Comment: The trade war between the US and China not only risks rolling back the benefits for American and Chinese citizens, but also has the potential to derail the rules-based trade order vital to the wellbeing of citizens from third party states, such as New Zealand, writes Federated Farmers Climate Change and Trade Policy Advisor Macaulay Jones.

"When elephants fight, it is the grass that suffers."

This proverb is an apt metaphor for the ongoing trade war between the United States and China.

The United States and China are modern economic 'elephants', and New Zealand, along with most other nations, are very much 'the grass' that looks set to suffer.

Advertisement

The trade dispute, or war, between the United States and China can be traced back to long standing American grievances toward Chinese trade practices, but these simmering grievances boiled over with the election of Donald Trump in 2016.

Read more from Federated Farmers here.

President Trump campaigned on an agenda of addressing perceived unfair trade practices undertaken by China since becoming a member of the World Trade Organisation (WTO) in 2001.

Donald Trump's key election promise was to, 'make America great again'.

In an attempt to fulfil this promise, the Trump administration has sought to address 'disastrous' trade agreements the US was party to.

Once in office President Trump quickly pulled the US out of the Trans Pacific Partnership (TPP), and sought to renegotiate the Korea-United States Free Trade Agreement (KUSFTA) and the North America Free Trade Agreement (NAFTA) with Canada and Mexico.

President Trump has also vocally condemned China for alleged currency manipulation, intellectual property theft and implementing illegal subsidies.

In 2017 the Trump administration escalated trade tensions with China by launching an investigation into Chinese trade policies.

Advertisement

This investigation found widespread deliberate misconduct by China and was followed by an announcement of increased tariffs for Chinese goods, further escalating the dispute.

In addition to a unilateral hike in steel and aluminium tariffs, in April 2018 the United States announced it would impose US$50 billion of tariffs targeting Chinese machinery and electrical equipment.

In retaliation China quickly announced about US$50 billion of tariffs on US agricultural products and cars.

After a brief truce, the US followed up in July 2018 with another round of tariffs on about 6,000 products worth a further US$200 billion.

China again retaliated, with increased tariffs on about 5,500 products worth about US$60 billion.

Talks between President Trump and Chinese President Xi Jinping at the G20, delivered a tentative pause in hostilities, and talks between state officials resumed in an attempt to end the harmful bilateral tit-for-tat.

Along with reversing the long-term global trend of trade liberalisation, the US-China trade war is also threatening the operation of the WTO itself.

The WTO contains a Dispute Settlement mechanism that is designed to resolve trade disputes in a manner that preserves the rules-based trading system.

The WTO dispute settlement system details a process in which states can pursue trade complaints against a fellow WTO Member.

In the WTO dispute settlement process, members either resolve a dispute by simply consulting with each other and reaching a mutually acceptable compromise, or failing this an adjudication is made by a panel or the Appellate Body.

The WTO Appellate Body is the overarching appeal panel of the WTO and consists of seven members, in which three members serve on a case, selected by rotation.

Angry at a perceived lack of action in addressing issues of concern, and in reforming the WTO, the US has been blocking the appointment of new members to the Appellate Body since the Obama administration, resulting in the panel currently being comprised by only three out of a possible seven members, the minimum required for a case to be heard.

In December 2019 the terms of two of the Appellate Body members, from India and the US, will expire.

If the US continues to block the appointment of new Appellate Body members, this will leave only one lonely member (ironically from China) and render the appeals chamber ineffective.

A functioning WTO dispute settlement process has allowed nations such as New Zealand to trade with larger nations and be confident the rules are enforceable, and therefore will be followed fairly.

New Zealand is a small, geographically isolated nation heavily reliant on the modern rules-based liberal trade regime.

New Zealanders depend both on finding markets for large amounts of high value agricultural exports, such as cheese, lamb and kiwifruit, and on being able to import countless goods and services crucial to modern life (such as cars, computers and medicines).

Federated Farmers Climate Change and Trade Policy Advisor Macaulay Jones. Photo / Supplied
Federated Farmers Climate Change and Trade Policy Advisor Macaulay Jones. Photo / Supplied

International trade is critically important to New Zealand, with goods and services exports and imports making up around 60 per cent of all economic activity, and 620,000 jobs are dependent upon access to reliable export markets.

Trade has empowered nations to specialise in doing the most of what they do best, and to trade excesses.

Without trade, nations such as New Zealand would cease benefiting from this international comparative advantage, and be forced to do a little of everything, often poorly and for greater cost.

As anyone who remembers the heavily protected New Zealand economy prior to the 1980s economic reforms, this results in more expensive and poorer quality products for consumers.

It has been consumers who have benefitted most from the ongoing trend of trade liberalisation, and it is consumers who stand to lose the most if the creeping shadow of protectionism continues to grow.

It is the US and Chinese elephants that are casting the largest shadows, yet the American and Chinese people have benefitted tremendously from the liberalisation of trade and the rules-based system.

The trade and economic liberalising 'Open Door' policy of Deng Xiaoping has incredibly helped lift over 800 million people out of abject poverty in China since 1978, and the proportion of Chinese citizens in poverty has plummeted from nine in ten to one in a hundred.

The US is also reaping the rewards of trade, not coincidentally representing both the largest trading nation and the largest economy on earth.

Mothballed automotive factories in Detroit are stark gravestones to the victims of trade liberalisation, but the benefits of rules-based trade have quietly lifted the opportunities available and living standards enjoyed by millions of Americans.

The trade war between the US and China not only risks rolling back the benefits for American and Chinese citizens, but also has the potential to derail the rules-based trade order vital to the wellbeing of citizens from third party states, such as New Zealand.

While China and the US have the ability to implement domestic subsidies and to enforce trade agreements with deterrence, smaller states, such as New Zealand, lack the domestic consumer market or the military might to repair the damage.

The earlier referenced proverb is however, not perfect.

Unlike the grass, New Zealand, and other small trading nations, are not passively hoping for peace between the posturing elephants of China and the US.

David Walker is a former New Zealand chief trade negotiator, and as New Zealand's Permanent Representative to the WTO, has recently been appointed chair of the WTO Dispute Settlement Body and facilitator of the informal general council process to address issues regarding the Appellate Body.

This appointment will make Walker responsible for WTO reform and place him in the eye of the trade war storm.

The leadership demonstrated by Walker highlights the critical role innovative small nations such as New Zealand must play in protecting the rules-based international trade regime and in placating the elephantine superpowers of the US and China.