Running Head: TRADE WAR BETWEEN THE US & CHINA

Trade War Between the US and China

Thuy T. Nguyen

National University

Trade War History

 Historically, trade wars are not a new occurrence. In the 17th century, the colonial states

fought between themselves to trade with colonies overseas. In the 19th century, the British

empire fought with China over the opium wars. In 1930, the Smoot-Hawley Tariff was enacted

to protect American farmers that had suffered from the Dust Bowl. This tariff increased the

import duties by almost 40% which caused countries to retaliate. This was the start of a domino

effect which lead to the decrease of international trade by 65%, which increased food prices, then

turned into a recession and then eventually a depression. In addition, it contributed to the start of

WWII (Amadeo, K., 2019).

Evolution of China & U.S. relationship

In 1979, the U.S. and China signed a bilateral trade agreement. This ignited the rapid

growth of trade between the two powerful nations. In less than 40 years, the imports and exports

astronomically increased from $4 billion in 1979 to over $600 billion in 2017 (Nagashybayeva,

2019). Between 2000 and 2005, US imports from China rose from $100 billion to $243 billion

Nagashybayeva, 2019).

Since that time, their relationship has evolved in many ways. Not only does China have

the third-largest merchandise export market, but it has changed from labor-intensive good to

more capital intensive. It is now one of the U.S.’s major suppliers of advanced technology

products. In addition, China is the largest holder of U.S. Treasury securities.

China’s Astronomical Growth

Since China joined the WTO in 2001, U.S. trade with China has increased from $125

billion to over $700 billion in 2017. Meanwhile, China’s economy has quadrupled in size, from

the fourth largest economy in 2001 to the world’s second largest today. In addition, the world’s
largest middle class now lives in China, four of the world’s top 10 banks are Chinese, including

the first and second largest banks , and China has the largest e-commerce market (Meltzer,

2019).

Issues with China

Since early 2018, the U.S. trade deficit has been $419 billion, with U.S. exporting $120

billion in goods and only importing $539 billion of goods. The trade imbalance is primarily due

to the lack of reciprocity in terms of tariffs, market access and investment. (Sardova, 2019).

There has been a lot of blame on China for this deficit, but the validity remains questionable.

There is no doubt, however, that there have been many unresolved issues that impacted the

bilateral trade flow. For instance, China has intentionally kept its currency undervalued for

numerous years. This has enabled Chinese exports to become more competitive, made imports
less competitive, and has attracted foreign investment. This has been one of the major factors

behind China's rapid economic growth.

The Chinese government argued that the competitiveness of Chinese products comes

from low labor costs rather than from the exchange rate. Recently, however, it has moved to a

more market-based currency rate. In addition, their continued violation of their WTO

obligations, and failure to protect U.S. intellectual property rights have also been a source of

much conflict. China's foreign reserves continue to mount and its money supply has

skyrocketed. Without a revaluation, these increases may lead to overheating of the economy and

may fuel inflation.

“Made in China 2025” program

But the most threatening policy in Trump’s perspective was probably when China

promoted the “Made in China 2025” program. Initiated in 2015, the intent was to become a

major competitor in advanced manufacturing, transform the country into a high‐tech power,

foster economic growth and raise incomes. They wanted to lift the country’s economy to higher

value, by adding manufacturing sectors such as robotics, aerospace, and energy‐saving

vehicles.

This policy targets 10 strategic industries, including advanced information technology,

automated machine tools and robotics, aviation and spaceflight equipment, maritime engineering

equipment and high-tech vessels, advanced rail transit equipment, new energy vehicles, power

equipment, farm machinery, new materials, biopharmaceuticals, and advanced medical devices

This program involves government subsidies, a lot of research and innovation

investments, and targets for local manufacturing content. It also builds on earlier
government policies that encouraged or required foreign businesses that wanted access to the

Chinese market to enter into joint ventures with, and to transfer technology to domestic firms.

Chinese companies have a right to compete with US companies and succeed in any

sector, including in high-tech, but they do not have a right to a transfer of American technology.

Any technology transfer from the U.S. states must come through open source or voluntary

commercial agreements.

However, the American government believes that this initiative will enable Chinese

companies to unfairly compete and dominate over strategic industries, especially food,

fuel, medicine, and semiconductors (Sardona). The 25% tariff on “high‐tech” imports from

China will harm the competitiveness of US’s high‐end manufacturers across various

sectors.
Trade War

Even before he was elected, Trump had promised to change many trade agreements. In

March, 2018, Trump initiated the trade war by threatening to impose 25 percent of tariff on steel

imports and 10 percent on aluminum and establishing tariffs on approximately 1,300 Chinese

products, worth about $50 billion. He also threatened a large fine over alleged intellectual

property (IP) theft and significant tariffs on $500 billion worth of Chinese products such as steel

and soy (Chen 2019).

 To retaliate, the following month, China imposed tariffs on approximately $3 billion of

US exports to China, including pork, fruit, and steel pipes. China hit back with a plan to impose

a 25 percent tariff on 106 US products worth $50 billion, including soybeans and Boeing planes

(Posin 2019). Throughout the next 1 1/2 years, China would retaliate and the two super

countries would continue to threaten each other on all kinds of tariffs.

