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US-CHINA Trade
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LETTER Of Transmittal

Prof. Tulika Sharma

Institute of Management Technology
Hyderabad, Telangana
Dear Ma’am
As requirements on the subject "Business
Communication and Soft Skills", we would like to
present the report entitled "US-CHINA Trade War", by
your instruction. The purpose of this report is to
understand the ongoing US-China Trade war and its
implications on the global economy.
We hope that our report will meet your approval.

Yours Faithfully
Aastha Mohane
Amal Srivastava
Aman Kumar Jha
Geethika Daruvoori
Siddharth Aggarwal
Sushmita Jha
(GROUP-1, Sec-C)
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ACKNOWLEDGMENT

We would like to express our sincere gratitude to

Professor Tulika Sharma, for providing her invaluable
guidance, instructions, and suggestions throughout the
report. She was very specific and prompt in stating the
instructions about the report.
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Contents

Acknowledgments iii
Executive Summary 1

1. Introduction 2

2. US-China Trade Relations 4

3. Effects on US-China Economy 6

4. Global Impact of Trade War 9

5. Impact on Indian Economy 10

Conclusion 11

References 12
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Executive Summary
The U.S.-China economic relationship has reached a critical juncture. Over the past years,
the
The U.S. has imposed tariffs on $250 billion worth of Chinese imports and China has
retaliated, raising tariffs on U.S. exports. At the G-20 leaders' summit in November 2018,
Presidents Trump and Xi agreed to resolve the trade dispute within 90 days—by March 1,
2019, though this deadline has been recently extended.

The U.S. concerns that underpin these bilateral trade tensions stem from specific practices
endemic to China's economic model that systematically tilt the playing field in favor of
Chinese companies domestically and globally. Progress on specific trade issues will require
China to comply with its World Trade Organization (WTO) commitments and to make
certain reforms that will likely touch on areas of state control over the economy. Besides,
new trade rules are needed to address China's economic practices not covered by its WTO
commitments, including in areas such as state-owned enterprises (SOEs), certain subsidies,
and digital trade. These issues also come at a time of increasing U.S. concern over the
national security risks China presents, particularly for technology access.

Despite the challenges the U.S. has faced at the WTO, the WTO is central to resolving U.S.-
China trade tensions. In taking this multifaceted approach, the U.S. also needs to stay true to
its values and not accept short-term gains or “fig leaf” deals. Creating a managed trade
relationship with China would not be a constructive outcome. The resulting deal should
address the real issues at hand in a free-market manner and strengthen the multilateral global
trading system and rule of law that the U.S. has championed in the post-World War II era.
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Introduction
Importance of international trade in today’s global world
In the current global world, counties are experiencing a change in the way they market and
deliver various goods, items, and services. Those countries which were earlier a closed
economy, who were striving upon the principle of self-sustainability are currently developing
route towards international business. The major reason for this crucial change can be
attributed to the development of correspondence, innovation, infrastructure and so on.
Benefits for Nation
a) It helps a nation to earn foreign exchange which can be utilized or import purpose
b) It even helps in developing the internal economy and thus generating employment
c) It enhances the specialization of a nation in the production of a product

Below we can see how international trade has significantly increased in the past years.

From the above chart, we can figure out that the export indexes have risen approximately 45
times since 1950, from being 100 in 1913 to 4427 in 2014.
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Trade Wars
Although international trade is important for a nation’s economy to prosper, it sometimes
arises a situation called trade war. Trade wars can commence if one country perceives a
competitor nation has unfair trading practices. Domestic trade unions or industry lobbyists
can place pressure on politicians to make imported goods less attractive to consumers,
pushing international policy toward a trade war. Also, trade wars are often a result of a
misunderstanding of the widespread benefits of free trade.
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US-CHINA Trade Relations

Both the US and China are a major economic power in the current global world. In the year
2000, the then US president Bill Clinton signed the US-China Relations Act in October. This
Act granted China a permanent normal trade with the US and paved the way for China to join
the World Trade Organization.
Comparative trade statistics of both the US and China for different years. (in billion $)
2001 2005 2010 2018
US exports to
19.396 41.874 93.059 120.341
China
US imports
102.570 244.699 366.126 539.503
from China
China exports
54.277 162.939 283.184 478.423
to the US
China imports
26.204 48.735 101.310 155.096
from the US
(Source- , Federal Reserve bank of New York)
From the above data the following points can be inferred:
a) Soon after China signed the 2000 Act the total US-China trade (exports plus imports)
was approximately $80 billion. In 2018, the total US merchandise trade with China
was $630 billion.
b) It can also be noted that the trade balance (Total Exports-Total Imports) has kept on
increasing on a negative side for the US. But these trade relations had an increasing
trade balance for China on the positive side.

