The US-China Trade War: A Financial Adversity Of The 21st Century

Amidst geopolitical conflicts and economic tensions around the globe, the ‘x’ generation of the 21st century is faced with a seemingly unresolvable issue, one that is iconic to the founding values of this century – globalisation, multilateralism and international co-operation. The trade war between two global superpowers, the United States and China, has problematised the fabric of international trade and connectivity, thereby looming as an economic and financial threat over all nations of the world. Starting in March of 2018, the 16-month long trade war significantly hurt the economies of both parties involved, and of those caught in the cross-fire. Paula Meyers has rightly said, “Business is a battlefield.” In light of this statement, while this trade war commenced with ulterior political motives, trade and taxes became the perfect weaponry.

It all began with Donald Trump becoming the President of the United States. Since his election in 2016, the States developed an all-round mercantilist commercial policy, aiming to strengthen the US economy in a shut economic system, and leaving the world wanting more. Trump’s preoccupation with China, however, was limited to three barriers:

1) The threat that China’s increasing ambitions undermine the US’ position as a global superpower and its military strengths,

2) The trade imbalance of $378.6 billion in 2018 between the US and China (the former being in deficit), and

3) The Trump view that China’s trade vision and practices go against the World Trade Organisation (WTO)’s regulations, because technically under WTO, China is still a developing country and therefore, its markets should be very welcoming to imports from developed countries.

President Trump consistently emphasised that China is stealing jobs from the US, and engaging in unfair trade practices, something which even Saudi Arabia seemed to agree to. Not surprisingly in the game of geopolitics and geo-economics, the foundation of the trade war was also based on the fact that 67% of the US trade deficit in the world was caused due to imports from China. Adding on to this was China’s very aspiring “Make in China 2025” vision, one which aims to manufacture 100% of the products in the Chinese economy, and work towards making China the economic number 1 in the world in the next 30 years, by making the yuan currency value stronger than that of the US Dollar.

However, this vision also relied on the fact that China will allow other countries to trade in their nation, only once they reveal all of their trade secrets, and that China is constantly coercing its corporates to align their vision with the Communist Party (CCP)’s Make in China 2025 vision. The common consensus among US government officials is that a huge trade deficit between the US and China accounts for greater indebtedness for the US, something which the Trump government certainly doesn’t want. Not to forget, China owns US $1.13 trillion in US Treasury Bonds.

The US-China Trade Deficit (US Census)

The US-China Trade Deficit | Source © : US Census

Now, the task of tariffs is to act as a tax; an additional amount to be paid on top of the cost of exports. It is important to note here that the main items US imports from China are aluminium, steel, electrical machinery, furniture and of course, cheap labour, while China imports technical parts such as chips and soybeans from the US. Part of the task of a tariff is also to protect indigenous companies of a nation against market competition while also allowing this competition to enter the country at the cost of a tariff. And this is exactly what President Trump pursued in March of 2018. Realising the huge trade imbalance in US-China trade, on March 1st, 2018, he announced a 25% tariff on aluminium imports and 10% on that of steel, effective from March 15th, 2018. Moreover, Trump announced an additional import tax of $60 billion as “punishment” if China chose to retaliate, which it did, fortunately, or unfortunately. Not only this, but he also labelled China as a “currency manipulator”. Thus hitting a common weak spot, President Xi Jinping of China taxed the US imports of Soybean which is not just a major protein source for all of China, but the Soybean export from the US to China went from around 37.5 million metric tonnes in 2017 to negligible, in 2018.

For a long time, the States have benefited from the cheap labour provided by China, and have been on the gaining side of the trade imbalance. However, ironically, 60% of the exports from China to the US are products manufactured by American firms in China, who moved their production abroad to meet with high manufacturing demands and benefit from the low costs of input and labour. Walmart alone purchased US $18 Billion in products from China, making it China’s 8th largest trading partner. It is difficult to say if US claims on China’s unfair trade practices are meritable or not, based on the CCP’s history of heavily regulating its markets, and the fact that almost all nations in the world have a trade deficit with China. This scenario is also evident in the US ban on the Chinese company Huawei, the only tech giant in the world to have produced internationally networkable 5G.

