Question

Using offer curve analysis, illustrate and explain the possible economic impact of the US-China trade war, on world trade levels and how would this trade war impact on the Caribbean? respond (700-1000 words)

Answer 1

US-China relations have had turbulent periods throughout the years, but the Trump Presidency has taken a markedly more aggressive stance to Beijing’s purported unfair trade practices which the US President blames for China’s large merchandise trade surplus with the US, estimated to be US$375 billion in 2017.

US-Caribbean Relations

While China’s deepened economic engagement with the Caribbean is relatively recent, US-Caribbean relations with the region it considers its “backyard” or “third border” are longstanding, dating back to colonial times. The US is not just the region’s largest trading partner, but since the late 1980s many Caribbean countries have benefited from duty-free, quota-free access for most goods to the US market under the Caribbean Basin Initiative, a non-reciprocal goods-only preferences programme.

The US is the major source market for Caribbean tourist arrivals, with the Caribbean Tourism Organisation reporting an estimated 14.9 million US arrivals to the region in 2017. US-Caribbean ties also manifest through the relatively large Caribbean-American diaspora which numbers approximately four million. The US is also a major (though declining) provider of foreign assistance to the Caribbean, and the Trump Administration has sought to scale back its assistance even further.

So, what may US-China trade tensions mean for the Caribbean?

It is still too early to tell whether there will or has been any economic fall-out from the US-China tariff war so far on Caribbean economies. Most Caribbean countries are services-dependent making them generally more insulated from direct fall-out from the tariff hikes on global goods supply chains. Commodities-based economies, however, might suffer from softening commodities prices due to reduced Chinese demand.

President Trump’s calculation may be that a trade war would be more damaging to China’s economy than to the US since it exports more to the US than viceversa. This gives Beijing less American imports on which it could levy tariffs. An already slowing Chinese economy would be further weakened by reduced American demand for its products.

One possible negative consequence of any severe downturn in the Chinese economy may be a reduction in Beijing’s economic largesse in the region. But, the US economy may not be immune either. Though the US economy grew 4.2% in the last quarter and unemployment is low, these fortunes could be reversed due to Washington’s erratic trade policy and recent tax cuts. American farmers in key states are already warning about the possible impact of the tariff hikes. A downturn in the US economy could have a ripple effect on Caribbean economies, especially those dependent on US tourist arrivals. It is also worth pointing out that China is the US’ largest creditor, with a stockpile of over US$1 trillion worth of US Treasury securities. Beijing may see this as a source of leverage in this economic war, but a mass sell-off by China of its US debt could also backfire.

Another possible channel of impact for Caribbean countries could be in the financial markets. Spooked by these trade tensions, investors may revert to less risky investment options, which may make bonds issued by emerging economies, like those in the Caribbean, less attractive, and also affect currency markets. Additionally, any downturn in the global economy precipitated by softening global demand due to the rising trade tensions and reduced investor confidence could have a ripple effect on the small open economies of the Caribbean. In its recently released Interim Economic outlook, the OECD warned that new restrictive trade measures were already impacting global trade flows, resulting in a slowdown in global trade volume growth in the first half of 2018.

An upside to the US-China trade tensions, and this may already be playing out, is that Chinese exporters, faced with these high tariffs in the US market, will be looking at alternative markets for their goods. In light of Washington’s anti-China stance, Chinese firms may also seek out more investment-friendly climates in which to invest. In this case, the Caribbean also hypothetically stands to benefit.

It should be noted as well that China increasingly sees itself as having similar interests to the Caribbean, and also as an ally to the region in multilateral fora. This week the Chinese government noted that it plans to step up its multilateral cooperation with the Caribbean Community (CARICOM), to help protect the integrity of multilateral institutions which have been increasingly under attack from the current unilateral stance taken by the Trump administration. WTO reform is one area in which China and the Caribbean could potentially collaborate, although China’s status as a developing country is one of the sore points for some WTO members, including the US.

There may also be greater opportunities for Caribbean countries to meaningfully increase exports to China. However, this is easier said than done. Caribbean firms looking to export to, or invest in China, will need to overcome barriers to market access and penetration, which are not just legal/regulatory in the form of non-tariff barriers, but also linguistic and cultural.

One way in which these barriers may be mitigated is by tapping into those persons who have knowledge of the Chinese market and culture. A growing number of Caribbean nationals have benefited from Chinese government scholarships. These persons not only speak the language, but know the culture and may have built up lasting contacts there. They could be employed as trade and investment liaisons in their countries’ diplomatic missions in China and their expertise used during trade shows to China. Local chambers of commerce, trade and investment promotion agencies, and individual firms looking to scope out the Chinese market, should also view these persons as useful sources of insights on the Chinese market and sources of contacts for exploring possible joint ventures and partnerships as market entry strategies.

Notwithstanding, it is still too early to state definitively what impact the current US-China trade tensions will have for the Caribbean region. As such, Caribbean leaders and the business community should continue to monitor the situation closely, looking for ways to mitigate any possible channels of impact, but also areas where opportunities may arise.