How USA-China Economic War Affects Developing Countries of Asia and Georgia
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Economic War
The first phase of the mentioned trade conflict started in the first quarter of 2018. On January 22 the USA imposed a 20% tariff on imports of big washing machines, 30% tariff on solar panels. On March 23, the USA set a 25% tariff on coal imports and 10% tariff on aluminum imports. In whole, the new tariffs applied to products of 58.3 billion USD and an essential strike was blown to Canada, EU, Mexico, Russian Federation and developing countries of Asia. According to the mentioned indicators, primary tariffs made unimportant effect on Asian countries, because these developing countries had structured only 0.1% in the regional exports.
The conflict sharpened and became of bilateral character in the 2nd and 3rd quarters of 2018, when the USA introduced bigger tariffs against Chinese imports and this process proceeded in two phases. The sanctions applied to products of about 50 billion USD. The People’s Republic of China immediately took a retaliatory measure and sanctioned the same volume of USA imports.
On September 24 the Asian party was subjected to extra strike in the amount of 200 billion USD following the 10% tariff with the outlook of expanding to 25% in January 2019. China applied countermeasure on the same day and imposed 5%-10% tariffs on products of about 60 billion USD.
This bilateral conflict is a major problem for not only the specific region, but also the whole world, because the People’s Republic of China and the USA shape two major hubs from the world’s 3 major knots and they are tightly interconnected through such important sectors as electronics and high-technology equipment.
How the Trade War Affects Developing Economies of Asia
There are a lot of considerations and expectations that the USA-China economic war may inflict accumulative damage to other countries too. The Trade War goes on. At the same time, both countries expand trade relations with various countries of the world. Therefore, outcomes of this conflict may bring reverse effects amid the growing economic interdependency.
Free trade agreements are concluded on Asia-Pacific Trade Agreement (APTA), Trans-Pacific Partnership (TPP) and Regional Comprehensive Economic Partnership (RCEP) that shape the region’s major trade block jointly with China and India. We should also mention the growing role of EU and free trade agreements with such countries as Japan, Singapore and Georgia, whilst EU maintains the zero tariffs regime with the USA.
According to experts, there are several scenarios for the developing economies of Asia amid the trade war:
- Direct effect – influence on the sanctioned products. Customers in the countries that have imposed tariffs will have to pay higher prices per unit. As a result, the demand for specific products from the target countries will decline.
- Indirect impact – makes influence on domestic and international supply chain. Manufacturers have to buy fewer products, because, as a result of tariffs, the customers from the sanctions-imposing countries buy fewer products from suppliers on both domestic and international formats. As a result, this process generates the Butterfly Effect on domestic and global supply chains.
- It is possible to readdress trade to suppliers, but indirectly, and the introduced tariffs make essential impact on this. This way may be harmless and the countries with no direct engagement in the trade conflict may get benefits from this process. Especially, the countries that manufacture “target” goods, but are exempted from tariffs, have the expansion opportunities to satisfy the growing demand. This process will bring benefits also to the countries, which manage continue production for a long period amid the trade conflict.
Whether the Trade Conflict May Affect Georgia
What outcomes should we expect the USA-China trade to bring? – This is a natural and legitimate question based on Georgia’s geopolitical location. First of all, we should analyze what strategic interest these major economies may have in Georgia. The China-USA confrontation is of economic character, but for Georgia geopolitical aspects and details are of vital importance, because the collision of interests in this specific direction may make Georgia take economically undesirable decisions.
Geopolitical aspects: The USA-Georgia relations are based on long strategic partnership that was cemented through the Strategic Partnership Charter initiated by the George Bush administration after the August 8, 2008 war. This charter was institutionalized under the administration of Barack Obama and was enhanced by Mike Pence, the vice president of the Trump Administration, as part of his official visit to Georgia, after which Donald Trump signed the Consolidated Appropriations Act. Thus, Georgia received a signal on non-recognition of the occupied territories. Under this act, the USA assumed the obligation not to provide financial assistance to the mentioned regions. The NATO-Georgia relations represented another fundamental aspect with a long “Reliable Partnership”, which is considered to be a certain deterrent factor of Russian expansion in the region, jointly with its development phases.
