American President Donald Trump declared his decision to impose duty on Chinese goods of 34 billion dollars on 6 July 2018. This duty has been meanwhile slapped on 13 thousand Chinese export commodities.
10% duty has been levied on Chinese aluminum and steel products too. Similar tariffs have also been imposed on some of the European and Canadian products as well, particularly aluminum and steel.
Protesting this move, China and European Union (EU) have decided to put additional duties on American goods. China announced to impose additional duties on 106 US goods on 11 July including transports, airplanes, soybeans and agricultural products valued 50 billion US dollars.
Right after this announcement, Donald Trump has ordered the US trade officials to identify Chinese goods of worth another 100 billion dollars for imposing similar duties. EU has also proposed to enforce 25% duty on US steel, garments and other commodities.
President Donald Trump started this trade war saying that China has stolen America's intellectual property. He also complained that China has curtailed US investments.
A highly tensed situation is prevailing all over the world as a result of this trade and investment conflicts between USA and China. Many countries are also worried about the danger of becoming victims of this trade war related cross-fires.
However, China is facing this trade war with much restraint. It has said that it would appeal to World Trade Organization (WTO). President Donald Trump does not, of course, want to care about WTO which was created with very strong support from the US.
So it will not be unfair if it is presumed that his advisers would try to convince him to move away from making business difficult for the European and Asian countries. Yet, given the level of unpredictability of policy stance of President Trump anything can happen to the global trade regime.
There are certainly worries in the minds of the global trade observers that global recession may even further deepen if this trade war between China and USA is prolonged. Such a scenario is bound to complicate global trade prospects with huge welfare implications for the people at large.
It will certainly reduce employment globally and cast adverse impact on the standard of leaving of people, particularly among the millions of women workers engaged in the RMG and other export industries including those in Bangladesh.
The American citizens who have elected Donald Trump will also be facing economic pressures arising out complications of the brewing trade war between USA and China. It may put Donald Trump in bigger trouble as and when the next American election approaches.
He will surely try his best to be reelected. So, it is being hoped that Donald Trump will not anger the Republican leaders and supporters for his own self-interest. But you never know how he will react to the interests of his vote-banks.
The Indian Express has stated on 10th July 2018 that the ongoing squabbles between China and USA would not turn into full fledged a trade war at the end of the day. The Indian Express has referred to three reasons for such presumption.
First, the federal law of USA says that the USA will have to negotiate with its trade partners including China before imposing such duties.
Second, China has said that it would appeal to WTO. If China's appeal is granted by WTO, it will strengthen China's diplomatic foothold though USA wants to quit WTO.
Third, if China and EU impose duties on American goods as counter-measures it will cause broadly negative effects on US domestic business. For example, China imports 60% of the world's soybeans. About 40% of these soybeans are imported from USA.
The farmers and entrepreneurs of USA living in Iowa and other central-western states will face immense losses if China imposes duty on US products. China has already started importing soyabeans from Russia and Brazil. The Indian soyabeans producers are also busy negotiating deals with the Chinese importers.
At the same time the voters from Republican leader Paul Ryan's state Wisconsin and McConnell's state Kentucky will get furious if EU imposes duty on American steel and aluminum goods. Consumers in Florida will get angry if EU puts additional 25% duty on orange juice. It means that Donald Trump's abrupt decision on imposing duty on China will generate storms inside his own political front Republican Party.
Keeping these points in view, economic analysts are saying that Donald Trump would finally abstain from triggering a full-fledged trade war with China. Besides, USA cannot make consumer products at a low cost given the higher wage rate of its blue-colored employees.
Many commentators feel that this could open up new opportunities for low-cost exporting countries like Bangladesh. If the American buyers can purchase foreign goods for lower prices, why should they pay more for the expensive local products?
Particularly, the low cost export products from countries like Bangladesh (which is second largest producer of the readymade garments) are gradually increasing their share into the US market. There are a number of other export industries in these countries which too can make greater in-roads into the US market once the scope of the Chinese export is shrunk.
The market for medicines, ceramic and leather goods exported from Bangladesh to USA is increasing too. Although Bangladesh is assured of the duty-free or lower duty export of its pharmaceuticals for more than one and a half decades, yet it will have to further improve the quality of its compliance standards for making deeper entry into the sophisticated high-end markets of the US and EU.