 There are multiple actions that China can pursue to retaliate. For example, they can stop

buying US Treasury or sell off its holding. This would be a huge impact since China owned

about approximately $1 trillion bonds in 2017. They could also continue to devalue the Yuan,

which would be the most effective way to offset the impact of tariffs. Third, China could make

life harder for American companies, by encouraging people to not travel to the US for tourism

and to quit buying American goods. They have already talked about the crime in the US and

have discouraged and limited travel. Fourth, they can isolate the US by China by trading with

Europe or Canada. China could work out arrangements with remaining 11 countries of the Trans‐

Pacific partnership, which Trump pulled out of in 2017, and reduce or eliminate tariffs among

them.

China is not critically dependent on the US market, which accounts for just 18 per cent of

China’s exports (Sardana, 2019). However, China as compromised and has agreed on opening

up particular service sectors, lowering investment restrictions, and offering to buy more

American agricultural and energy products (Sardova). The US has asked them to reduce the

trade deficit by $200 billion and cut tariffs on U.S. goods by 2020, end subsidies to tech

companies, stop stealing U.S. intellectual property, and become open to more U.S. investment.

Impact on American Economy

A direct consequence of the Trump trade war is a faster and wider economic integration

outside of the US, accelerating the shift of global economic center of gravity toward Asia. A

trade war impacts a country’s economy in different ways. In the short run, it gives a competitive

advantage to domestic producers so that prices would be lower by comparison, so more orders

from local customers, so as to add jobs (Amadeo 2019). In the long run it costs jobs, depresses
economic growth for all countries involved, triggers inflation due to increase the prices of

imports.

First, the new tariffs could lead to rising inflation expectations. Strong economic and

employment growth, as well as rising oil prices, have already raised inflation expectations.

Second, it could signal the end of a long bull market and booming US economy. American

consumers may pay more for the products they buy. Third, it may lead to Chinese retaliation

against industries in the United States, such as agriculture, automobiles, and airplanes.

There has been job creation in some sectors such as agriculture and services, and job losses in the

manufacturing sectors.

Experts around the world have given different opinions. The IMF Trump trade war could

cost the global economy $430 billion, risked lowering global growth by 0.5% by 2020. The

Federal Reserve estimates Trump's tariffs are costing the average American household $1,245 a

year. This includes higher prices and lost economic growth. In August 2019, Goldman Sachs

warned that the trade war could spark a recession. It's already lowered gross domestic product by

0.6%. Oxford Economics predicted that it could cost the global economy $800 billion in reduced

trade.

Impact on other Countries.

Although the impact of this trade war is globally impacted, India will be effected in the

areas of trade, economy and geopolitics. In trade, India will benefit as levies are placed by China

on products like soybean originating from the US while these have been brought down to zero

percent for import from India. India may gain some business in the supply of garments, and

gems and jewellery. In terms of economy, within the US domestic economy, higher tariffs on
a range of imported products escalate the threat of higher consumer prices. This could force

the Federal Reserve to increase the interest rates faster than it would have done on its own. In

that case, the Rupee may come under further stress. In terms of geopolitics, China will seek

alliance with India so that India may seek to reduce its own imbalance trade vis‐à‐vis China.

Conclusion

In conclusion, when China joined the World Trade Organization (WTO) in 2001, they

pledged to further liberalize their trade regime and to follow global trade rules. It is controversial

as to whether or not Chinese economic policies are immoral and illegal according to IMF and

WTO rules. The debate continues.

In 2004, the trade deficit with China accounted for only 23% of the sum of total U.S.

bilateral trade deficits, indicating that it is not caused by the exchange rate policy of one country,

but rather the shortfall between U.S. saving and investment (Nagashybayeva, 2019). Most

experts are urging China's policymakers to opening up more of the financial sector, to allow

more foreign participation, lift its capital control and adopt a free-floated exchange rate. As the

world's top-two countries in terms of energy consumption, net oil imports, and carbon emissions,

as well as gross domestic product (GDP) and manufacturing, the only agreed upon fact is that

China and the US need to come to an agreement that will minimize global effects.

China and the US’s relationship has been mutually beneficial up until recently. What

used to be perceived as a partner is now seen as a competitor. International trade increases

economic productivity, reallocating jobs to more efficient industries. The debate of the pros and

cons of trade war continues. Those in favor of protectionism argue that it protects domestic

business from unfair competition, increases the demand for domestic products, thereby

promoting local jobs, improving trade deficits, and punishing countries with unethical trade
policies. On the other hand, those against protectionism argue that it increases costs and

inflation, slows economic growth, and hurts the relationships between countries (Chen 2019).
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https://www.bbc.com/news/business-45899310

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Gulnar Nagashybayeva, 2019. U.S. Trade with China: Selected Resources

Jiming, H., 2018. https://www.piie.com/system/files/documents/ha20180611ppt.pdf

Meltzer, J., 2019. https://www.brookings.edu/wp-

content/uploads/2019/02/us_china_economic_relationship.pdf

Posen, A., 2019. https://www.piie.com/publications/piie-briefings/us-china-economic-relations-

conflict-solutions-part-ii

Sardana, M.M.K., 2019. Causes and Consequences of the Escalating Trade War between the

US and China. http://isid.org.in/pdf/DN1805.pdf