The USA-China collision of interests and the strategic importance of Georgia, as “a corridor” are of crucial importance for the Black Sea security issues. Chinese interests conflict with the USA interest in many directions.
China considers Georgia as a country for strategic partnership. This is not expressed in major trade activities of China, but this partnership is represented in such positive aspects as: faster transportation with desirable temperature conditions. The key hazard in terms of geopolitical aspects may arise if one of the conflicting parties asks Georgia to take a political decision on behalf of one of the parties. This process will not be painless in either closed or open format. There is a little probability of similar scenarios, but we should take into account and analyze any variant. And the USA statement regarding the Anaklia deepwater seaport proves this consideration. Mike Pompeo, the US Secretary of State released this statement and expressed hopes that Georgia would finish the project without involvement of Russia and China for ensuring trade development perspectives.
Economic Aspect: Georgia has acquired essential economic importance for the USA and the People’s Republic of China. As to transportation aspects: we should mention the New Silk Road and East-West Trade Corridor as inseparable parts for transporting goods between Europe and Asia, in terms of both military and commerce issues.
Georgia is one of the key players in the mentioned corridor. We should also stress its importance as the route for transporting energy carriers from Caspian Region to western countries.
In terms of trade, it is interesting whether the USA-China conflict will influence the country with 12 billion GEL state budget. And there is no clear answer to this question. The Butterfly Effect is a well-known concept in international politics, under which changes in one country transforms “weather” in another country and this effect is directly related to economic interdependence.
In this respect, the People’s Republic of China holds a very important mechanism in relation to Georgia. On January 1, 2018, Georgia became the first country in the region that signed an agreement on deep and comprehensive trade relations with China. This document introduced tariff-free regime for such products as wines, mineral waters, honey, tea, fruits, vegetables and agriculture products. Thus, this agreement has brought huge opportunities for Georgia and unlocked gates to the market with 1.4 billion customers, under tax-free regime. Meanwhile, the USA-Georgia economic relations have not reached this phase, but negotiations are underway on analogical agreement. In this respect we should outline what interests Georgia has, besides political security aspects – This is economic safety and exports growth plans to boost profits and benefits for the country. It is noteworthy that Georgia ranks only 117th among the world’s exporter economies and 63rd as the most complex economy under the World’s Economic Complexity Index.
As part of economic partnership with China, Georgia manages to essentially grow exports indicators and this country is recorded among Georgia’s major trade partners with 209 million USD after Russia (403 million USD), Bulgaria (326 million USD) and Turkey (229 million USD).
Based on the mentioned relations and interdependence, we can conclude that at this stage Georgia essentially depends on the USA in terms of military and geopolitical issues, because this country is considered as a key guarantor of regional security and this country sets huge perspectives for boosting Georgia’s economic potential.
As to the People’s republic of China, this country should be considered rather as an economic partner, where Georgia has obtained a direct access to the huge market. China is a fundamental factor for boosting transportation opportunities. At the same time, regional instability around its trade partner is not acceptable for China. Despite a little probability, if the economic conflict between the two super powers makes Georgia take decision on behalf of either the USA or China, the country will face the following dilemma: It will have to choose between economic safety and political security. Georgia will have to choose between economic growth and regional stability. If the trade war sharpens further, as a rule, countries are expected to shape economic blocks jointly with their partners. In this case major economies will “find the time” for Georgia and this country will naturally to take radical decisions. The mentioned scenario is not expected to take place in reality and at this stage Georgia does not face specific threats, but we should realize the core and essence of the problem and prepare due mechanisms to show economic and political readiness for presumable escalation.
Megi Kavtaradze, Analyst for Association of Young Financiers and Businessmen (AYFB)