US-China Trade War : SSB lecturrette

Every leader delivers great promises while they aspire for a higher position. To be the president of the most powerful country is a hard nut to crack. Donald Trump while campaigning for the election made a promise to make trade fairer for the US. But no one ever imagined that this would result in a trade war. Here, through this post, I will give an overall view of this tiff.

Let’s first understand the term Trade war and how does it start.

  • A TRADE WAR is when any nation imposes a tariff on imports and foreign countries retaliate with a similar form of trade protectionism. This would affect not only the countries directly involved but will also disturb the international trade.
  • A trade war may also begin when a nation attempts to protect and promote its domestic industry and create jobs. The focused areas are the Tariffs on the imports from its economic partners. This has only a short term advantage and hence prevailing the Law of Demand that “as the price increases, the demand decreases”. The increase of taxes on imports affects the market in a huge manner.
  • China has been a part of many trade wars in history. The famous one among them is The Opium War of the 18th century and now the US-China trade war. China and the US have embarked upon a full-scale trade war as both the countries lob threats of new trade tariffs on different products which include Aluminium, Steel, Electrical machinery, Machinery including computers, to name a few.

What happens in a trade war?

  • Trade war brings unintended consequences. But president Trump says that the trade wars are good! For example, the last time a trade war took place in the US during the Great Depression in the year 1930. The then US Congress enacted the Smoot-Hawley Tariff Act with the main goal of protecting US agriculture by taxing 20,000 imported goods. But, the impact tells a far greater story. The increase in US tariffs added economic strain to foreign countries during the depression. In a sign of disapproval, others retaliated and also increased their tariffs.. Sounds familiar with the present one!
  • Likewise, in the present context, the US in order to increase the internal trade and to stop the unfair transfers of American technology and intellectual property to China, has hiked the tariff on a series of items.
  • As per Trump’s perspective, this will make US-made products cheaper than imported ones. Besides, this would encourage consumers to buy American products. The idea behind this was to boost local business and to support the national economy.


How did it all start?

  • There is a significant part of Trump's administration that is worried about China’s technology ambitions. Both the countries are in the midst of an increasingly bitter trade war and neither side is backing down. Trump alleged that the trade between them is massively lopsided. For example, in the year 2017, US imported US$500 billion worth of goods from China but while in turn, China imported US$130 billion worth of goods from the US. Resulting in a US$375 billion trade deficit for the US.
  • On top of that, Trump accuses China of stealing US technology sharing the fact that Beijing requires foreign companies to share the intellectual property in exchange for access to the Chinese market. Certainly, no country would be so negligible in regards to their foreign trade policy. So, Trump's only choice of reply to deal with it was to reframe the tariffs on imported goods and making them a lot more expensive for the Chinese.
  • Initially, the basic things which were targetted were the Washing Machines and the solar panels. Progressively, the much more demanded products of steel and aluminium, aircraft parts, TV's, medical devices have been added to the ever-growing list of Chinese goods which face a 25% import tax in March 2018. Already, by then the US administration had announced a new list of 1,333 Chinese product categories that were to face 25% tariffs.
  • Even the traders of US have to pay a 25% tax when they import steel from the red marked countries and a 10% levy to buy aluminium from them. The US president said if China retaliates then Washington would impose fresh tariffs on $267bn worth of Chinese exports furtherly.


Who has been the distressed so far?

  • This trade spat had already left signs of damage to both the countries economies. Seemingly, the major victim of this war is the sector of Automobiles. The International Monetary Fund directs that the ascend of this tariff hikes and lows could shave 0.5% off the global economy.


China's reaction

  • China isn't just sitting back and taking it. It has retaliated its own tariffs in turn. Previously, China had gone blow for blow with the US on tariffs only of worth US$50 billion. But its response further had gone complicated as the time passed by.
  • American producers wanting to export to China, now have to pay 25% duties on a series of things ranging from soybeans and meat to offroad vehicles. Tax duties have also been increased on US fruits such as berries, grapes, apples which are China's major import. There's has been a threatened tariff on US$500 billion worth Chinese goods. While China has implemented levis on US$130 billion worth of American products.


How does it affect a common man?

  • Basically, Tariffs mean that the producers have to pay more and that resembles higher prices for consumers. But it's not just Chinese and American consumers were affected.
  • This dispute between the world's two biggest economies is disrupting the global supply chains mainly affecting the stock markets which had seen dips as a result of Beijing's and Washington’s tit-for-tat tariffs.


Impact on India

  • India can move swiftly and seize the opportunities. It is easier to export India's surplus agricultural products to China than manufacturing products. further, China would look for long term software partners to replace the US hegemony of technology companies and India's software industry is capable of graduating to a higher level. India can capture the Chinese commodity market vacated by US exports.
  • In fact, a study had analysed and identified a hundred products where India can replace US exports to China, which has a round figure of US$130 billion in the year 2018. This way, the economic ties between both the countries will strengthen up which would bring fruitful results eventually.


Advantages of trade war

  • As the imported goods would cost more, the demand of the substituting local goods would rise and hence their business grows, this would add employment for the American locals.

Backdrops of trade war

  • In a long run, trade war depresses the economic growth of not only the country but also the ones which are involved. The Steel and Aluminium tariffs had hurt the domestic industrial manufacturers that rely on this commodities as key raw materials for production.
  • Harley Davidson has responded to the EU's threat to impose the tariff on motorcycles saying it could have a significant impact on sales and customs. Some beer companies feel the same way.


Conclusion

Any step forward just to fulfil short term goals has no uses in the future. Many economists say this only shows that in trade wars, there are no winners!