Introduction

In early April 2018, the United States (US) government released a list of goods imported from China which would be imposed punitive tariffs i.e. taxes on imported goods and services. This measure was in response to China’s step to encourage foreign companies to pass over their technology to Chinese investors.

A trade war then ensued between these economic giants. This occurs when a country deems another’s trade policies as unfair to the country or the world at large. It can be understood better as one of the interfering measures by the government to limit free trade with another nation.

In the context of the US-China trade war, you will be wondering which country initially started implementing oppressive tariffs? Tracing back to 2017, Donald Trump raised the duties on China’s goods, which prior to that, were extremely competitive. According to The Economic Times, the initial low price had pushed US suppliers to complain of the unfairness. As a result, the summer story of the year happened.

Implications

Since 2010, the US has been in increasingly close trading relationship with China. Trade in goods between the two economic titans has seen an overall increase over the past 8 years. At the same time, it created a billion job opportunities for people from both lands.

Now that the trade war has already started, the businesses in US will very much be affected in several ways. (MoneyWatch) Firstly, it becomes more expensive to purchase raw materials imported from China due to the high tariffs by Trump. By the reciprocal tariffs in China, goods manufactured in the US become more expensive in China, a market which many American companies regard as their main revenue reservoir. If the war escalates, the situation might aggravate in the sense that China may impose stricter regulations for American companies based in China.

By the same token, countries which supplies manufacturing components to China and/or the US will be affected. Export-driven economies including Malaysia and Taiwan would certainly be severely “injured”. This is primarily due to the possible significant fall in exports. Further, the trade war is expected to drive down stock prices and increase borrowing costs. This, to a very large extent, is harmful to the free market which is the basis to stimulate the global economy. (European Central Bank)

While many would expect a great hurdle, Capital Economists recognised that countries like Japan, who rely on both evenly, would experience a small negative direct impact from the implementation of tariffs. Nevertheless, in the event that a war breaks out, fluctuations in stock market and currency exchange will still haunt the country.

Solutions

The trade war between the US and China obviously has both advantages and disadvantages for each and every country that is affected by these policies. Whether these protectionist strategies carried out by the two countries against each other should continue, is still being heatedly debated by economists and lawmakers worldwide.

The main reason why this trade war should be continued is that it benefits nations that directly trades with one of these countries in certain commodities. For example, Brazil and Argentina, which are both soybean exporters, will benefit from China’s new 25% tariff on American soybeans. This is because American soybean price will increase hence prompting China, which is the world’s biggest buyer of soybeans, to turn to other markets including South America for soybeans. Also, consumers and producers in China could respond to the hike in American soybeans price by switching to alternative of the commodity which includes palm oil. Therefore, palm oil-producing countries like Malaysia and Indonesia could see an increase in palm oil production and export. Tariffs set by China on pork and plane products from America could see other countries that export pork and planes benefitting- like Germany, Spain, Portugal and Russia for pork, and Europe for planes. Steel-exporting countries like Philippines will benefit if the US imposes tariff on steel and aluminium.

However, as much as the few countries mentioned above might benefit from the trade war, the drawback greatly outweighs the minimal advantages. For example, the US and China themselves will suffer a great loss with the new tariffs for they have to now spend time and effort to look for alternatives at a cheaper price, while facing a decrease of exports to one another, which might possibly cause a trade deficit. Many other countries will also face the same problems in their net exports. For instance, countries, such as Malaysia, South Korea, Taiwan and Vietnam, that export materials that is used in the production of goods in China, that is then exported to the US, will suffer a tremendous decrease in their revenue. Also, this trade war is a sign of increasing tension between the two biggest economies which raises an alarm in fear of a possible global economic crisis, which will ultimately cause virtually every country to suffer a meltdown.

It is clear that the drawbacks far outweigh the benefits of this trade war. If both the countries persists with their respective trade duties and tariffs, then the global economy will face an overall loss. Instead, both the US and China should agree to congregate and decide on a solution that benefits both their countries, as well as other nations involved.

Conclusion

All in all, the trade war which was started by the president of the US, Donald Trump, has indeed many implications to various parties, which includes the US itself, China, as well as other countries which might be affected by the war, both directly and indirectly. In fact, we have seen the pros and cons of the trade war and have concluded that although there might be positive outcomes, it might not be enough to offset the boon, be it in the short or long run. With that said, it is best for both the superpowers to come to terms and negotiate for what is best for the global economy.

References
  1. Irina Inanova (2018). Trade war with China could hurt these U.S. businesses most. [online] Available at: https://www.cbsnews.com/news/trade-war-with-china-u-s-businesses-most-at-risk/ [Accessed 14 June 2018].
  2. Investopedia (2018). Trade War. [online] Available at: https://www.investopedia.com/terms/t/trade-war.asp [Accessed 14 June 2018].
  3. Reuters (2018). Trade war fears already hurting the economy, ECB’s Coeure says. [online] Available at: https://uk.reuters.com/article/uk-ecb-policy-trade/trade-war-fears-already-hurting-the-economy-ecbs-coeure-says-idUKKCN1HD0VW [Accessed 14 June 2018].
  4. CNN Money (2018). How a US-China trade war could hurt (and help) others. [online] Available at: http://money.cnn.com/2018/04/10/news/economy/us-china-trade-war-fallout-countries/index.html [Accessed 14 June 2018]

 

Prepared by:

Researcher – Lee Yang Ler, Max Kong

Editor – Saras Rehathi Thurai Lingam

 

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US-China-Trade-War.pdf