trade deficit the US faced in its dealings with China. A trade deficit of $419.2 billion was acquired by the United States in 2018. However, according to Donald Trump, this was only the first of a series of trade regulations and tariffs that it planned to impose on China. This would essentially be the initiation of strained economic relations between the world’s two giants. There exists another, less attributed, reason for US fear and that is the ‘Made in China 2025’ policy announced by China in 2015.
The policy aims to transform the Chinese industrial ambitions by 2025. Much to the dismay of the United States, it aims to shift China from a producer of low-specialized, cheaply manufactured goods to one that produces highly specialized products and technology. Research and development for this initiative are already underway. China will aim to produce and incorporate hi-tech equipment and artificial intelligence in its manufacturing. This policy will increase the country’s domestic capabilities and eliminate the risk of isolation from the global economy. However, many major Chinese markets around the world including the US fears the loss of cheaply produced goods and labor in China.
An economic decoupling will without doubt negatively affect the GDP of the two countries in the center of the conflict. If the ongoing trade war escalates or possibly turns into a cold war, its effects will reverberate across the entire world especially across developing regions in Asia. According to a statement by the IMF at the end of 2018, “the U.S.-China trade war could reduce Asia’s gross domestic product by 0.9% over the next two years.” This statement was made before the onset of the novel Coronavirus. In light of the current situation, it is fair to say that the effects of an economic decoupling would be far severe.
China exports around $120.3 billion in goods to the United States. The imposed tariffs have greatly hurt this export market and will continue to do so as trade regulations increase. As a result, foreign manufacturers in China have begun to close down and leave. With many deciding to move their businesses to Southeast Asia in order to avoid US tariffs. Consequently, a great shift in the global supply chain is at its initiation. With the onset of COVID-19 in Wuhan, even more businesses have shut down and moved operations elsewhere, particularly US owned businesses.
The US mainly exported agricultural products to China, but the ‘Made in China 2025’ policy includes the production of hi-tech agricultural equipment that would hurt the import market from the US. This will result in losses for the US mainly in the agricultural sector but also construction, transportation and trade services. These are said to far outstrip gains in other sectors as a result of the imposed tariffs on China.
Prospects for Southeast Asia, particularly Pakistan are not that severe since Pakistan is not well integrated with the global economy. The effects on the country will, therefore, be limited. They will, in fact, provide many opportunities for businesses to boom. There will be an opportunity for Pakistan to revise its economic policies to favor the current situation and place itself in a benefiting position. The country must aim to integrate itself into the world trade chain in the long run. It must also reach out to other countries that have few or no tariffs and form Free Trade Agreements (FTA’s) post-pandemic to re-boost its GDP.
Due to the increased prices of Chinese goods in the USA, the demand for these goods is likely to decrease. This will leave space for Pakistan and other developing Southeast Asian countries to export goods to the US for a competitive price. Pakistan must increase its textile export to the US, for which there is already high demand. An increase in the prices of Chinese manufactured goods means that Pakistan can revive industries that have closed down and boost small to medium scale enterprises.
After the Coronavirus has increased unemployment and caused stagnation in GDP growth, this will provide a perfect opportunity to revive the economy and increase employment. In the medium to long run, industrial growth and an inflow of foreign investment into Pakistan will become inevitable. Industries that are looking to shift operations from China can find a good opportunity for growth in Pakistan. Chinese owned manufacturing industries will also likely choose Pakistan in light of an amiable Pakistan-China friendship, this will help Chinese goods ward off US tariffs.
However, a Sino-US cold war is likely to have more than just economic consequences in Southeast Asia. The US alliance with India and its supply of military equipment and information has attested to this projection. As a result, the Pakistan-China partnership is likely to intensify. Unfortunately, a recovering economy means that the costs of projects in CPEC are likely to increase and delays are to be expected. Developmental budgets in Pakistan are likely to be impacted negatively as is the Prime Ministers 5 million housing projects for the destitute.
When the world’s two great countries escalate in a silent conflict, the effects will be faced by the entire world. Foreign investment is likely to decrease for some, while the buying power of others will limit. Global supply chains will have to be laid again, and the world economic order redefined resulting in far-reaching consequences for producers, consumers and investors around the world.
Nausheen Samad is a student of Social Entreprenuership at Institute of Business Management and has interests in International Relations, Philosophy and Political Sociology.