While the CCP also has a history of city surveillance, media and communication blackouts, and imposing massive regulations on its tech firms, the 5G is a revolutionary technology that drastically enhances data analytics, automation, machine-to-machine connectivity and network speed, making it a game-changer in networks and telecommunications in the world. While an average 4G network can cater to a population of 2000 per square kilometre, a 5G network provides the benefits mentioned above to a population of about 2.6 million people per square kilometre. For wide-area networks, a 5G network can capacitate a traditional base station’s network service by 20 times, while keeping it 3 times smaller than 4G. Not to forget, just like the US trade sanctions on China, the Huawei ban has affected almost all nations across the world and has caused a worldwide state of “dilemma”.

The total tariffs applied by the US on Chinese companies exclusively total to approximately US $550 billion, while those applied by China on the States equal approximately US $185 billion. China redirected its state-owned firms to stop buying any agricultural products from the US. These measures have significantly disrupted the lives of American businesses and consumers. While the prices of cars, gadgets, furniture, beer and plane tickets, the agro-industry of America took a deep hit – China’s 25% tariff on Soybean and pork caused US agricultural exporters to suffer major losses, and the cost of soybean faced a ten-year low in the US markets.

Stressed by the tensions in international agricultural trade, the US farmers even plead the government to find alternative markets and work out possible solutions for the trade feud; solutions which do not involve a tit-for-tat with tariffs. While American steel industries suffered back when China heavily exported steel to the country, the hiked up prices of steel in America now is worse for the consumers. The Wall Street faced its worst day on 2nd August 2019, when the Dow plunged more than 750 points on the Stock Exchange. This was worsened by the other trade wars the US had going on with Mexico, Canada, Turkey and the European Union (EU).

While the US pork industry is losing $12 per animal due to Mexico’s retaliatory tariffs of 20% on American cheese, pork, steel, apples and potatoes, the EU threatened to heavily tax imports of Levi’s Jeans, Bourbon Whisky and Harley Davidson motorbikes from the US, when Trump declared plans to tax EU steel and aluminium imports. Basically, President Trump justified taxes on imported steel and aluminium by saying that they were a threat to the US economic security, and its two largest trading partners, China and Canada (respectively), were deeply upset. Subsequently, Canada began imposing tariffs worth US $12.6 billion on US goods from 30th June 2019, as retaliation for the Trump administration’s new taxes on Canadian steel and aluminium imported to the United States.

On the other hand, the American tariffs have hurt Chinese manufacturing, the industry suffering losses of about US $15 billion. China owns 1/3rd of the technological equipment production in the Asian region, and ever since the US tariffs were imposed, a significant chunk of manufacturers shifted their industries to parts of Singapore and Taiwan, two major competitors against China in the field of manufacturing tech parts. Amidst the ongoing trade war, the Shanghai Composite Index, the strongest indicator of China’s Stock Market competence, plummeted by approximately 18%. Moreover, the US sanctions are expected to cause considerable unemployment, especially in the East Coast of China.

The Many Trump Trade Wars (BBC)

The Many Trump Trade Wars | Source © : ​BBC Research

Under much international and market pressure, both the US and China began considering trade talks and negotiatory deals to make a truce. During the Argentina G20 Summit held on December 1 and 2, 2018, the US and China governments discussed plans for a ceasefire on the trade war, and a possible course of trade negotiations for making peace and solving the trade imbalance. Consequently, the US halted on increasing the tariffs from 10% to 25% on Chinese imports, while President Xi Jinping lifted tariffs from US cars and Auto parts and even purchased American soybean for three months. When negotiations broke down, tariffs were imposed again and more rigorously on soybean, technical equipment, steel and other products. China had also eased US auto parts tariffs on the sidelines of the Buenos Aires G20 Summit, which Jinping re-slapped in an announcement on September 23, 2019.