According to the reports of the US Census Bureau, China is the largest trade partner of the
US. Since imports from china are increasing year after year it’s imposing a threat to the US
domestic economy.
Current Scenario
In the early 1980s and 1990s majority of imports from China were of low-value labour-
intensive products. But after the relaxation of trade policies, an increasing proportion of US
imports from China are more technologically advanced products. According to the US
Census Bureau, the US imports of “Advanced Technology Products" (ATP) from China in
2017 totalled $171.1 billion. Information and communications products were the largest US
ATP import from China. ATP products accounted for 33.8 percent of total US merchandise
imports from China.
There has been a steep growth in the US trade deficit since past years signifying the growing
international competitiveness of China in high technology.
Changes in tariffs
On March 8, 2018, the US President, Donald Trump announced imposing additional tariffs
on China's export of steel and aluminium to the USA. On March 22, 2018, President Trump
announced plans to enact sanctions against China over its Intellectual Property Rights (IPR)
policies that negatively affect USA stakeholders. These sanctions included raising tariffs by
25 percent on selected Chinese products valued at $50 billion to $60 billion. On April 1,
China announced that it had retaliated against the US action by raising tariffs on various
American products, such as pork. On April 3, the US administration unveiled a list of 1,333
products worth $50 billion in trade to which it intended to apply a 25 percent tariff. These
Chinese goods are in strategic sectors such as information technology, robotics, advanced rail
and shipping, new energy vehicles and high-technology medicine and health care. A few
hours later, China released its proportional response: 25 percent tariffs on 106 products, also
worth $50 billion in trade.
Thus, there is a tit-for-tat action going on between China and the US. The Trump
administration's plans to tax $50 billion worth of Chinese imports was met with threats by the
Chinese to subject $50 billion worth of American products to the same. China threatened to
retaliate with tariffs on American cars, chemicals, and other products. The 106 goods, many
produced in parts of the country that have supported President Trump, were selected to
deliver a warning that American workers and consumers would suffer in a protracted
standoff.
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Effects on US-China Economy

International trade increases economic productivity, reallocating jobs to more efficient
industries. In the case of U.S.-China trade, there has been job creation in some areas of the
U.S. economy such as agriculture and services, and job destruction in some sectors—
particularly low wage manufacturing. For instance, between 1995-2001, U.S. exports overall
are estimated to have created 6.6 million jobs and recent data shows U.S. exports to China
support around 1.8 million jobs in sectors such as services, agriculture, and capital goods.
U.S. consumers have also gained from trade with China. From 2000 to 2007, the impact of
lower-priced imports from China produced an economic gain of $202 billion for the U.S.—
equivalent to $101,250 per job lost in manufacturing during this period.

Yet, trade with China has led to job losses in the U.S. manufacturing sector. From 1999 to
2011, 560,000 manufacturing jobs were lost due to direct competition with imports from
China. Taking into account upstream effects—job losses in industries that supplied to those
industries facing direct competition from China—there were 2 million job losses in the
manufacturing and non-manufacturing sectors. This data, however, likely overstates the job
losses as it fails to account for the extent to which U.S. imports from China include U.S.
value add. China remains a locus of significant amounts of "processing trade" critical to
global value chains, whereby low value-added product assembly using inputs from the U.S.
and elsewhere are then exported to the U.S. and globally, while high-value inputs such as
research and development, design, distribution, retail, and so on remain outside China. For
instance, each iPhone imported into the U.S. from China is recorded as a $240 import, but
China's value add to the iPhone is only around $8.50 or 3.6 percent of the total, while the
imported U.S. value-added in the iPhone is worth around $70. As this example
demonstrates, a proper accounting of U.S. trade with China would better consider U.S. value
embedded in imports from China and reduce the impact of imports from China on U.S.
manufacturing jobs by over 32 percent.

