The US-China trade war is a tale of two countries: the rising superpower pitted against the incumbent. As its name suggests, a trade war is a war in which several countries impose tariffs, or taxes on imports, to damage each other’s trade. While the key members are the US and China, the situation has impacted the global economy by raising prices and slowing consumption.
President Trump, aka “Tariff Man”, points to the trade deficit as the cause for the war. A trade deficit refers to the total value of impacts subtracted by the total value of exports. A high deficit implies that a country doesn’t produce all the products it needs and thus imports them. Trump believes that the main cause of the deficit is China, where the US received many of its imports from. He claims China has taken advantage of us by stripping away jobs, providing low prices that American companies can’t compete with, and committing intellectual property theft. By implementing tariffs, Trump hopes to persuade US companies to move production and jobs back home, boosting the domestic economy.
China: The Rising Superpower
So how did China become such a formidable partner? It all traces back to its admission to the World Trade Organization in 2001. As a developing country, China received concessions that allowed it to ramp up exports and lower prices for foreign consumers. Eventually, this lifted millions of Chinese out of poverty by creating jobs.
Furthermore, China rapidly advanced its technological sector, and companies such as Huawei achieved global recognition. This was another cause of the trade war; the US government claims Huawei committed intellectual property theft by giving the Chinese government technology to spy on the US. Another controversy regards foreign direct investment (FDI), or an investment in which an entity in one country owns a business in another country. China forbids foreign companies from entering certain business sectors (e.g. automotive industry) without giving significant rights to a domestic partner. This enables Chinese companies to manufacture products very similar to patented foreign ones.
While the formal trade war has gone on for just over a year, it really took root during January of 2018. Trump established ‘global safeguard tariffs’ of a 30% tariff on solar panel imports and a 20% tariff on washing machines. In the spring and summer of the same year, the US passed tariffs on steel (25%) and aluminum (10%). China promptly retaliated with tariffs on fruit, wine, pork, steel, and aluminum (15-25%).
July 6th marked the official start of the war, with both sides instituting China-US exclusive tariffs (25%) on agricultural goods, automobiles, and aquatic products. Five months later, on December 2nd, the two sides reached a temporary truce for 90 days. After the 2018 G20 Summit in Buenos Aires, the tension eased as the sides decided to suspend tariff hikes and hold trade talks.
In early 2019, China also agreed to purchase more US soybeans and restrict Fentanyl production and distribution. However, by May, Trump had yet again tweeted about additional tariffs of 10-25%. After he followed through on his threat, China responded by increasing tariffs on American meat, vegetables, and furniture. Within a month, China had also hiked up all previous tariffs by either 5-15%. By June of 2019, both sides had, again, come to a temporary truce. As a signal of peace, the Office of the US Trade Representative (USTR) passed limited exemptions on some Chinese products. A month later, we saw Trump threaten and implement more tariffs on electronics and clothing (10%). Subsequently, Shanghai talks fell through, similar to all previous talks.
On August 4th, US stocks hit a record low for 2019. In particular, the S&P 500 Index plunged 3% over $700 billion was wiped from the value of U.S. equities. In other news, the yield on the 10-year Treasury note fell to a value we haven’t seen since 2016, much before the trade war took place. The Treasury yield is the return on investment (the ratio between profit and cost of investment) (%) on the government’s debt obligations to individuals and businesses. It can serve as an indicator of how investors feel about the current economy as lower yields suggest pessimism.
As for China, the yuan dove beyond 7 per dollar. This is something we haven’t seen since the 2008 financial crisis. We say “beyond” because the larger the ratio is between the two currencies, the weaker the former is because you can buy less for a certain amount of that currency. This is because currency fluctuates. As a result, the Chinese government requested that state-owned businesses halt purchases of US crops. In response to the tumble of the yuan, Trump tweeted that China committed “currency manipulation” and that the Federal Reserve, the US central bank, should continue to lower rates.
On August 6th, China stabilized the yuan in two ways. The central bank set the daily currency fixing stronger than expected, and it began to sell yuan-denominated bonds in Hong Kong.
As of the day I’m writing this, the total US tariffs on Chinese goods are $250 billion and the total Chinese tariffs on US goods are $110 billion.
Many prominent Chinese and American politicians have been embroiled in the conflict. Despite this, they’ve yet to find enough common ground to hold a steady truce. August of 2018 marked the first time the two countries sent representatives to talk. Several times, talks have actually been cancelled due to poor relations and escalating tensions. By November, the discussions had transitioned to US Treasury Secretary Steve Mnuchin and Chinese Vice Premier Liu He. While at certain times talks seemed to be promising, they often fell through in less than a month. Even when Xi Jinping himself met with top US representatives, a simple tweet could ruin the entire deal. Most recently, the trade talks on July 30th and 31st closed with an agreement on further discussions in September.
Who The Trade War Affects
Everyone, at some level, has felt the impacts of the trade war. Although companies, who are the importers, are the first to feel the effects of high tariffs, they pass on the burden to a wholesaler or a retailer. This eventually impacts the consumer. In China specifically, companies might move factories out of the country to avoid the tariffs. As a result, Chinese workers lose traditionally stable jobs. As for America, farmers are hurt when there is no market for their products because China doesn’t want to pay the import price. And on a consumer level, prices tend to skyrocket. According to the Tax Foundation, the most recent tariffs will cost an average American household $350/year in addition to the current $850/year.
No End in Sight
So is the trade war a success? While the reception is mixed, overall, most economics agree that the trade war has widened the trade deficit. This is achieving the opposite of what it was supposed to. By hiking up tariffs, both sides have contributed to rising prices, decreasing consumption, and a slowing global economy. Bloomberg Economics finds that, based on 25% tariffs on all products, the world economy could lose $1.2 trillion of output by 2021. This happens when high tariffs and low demand incentivize companies and farmers to produce less. But regardless of what the future entails and who ultimately “wins the war”, China has shown that when it’s backed into a corner, it pushes back. Both sides have many hardliners among their negotiators, indicating that neither side will yield without a favorable deal.