US-China tariff war is a global trade issue

Several foreign firms have announced tech partnerships in China as they try to get a hold in the world's biggest electric vehicle market. [AFP]

The proposed increase in US tariffs on some Chinese products is more than winning the 2024 presidential polls.

No candidate wants to be seen as soft on China, an emerging economic rival to the USA. Remember China has a big trade surplus with the USA.

Any economist would be aghast to the use of tariffs in international trade. Simply put, a tariff is a tax imposed on imports, either goods or services.

That makes them more expensive. Consumers are forced to shift to the domestic market, stimulating demand and creating jobs. That is music to any politician.

Some economists think tariffs interfere with the law of supply and demand. If the prices rise in the domestic market because of the tariffs, the producers are incentivised to produce more by high prices. 

Lobbying, at times, is used to have tariffs instituted on some imports, another reason tariffs are not popular with economists. Which products will get tariffs in this year's budget? Check.

Traditionally, tariffs were sources of revenue for governments. Tariffs can also be imposed for nationalistic reasons, to favour local products and voters. The counterargument is that once protected, the domestic industries have no incentive to innovate and become more efficient. 

In the long run, everyone suffers if every country protects its market through tariffs. Prices could rise without commensurate improvement in quality.

But it gets a little messy in the US-China spat. Why would Chinese imports be cheaper than similar products at home?

Economists argue China could be enjoying a comparative advantage in production, such as cheaper power, low wages, or a big market that brings economies of scale.

The bigger market is why lots of Western firms made China their home once it was opened up by Deng Xiaoping in 1978. Few would say that loudly, that was a mark of genius. 

Americans counter that China’s government has used unfair, non-market practices. "China has forced technology transfers and intellectual property theft,” says the White House.

The shifting of so many Western firms to China was not unconditional. But it seems profits and the bigger market made conditions tolerable. Now China has come of age and can compete with the West.

Strategic sectors

In response, the US has imposed tariffs “across strategic sectors such as steel and aluminum, semiconductors, electric vehicles, batteries, critical minerals, solar cells, ship-to-shore cranes, and medical products.”

For some products such as electric cars, the tariffs moved from 25 to 100 per cent. Solar cells from 25 to 50 percent.

Any student of economics can recall a period when tariffs made trade difficult. WTO and GATT before it has all tried to reduce tariffs and catalyse world trade.

The tariffs against China are to be increased under appropriate US laws such as the Bipartisan Infrastructure Law, CHIPS and Science Act, and Inflation Reduction Act. Do we have such laws in Kenya?

A few issues arise from these tariffs. Will China reciprocate? Tariffs slow down global trade and hurt everyone. They raise prices and decrease demand. They interfere with the laws of comparative advantage. 

Why these specific products? They are strategic and critical to the US and other economies. Think of lithium for car batteries. If China has an edge in these sectors, it can control the supply chains and economic lifelines.

These resources are the oil of the future, which is why the US is protecting the domestic market to ensure self-reliance.   

We can introduce a counter-narrative. Suppose China has become more innovative, spawning new products or services. Data on patents from the World Intellectual Property Office seems to demonstrate China's rising innovative capacity. Their brands now compete with popular Western brands - think of Haier or Huawei.

The big question is whether we should let politics overshadow economics and innovation. What if these tariffs incentivise China to seek new markets outside the US and outcompete America?

What is the WTO saying about these tariffs? The US is taking care of her strategic interests, and economic laws apart. Do we ever do that ourselves?  Are our tariffs that strategic?

The gospel of free trade has grown louder among economists. However, the implementation has age-old ties to nationalism and politics.

And out of curiosity, does Kenya have a high-level position of trade representative, a Cabinet-level official with the rank of ambassador, who is directly responsible to the President? 

The China–US trade dispute shows the importance of trade. We should not be left behind. We must start by ensuring more inter-county trade before fanning to other countries, the continent and the globe. Trade is a low-lying fruit. Shall we pick it?