Largest Trade War in Economic History!

In one of his tweets, Trump mentioned that Trade wars are good and
easy to win. He definitely did not consider the consequences. And if
economies as big as the US and China are butting heads, we might see
the beginning of a new world order.

A trade war is an economic conflict resulting from extreme

protectionism in which states raise or create tariffs or other trade
barriers against each other in response to trade barriers created by the
other party. Increased protection causes both nations’ output
compositions to move towards their autarky (self-sufficient) position.

When was the last time the US had a trade war?

The last trade war was in the 1930s, and intensified the effects of the
Great Depression, according to economists and trade experts. It started
after President Herbert Hoover signed the Smoot Hawley Tariff Act into
law in 1930, which raised tariffs on more than 20,000 imported goods.

It had a catastrophic effect back then when the World was going through
the Great Depression. US imports decreased 66% from $4.4 billion
(1929) to $1.5 billion (1933), and exports decreased 61% from $5.4
billion to $2.1 billion. GNP fell from $103.1 billion in 1929 to $75.8
billion in 1931 and bottomed out at $55.6 billion in 1933. The world
trade decreased by 66% between 1929 and 1934. And there were no signs
of improvement even after the enactment of the Smoot-Hawley Tariff as
Unemployment which was at 8% in 1930, jumped to 16% in 1931, and
25% in 1932–33. It was not until World War II, during which "the
American economy expanded at an unprecedented rate
A Brief on US-China Trade
In the year 2000, the trade deficit of US with China was around $83
billion which significantly rose to $162 billion in 2004 and $268 billion
in 2008. China is the major trading partner of US accounts for 15.6% of
the total trade and 21.6% of its overall imports, as of the year 2017. Last
year trade deficit with China spiraled to $375 billion, which accounts for
almost 50% of its total trade deficit ($795 billion).

While Chinese exports to US majorly include Electronic Equipment

($150 billion), Machinery ($112 billion), Furniture ($35 billion), Toys
and Games ($27 billion), plastics, iron and steel products, vehicles,
footwear, clothing, etc., Chinese imports from the US include Aircraft
($16 billion), Vehicles, Oil Seed, Machinery and Electronic Equipment
(all of them amounting to $13 billion), mineral and fuels, wood pulp, etc.
There isn’t much difference in the nature of goods being exported to each
country. However, a stark difference can be seen in the volume of
exports to the US when compared to China.

Nature of Chinese Barriers

For starting a business, the World Bank ranked China 127th, reporting
that starting a business requires at least 11 procedures in Shanghai and
Beijing that average more than 30 days to complete. In many instances
Chinese Government condition approvals on a foreign enterprise’s
agreement to transfer technology; conduct research and development in
China; satisfy performance requirements relating to exportation or the
use of local content. It pursues industrial policies that seek to limit
market access for imported goods, foreign manufacturers, and foreign
services providers while offering substantial government guidance,
resources, and regulatory support to Chinese industries.

In 2012, the WTO ruled China was discriminating against foreign

payment card companies, and despite pledging last year to give “full and
prompt market access” to U.S. payment network operators, no U.S. firm
has yet been granted a license. In the Entertainment Sector, China has a
strict quota system for imported movies, limiting the number allowed to
be shown on domestic cinema screens through the scheme to 34 each
year. Similarly, for Railways, China requires rail equipment suppliers to
its domestic train networks to have at least 70% of their supply chain is
in China. Tesla Inc chief executive Elon Musk said on Twitter earlier this
month that Chinese trade barriers created an unfair playing field and
that it was “like competing in an Olympic race wearing lead shoes.”
China imposes a 25% duty on imported vehicles, versus a 2.5% import
tax in the United States.

Trade War 2018!

With rising deficits and too many Chinese restrictions on US Imports,
there was a drastic impact on the US Exports and that led to $3.2 trillion
trade deficit with China over the past 10 years cumulatively. Because of
this which US has been continuously asking China to curb restrictions
and make way for US Businesses.

Continuing with its previous promises, Trump Government imposed

25% tariffs on $34 billion of Chinese imports in July and $16 billion in
August. To which China reciprocated with retaliatory tariffs on $50
billion of goods.

Since there was retaliation instead of continued efforts for the trade
talks, US further imposed additional tariffs of 10% on $200 billion worth
of Chinese imports starting from September 24. Starting January 1,
2019, the level of the additional tariffs will increase to 25%. In line with
the tit-for-tat policy, China said it will institute new tariffs on U.S. goods
worth $60 billion on Sept. 24. Because of this approach, Trump has
ultimately threatened tariffs on the remaining $267 billion of imports
from China.
Aftermaths of Trade War
Even after all these tariffs, there has been an increase in the US import
volumes, a growth of 13% YOY in the month of September and October.
However, if all planned tariffs go into effect, US imports from China will
fall by nearly $70 billion, which would amount to 14% of the imports
from China. It has already started to affect the Chinese manufacturing
segment as official PMI fell to 50.2 in October, the lowest since July 2016
and down from 50.8 in September.

In terms of growth even if 25% tariffs were to be imposed on all the US

imports from China, it will only reduce Chinese growth by 0.5%. This
signifies that exports to the U.S. do not hold a commanding presence in
China's economic portfolio. But that line of thinking does not take into
account how tariffs will affect business sentiment, investment, and
growth in China.

While in the longer run, the Chinese might adapt, US Companies and
Consumers are going to lose. These tariffs have become a headache for
them as they continue to rely on Chinese imports or inputs to their
supply chains. Builders have started feeling the pinch of the trade war as
an increase in the cost of materials has led to an overall increase in the
Housing Cost. From the producers’ front, biggest loser would be the
Soybean producers of US who exported $12.7 billion worth of Soybean
and Oilseeds to China.

Both economies will suffer if the trade war further escalates and spreads
into other areas, especially the security area. The U.S. government
clearly wants to have a fierce competition with China, and this is fine as
long as competition does not become an outright confrontation. If not
managed carefully by both sides, this fierce competition might drag the
whole world into a new type of great power conflict.