The trade war between the United States and China seemed to be all you heard about in 2018 and the beginning of 2019. Although it has taken a backseat to several more pressing issues that have come up recently, this figurative war is still raging. As a trade war between the world’s two largest economies will have global repercussions, it’s important to stay cognizant of the status quo.
This article will bring you up-to-date on where things stand between the United States and China as well as what the future could hold for both countries.
What Is a Trade War?
A trade war, just like a cold war, is much more of a figurative war than a literal one. There are no bullets flying or tanks on the ground. Instead, a trade war is defined as one country retaliating against another by raising import tariffs or placing other restrictions on the other country’s goods/services. This may not sound as dramatic as battleground warfare but a trade war can still have major repercussions. This is particularly true when the trade war is between the world’s two largest economies.
Trade wars revolve around tariffs. A tariff is just a tax on an imported good and they are usually implemented by a country in hopes of protecting domestic production and jobs. The thinking is to put a tax on foreign goods so that domestic goods will seem cheaper by comparison. However, many economists believe that they ultimately hurt domestic consumers instead of protecting them.
A tariff example:
To use a real-life and relevant example, on March 1, 2018, President Trump announced that he would impose a 25% tariff on steel imports and a 10% tariff on aluminum. His motivation for doing this was to hopefully add U.S. manufacturing jobs and protect U.S. companies. However, the tariff has and will raise costs for steel users (such as automakers) because they now have to pay more for their raw materials. It will now cost automakers more to produce each car because they have to pay more for steel. To compensate for this increased expense, they will raise the prices of the cars that they sell. This means that ultimately the American consumer will end up paying more when purchasing a vehicle.
When people say that consumers end up paying for tariffs, this is what they mean. The government artificially increases the cost of imports and the company raises prices to make up for it.
Let’s take a look at a few more events from the recent trade war between the United States and China.
A Brief History of Sino-American Tensions
If you’ve been keeping up with some of our other posts, you probably know that the United States and Chinese economies are very closely intertwined.
➢ The United States is currently the world’s top economy by GDP while China sits at #2
➢ China is the largest U.S. merchandise trading partner
➢ China is the largest U.S. source of imports
➢ China is the third-largest U.S. export market
➢ China is also the largest foreign holder of U.S. Treasury securities (which help fund the federal debt and keep the U.S. interest rate low)
It’s safe to say that these two countries dominate the global economy. However, both rely heavily on each other. Lots of China’s growth over the past couple of decades has been fueled by American consumers and corporations. Additionally, China is generally the most meaningful foreign market for American corporations as they look to expand.
Let’s take a timeline at the history since the conflict started.
To date, the United States has delivered 4 rounds of tariffs. Three rounds in 2018 and a fourth on in September of 2019.
Trade War Timeline
➢ The U.S. declares $34 billion worth of tariffs on China. China responds with the same amount on U.S. goods
➢ The U.S. declares another $16 billion worth of tariffs on China and China responds with the same amount
➢ The U.S. declares tariffs on $200 billion worth of Chinese goods, taxed at 10%. China responds by declaring tariffs on $60 billion worth of U.S. good, also taxed at 10%
➢ The U.S. declares tariffs on another $200 billion worth of Chinese goods, this time taxed at 25%
➢ China declares tariffs on $60 billion worth of U.S. goods, also taxed at 25%
So far in the trade war, the US has imposed tariffs on more than $360 billion (£268bn) of Chinese goods, and China has responded with tariffs on more than $110 billion of US products. In addition to taxes, the trade war has ascended into a bit of a power struggle between both countries.
Implications for the United States
The United States has quite a bit to gain from a solid trade relationship with China. China has the world’s largest population and over the next decade, it is projected that they will have more middle-class consumers than the entire population of the United States. This means that there are plenty of opportunities for American companies to sell products to Chinese consumers and this sector will only continue to grow.
Additionally, there are more benefits to the U.S. than just the size of the Chinese population than people realize. China is often labeled as a boogeyman for stealing jobs away from the U.S. (because American companies choose to produce their goods on Chinese soil instead of the U.S.). However, data shows that U.S. exports to China supports approximately 1.8 million jobs in industries such as agriculture, services, and capital goods. While the U.S. may lose low-paying manufacturing jobs, it may be adding higher-level jobs at the same time.
The U.S. definitely does not want to isolate China and risk losing them as a trading ally. As with most situations that have a global impact, the U.S. should seek to find a mutually beneficial outcome. They should take a comprehensive approach to the negotiations and focus on finding market-orientated solutions which strengthen the global trading system and rule of law.
Implications for China
When it comes to trade, the U.S. dominates the world. The overwhelming majority of the world’s largest companies are U.S. companies, including many young tech companies like Facebook, Amazon, Google, and Netflix. If China draws the ire of the U.S. government then they might be inclined to implement policies that discourage U.S. companies from investing in China. Donald Trump has already “hereby ordered” companies to seek new places to do business via Twitter. Although a tweet doesn’t carry much weight, it could be bad news for China if tweets turn into actual legislature.
China has long been accused of unfair trade practices as well as using currency manipulation to encourage foreign investment. Currency manipulation is a tactic where China sets their currency cheaper against the U.S. dollar. This makes it cheaper and more attractive for U.S. entities to invest in China because their money goes further. China is able to do this because the government sets the currency rate, instead of it being determined by a free market.
If tensions continue to escalate between the two countries, China will be in a very bad spot since so much of their growth is fueled by the United States.
The trade war dominated the news cycle in 2018 and 2019 mainly due to Donald Trump’s vocalness over China in his tweets. It seemed like every week there was a new update in the trade war or a jab from one side to the other. However, 2020 has so far given both sides much bigger problems to deal with than imposing tariffs.
The Coronavirus Pandemic
The epidemic sprung up in China in mid-December and made its way to the U.S. around mid-February.
Since then, both governments have been scrambling to provide the proper response to handle the implications of the disease from both a health and economic standpoint. The coronavirus essentially lead to a shutdown of the global economy. Non-essential businesses were forced to close to protect populations, supply lines were disrupted, and global trade ground to a halt. Since global trade wasn’t really happening anyway, it’s rather pointless to discuss a trade war.
Midway through 2020, it appears as though we at on the tail end of the coronavirus pandemic (or at least the first wave) and global trade will hopefully be resuming in some capacity over the following months. When things start to regain speed again, the future of the trade war (whether it escalates or de-escalates) will most likely be a topic that comes front and center.
The United States has a presidential election coming up in November. This will have big implications on the future of the Sino-American trade relationship. Donald Trump has thus far had no problem launching into a tariff war with China and if he’s given another 4 years, it is likely that he will continue to stay on the offensive. However, if democratic candidate Joe Biden is voted into office then he will likely bring his own approach to handling the relationship. Historically, democratic presidents are much more open to negotiations and keeping trade lines peaceful. Read more on that here.
We hope that you’ve found this article valuable when it comes to understanding the trade war between the U.S. and China as well as what the implications are for both countries. If you’re interested in reading more articles about China, please visit our “New Here” section or for a more personalized approach, our consulting services are at your disposal.