Introduction to trade war:

A trade war happens when countries attack each other's trade with tariffs and quotas; it can be
referred to as a side effect of protectionist trade. This kind of economic war is usually sparked up
when one country raises tariffs, i.e. a tax that is imposed on imported products made abroad.
Imposing a tax on a product means that people are less likely to buy them, because they've
become more expensive. As a result, people buy cheaper local products which consequently
boosts the local economy. Trade wars can hurt the economies of other nations and lead to rising
political tensions between them.

Trade deficit of the US:

One of the main reasons why Donald Trump decided to impose tariffs on Chinese goods was to
reduce the trade deficit. The US imported $539 billion worth of goods from China in 2018 and
exported nearly $120 billion worth of goods to China. Consequently, the trade deficit of US with
China was a massive $419 billion. The tariffs imposed by the US are part of President Trump’s
“America First” economic policy which aims to reduce trade deficit by shifting American trade
policy from multilateral free trade agreements to bilateral trade deals.

US accuses China of unfair trade practices:

Trump has been accusing China of unfair trade practices. China uses foreign ownership
restrictions to compel U.S. companies to transfer technology to Chinese firms. China has
implemented laws that require the transfer of American technology and intellectual property to
enterprises in China in order to gain access to Chinese market. But this cannot be a reason for
imposing tariffs because US companies that don’t want to share their technology can always
choose not to invest in China.

The US-China trade war:

The US and China are locked in an escalating trade war which was instigated by the US in
January 2018. President Trump imposed tariffs on Chinese imports worth billions of dollars.
This garnered a tit-for-tat response from China and thus escalated the trade war. Since then, the
two sides have imposed taxes on a big chunk of each other’s products.
In January 2018, President Trump kicked off the trade war when he began imposing tariffs on
imported washing machines and solar panels. The tariffs on solar panels initially start at 30% and
gradually fall to 15% over a period of four years. The tariff for washing machines was set at 20%
for the first 1.2 million imported washers and all subsequent washers had a 50% tariff for a
period of one year. China is the world’s largest solar panel manufacturer and the top exporter of
washers to the US.
A second round of tariffs was announced in March 2018 when President Trump ordered an
imposition of 25% tariff on imported steel and 10% on imported aluminum. Canada and Mexico
were the only countries not included in the list of nations that were to be tariffed. In response,
China imposed tariffs on $3 billion worth of goods imported from the US.
In June 2018, the US imposed a 25% tariff on $50 billion worth of goods imported from China.
These tariffs targeted goods related to China’s strategic plan “Made in China 2025” to dominate
high-technology industries. In response, China placed tariffs on $34 billion worth of US goods.
In May 2019, the US increased the tariffs on another $200 billion of Chinese imports from 10%
to 25%. China retaliated by announcing tariffs on another $60 billion of American imports.
Trump also said the US would begin the process of applying the 25% tariff to another $325
billion of Chinese imports that have been left alone so far.
China was running out of goods to tax because US exports to China are roughly one third of the
amount that China exports to the US. Thus, China decided to use other means to leverage the
United States. One of these was the Chinese currency, Yuan. The value of Yuan is controlled by
the Central Bank of China, which is owned by the Government of China. The Chinese
government continuously devalued its own currency against the US dollar to make China’s
exports cheaper and therefore more competitive against US manufactures. Letting the Yuan
weaken against the US dollar softened the impact of US tariffs on Chinese economy.

Effects:
China’s trade with the United States greatly increased in the past 20 years, thanks to China’s
membership of the WTO in 2001. United States is China's largest trading partner while China is
the second largest trading partner of the US after European Union. US exports to China are
roughly one third of the amount that China exports to the US, therefore, economically speaking
China is the one suffering more from the trade war.
In 2018, US investment in China declined only marginally, while Chinese investment in the US
dropped by more than 80%. American foreign direct investment in China dropped from $14
billion in 2017 to $13 billion in 2018. On the other hand, Chinese foreign direct investment in
US declined from $29 billion in 2017 to $5 billion in 2018.
Soybeans are the top US agricultural export to China. After trade talks with the US failed, China
cancelled soybean orders exported from the United States and started importing soybeans from
Brazil and other producers. Trump announced a $16 billion bailout package for farmers hurt by
the retaliatory tariffs and decline in export of agricultural products.
Big American corporations that trade with China such as Apple, Boeing, Caterpillar Walmart
and General Motors suffered large losses in their stock price and a sharp decline in their exports
owing to high tariffs levied on American goods. The decline in exports resultantly led to loss of
jobs, less profit and low productivity. Hundreds of economists and industrialists have sent letters
to Trump urging him to resolve the trade dispute with China and avoid pursuing a trade war.
There is a silver lining for China’s and US’ competitors in the trade war. As the volume of trade
between the US and China decline, their competitors have a golden opportunity to trade with
either of them on easy conditions and make huge profits. The European Union is set to be the
biggest winner of the trade war. The United Nations Conference on Trade and Development
estimated that European companies are likely to capture about $70 billion in trade; about $50
billion in Chinese exports and $20 billion in US exports. Similarly, a large number of Chinese
companies like GoerTek are evading President Trump’s tariffs by shifting their businesses to
overseas countries such as Vietnam.
In an interconnected global economy, the tit-for-tat moves of the trade giants are likely to have a
domino effect that will impact the economy of other countries as well. Tariff increases penalize
not only the assembler of a product, but also suppliers along the chain. Asian countries such as
South Korea, Taiwan and Malaysia that export raw material to Chinese firms which are then
used to manufacture goods sold to the US, are particularly vulnerable to higher US tariffs on
China.
In China, the effect of trade war is felt more by producers than consumers while in the US it is
the other way around. Chinese tariffs on US imports don’t have a direct effect on the price
Chinese consumers pay because many of those are not end-use products but industrial inputs
such as soybeans, liquefied natural gas and cotton. Commercial planes and motor vehicles are the
largest and third largest US exports to China, but China hasn’t imposed tariffs on them because
these are finished products and will affect the consumers directly if tariffs are imposed.

Conclusion:
A full-scale trade war between the United States and China is in no one’s economic interest.
World trade suffers in a more protectionist environment, as countries turn inward and
multinational companies move production to overseas countries to stay competitive. At this
point, it is difficult to assess which side is going to come out of the trade war as a winner. To
quote former British Prime Minister Neville Chamberlain, “In war, whichever side may call
itself the victor, there are no winners, but all are losers.”

In September 2018, Donald Trump mentioned China in a speech that he was delivering at the
UN General Assembly. He claimed that the US was winning the war on trade with China. He
also accused China of interfering in the 2018 mid-term elections because China doesn’t want
him [President Trump] to win since he was the first president to challenge China in trade.
Chinese refuted the accusations and said that it had no interest in the elections of another
country.
The Chicken War of 1963 was a trade war between the US and EU. The United States imposed a
25% tariff on imported trucks from the European Union in retaliation after the EU kept the
United States’ chicken out of their market.