Prospects are getting brighter for the export of Bangladeshi digital products to USA as well. We need to touch base with our NRB engineers and market experts working in the Silicon Valley to get back some of them into Bangladesh for enhancing the capacity of our exporters of our digital products.
Also Bangladesh has made a right move to get GE as strategic partner of our power industry which will surely strengthen the backbone of our export industries.
It is indeed heartening to note that Bangladesh's export business with USA is gradually expanding in the wake of the renunciation of America's free trade agreement (TPP) with Asia, though these are temporary privileges.
Ultimately trade war between China and USA is a bad news for the entire world. Inflation will rise in USA as a result of cost escalation of their raw materials and consumer products. This will impact negatively on the growth rate of the US economy which was just showing its teeth with long-term implication of Bangladesh's exports to USA as well.
If this goes on then American investments in foreign countries will be pulled back into the USA. It has already started putting negative effects on US FDI in India and for the same reason Indian Rupee is losing its value.
The bulging current account deficit in India is hurting the exchange rate of Indian Rupee. The current account scenario in Bangladesh is not much different in Bangladesh either.
Trade deficit in Bangladesh has doubled up (over 17 billion dollars in eleven months of the current fiscal year) compared to the same in last fiscal year. As a result enormous deficit has emerged in the current account balance. Currently there are 9 billion dollars current account deficit in Bangladesh.
It has strained the value of Bangladesh Taka. Foreign currencies reserve has started depleting which has wider ramifications for sovereign credit rating and FDI inflows. Import costs are mounting.
Prices are escalating too creating upward pressure on inflation maintaining stable current account balance will be a tough job if trade deficit cannot be tackled with iron hands right now. Our economy is bound to confront its far-reaching negative impact.
Therefore, Bangladesh will have to discover new export markets rapidly and discourage unnecessary import. Both NBR and Bangladesh Bank will have to keep sharp eyes on prices quoted in import Letters of Credit and their timely settlements so that there is no scope of increased flight of capital from Bangladesh in the name of foreign trade. Bangladesh should be well advised to look more aggressively for the regional market for its exports.
If Bangladesh can address 1% of India's total imports, then Bangladesh can make additional export earnings of 4 billion dollars every year. In addition, Bangladeshi products have much popularity in China and some more Asian markets. Vietnam, Malaysia, Singapore, Japan and some more countries are now trying hard to take part in the burgeoning economy of Asia. Then why should not Bangladesh look for economic potentialities in its neighborhood?
However, it's a matter of great optimism that Bangladesh is paying attention to the implementation of special economic zones and some other mega projects. Prime Minister Sheikh Hasina is monitoring these projects herself.
Now it is necessary to make our financial policies more stable and business-friendly. Foreign investors are showing a lot of interests to invest in different industries in Bangladesh besides garments. The recent visit of the trade delegation from Singapore speaks a volume about our potential to attract FDI.
The government has in the meantime taken up comprehensive initiatives to develop power and energy sectors. Government and private investments for the development of roads, highways, railways and bridges have increased as well. Ports are also becoming further sophisticated.
That's why foreign investors are getting encouraged to do more businesses with Bangladesh. Many 'sunset industries' from China will now rush towards Bangladesh due to the impending trade war and as well as rising cost of production of their export products. Bangladesh will have to cordially invite these investors.
The Bangladesh Investment Development Authority (BIDA) will have to work with more dynamism and stronger endeavors to make sure that its promise for 'One Stop' trade and investment facilitation services is actually meant so.
We will also have to make the most of social networks for promoting our goods worldwide. The campaign of green finance has revolutionized the garments sector of Bangladesh.
Bangladesh Bank has made a green fund for this purpose. Now the challenge is how fast Bangladesh Bank will actually be disbursing this low cost fund in foreign exchange to the 'would-be' green factory owners. Simultaneously, we must continue to remove anti-export bias which still persists to some extent. Above all these potentials will go in drains if we cannot ensure much desired financial stability.
The global best practices in running the financial sector more prudently must be kept in our minds while taking our economy from the current 'ignition' stage to more vibrant growth phase. At the same time we will have to remain focused on maintaining good governance in the financial sector and work more efficiently for further economic advancement of the nation.
The writer is an eminent
economist and former Governor of Bangladesh Bank.
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