Through a large number of series of talks and negotiations, some chances of a truce are finally appearing in the news. When on 1st September 2019, the US government slapped the US $125 million in tariffs on Chinese goods, China launched its third complaint with the WTO against a sum total of US $300 million unfair trade taxes imposed by the States. As of then, the US was left with only 60 days to resolve the trade dispute, as per WTO guidelines. Then on 5th September this year, the two presidents held the 13th round of trade negotiations, in Washington, and agreed to work together to figure out practical solutions, following which on September 11, China released an exemption list for US products.

Another round of mid-level trade talks happened in the US on September 19th and 20th, following which the US also received a list exempting 400 Chinese goods from tariffs. Under the cease-fire scenario, existing tariffs and counter-tariffs on many of each other’s goods would remain in place, but no additional import taxes would take effect. This bought time for U.S. and Chinese officials to restart talks that stalled last month in September after 11 rounds of negotiations. Next, following a two-day meeting on October 10th and 11th this year in Washington DC, President Trump announced that negotiators from the US and China had reached a “Phase 1” agreement that will take several weeks to finalize. As part of the Phase 1 agreement, China will reportedly purchase US $40-50 billion in US agricultural products annually, strengthen intellectual property provisions, and issue new guidelines on how it manages its currency. The apparent measures for the truce indicate a pattern of talks, upon which both presidents have remarked that they will be following the path of friendliness now, and avoid using protectionism in trade deals.

It is difficult to say if free trade is the best solution to the problem, given the fact that openness in the economy has caused many nations to become poor, (India being an example), but openness in trade negotiation is need of the hour to purge some heat in the global trade environment. The US also wishes to strengthen cross-border relations with others it upset by empowering trade contacts and treaties, one of which is the North American Free Trade Agreement (NAFTA), signed among the US, Canada and Mexico. Today, both nations are in trade talks, hinting towards what Trump calls a full-blown trade agreement that would settle long-running disputes over tariffs, currency rates, technology sharing and intellectual property laws.

Trump-Jinping meeting on the G20 Sidelines (AP News)

Trump and Jinping meeting at the sidelines of the 2019 G20 Summit | Source © : A​P News

Analysts expect the US to continue to use non-tariff measures to push back against China. Restrictions on Chinese investment into the US, limits on the ability of US firms to export technology to China, and further pressure on Chinese companies are all recommended tools. “Non-tariff measures don’t get the attention from markets that tariffs do, partly because their impact is harder to quantify, but they can have far-reaching impact,” says Michael Hirson, Asia director at the consultancy firm Eurasia Group.

Steps to resolve the trade war may also involve strategic communications between two countries, ministerial dialogues, and formulating ways to resolve trade imbalances. As for China, the country faces a national issue that needs to be addressed. Firstly, China should save its sliding currency, Renminbi (RMB/ Yuan), which depreciated by almost 8% during the trade war months. The country is already facing a socially unstable economic trend of excessive household savings, and a further plummet in RMB can worsen the situation and devalue the currency greatly, creating a deflationary bubble. So as an immediate solution, the CCP can sell its foreign exchange reserves to maintain RMB value (currently, China owns the US $3.1 trillion in FER). Secondly, China needs to encourage citizens to invest more, consume more and save less. The nation must also establish a social safety system that enables the citizens to invest in safe, liquid assets such as market receivables and account securities, and not just maintain household savings.

The US preoccupation with China has continued for a long time. Now the question remains: What is it that the US wants? Is it market access, reform of intellectual property rights and forced technology transfer, improved ease of doing business in China or restructuring of the entire Chinese economy? Indeed, the path of the trade war has been uncertain, flummoxed by spanners in the working of the US government and China’s restless ambitions to be on top. The title of my paper is “The US-China Trade War: A Financial Adversity of the 21st Century,” which it is indeed. However, the scope of this war goes beyond economic and market motives, for it clearly is a power play – a play between two giants who want to be number one and in the process, they step on many others, hurt economies, and still have a need to think outside their thick skin.

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