Moreover, the initial China shock to the U.S. economy is largely complete and trade with
China is having fewer negative effects on U.S. manufacturing. Evidence of firm
reorganization and innovation shows that U.S. business has been more adept at competing
with imports from China. In fact, since 2010, the U.S. has added over 1.2 million
manufacturing jobs. It is also the case that the U.S.-China deficit is not a meaningful
yardstick for assessing the health of the relation or its impact on U.S. employment, despite
being a focus for the Trump administration.

.
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Figure 1 shows the bilateral deficit in goods and services has grown from $81 billion in 2001
to $336 billion in 2017, increasing from just over 20 percent of the U.S. trade deficit in 2011
to over 60 percent today.

The bilateral trade deficit needs to be assessed in light of the overall trade deficit which is
less a product of restrictions on U.S. exports than it is a reflection of a low U.S. domestic
savings rate which requires overseas capital to fund U.S. domestic investment needs and
the growth in U.S. government debt. Efforts to reduce the U.S.-China trade deficit without
addressing the saving-investment gap will merely change the composition of the U.S. trade
deficit, leaving the overall trade deficit unchanged.
Seeing the U.S. trade deficit as a drain on the U.S. economy is also at odds with the facts.
During times of strong economic growth and full employment, the U.S. economy has seen
grow- ing trade deficits, since capital inflow from overseas is required to finance increased
domestic investment and consumption. Also, the trade deficit has decreased during periods
of economic contraction and rising unemployment.

.
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Notably, as Figure 2 demonstrates, there is a strong correlation between increases in the U.S.
trade deficit and employment
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Global Impact of Trade War

Trump’s assault on the rules-based order extends also to trade. While Trump has blinked on
China by putting on hold his promised sweeping tariffs on the Chinese imports to the US, he
has attempted to coerce and shame US allies like Japan, India and South Korea, even though
their combined trade surplus with the US – $95.6 billion in 2017 – amounts to about a quarter
of China’s. Trump has forced South Korea to accept a new trade deal and has sought to
squeeze India’s important information technology industry – which generates output worth
$150 billion per year – by imposing a restrictive visa policy. As for Japan, Trump forced a
reluctant Japanese Prime Minister Shinzo Abe to accept a new trade framework that the US
views as a precursor to negotiations on a bilateral free trade agreement.
Some of the losers in this trade war would be: -
a) US allies in the Far East like Japan, South Korea and Taiwan that are deeply
integrated into the manufacturing processes of high-end consumer products like
smartphones. Japan and South Korea, for example, are big exporters of integrated
circuits to China, where they get used in the final assembly of electronic devices
which are then shipped to the US and other countries.
b) European companies whose production chains have roots in both the US and China
are at risk. One example is BMW, a German car-maker that manufactures its
automobiles in the US and sells them to the Chinese. Beijing's retaliation package
includes action against the US autos.
Some of the winners in this trade war may be: -
a) International companies that compete with the American ones could see a sales hike.
b) Airbus could gain from Boeing's loss of sales to China, although Boeing might make
up for the loss of the Chinese market by diverting to India and the Middle East.
c) The Japanese carmakers could benefit if retaliation slows the American auto sales in
the Chinese market
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Impact on Indian Economy

With China and the United States being in the top largest economies of the world, due to the
trade war, they are importing from other countries. This has benefitted India as India's
exports to China have grown much faster than to US post the trade war. While overall
exports to the US grew by 9.46% to $52.4 billion in FY19, for China the growth was 25.6%
to $16.7 billion.
This offers an opportunity for India as it can become more competitive in segments such as
textile, garments and gems and jewellery since India already has an edge. However, this is
doubtful in the short run because China’s exports to the US are much more diverse and it’s a
tall order for India to fill the gap.
Also, there is slowing global growth which means lower interest rates and a relook at risky
emerging-market assets. In the short term, we have a larger loss because of a cyclical
downturn in the global economy. So, India’s export will get hurt to other countries.
Considering the dollar is flowing back to US bonds, Indian markets are seeing an outflow of
cash to the international market. With more money going out, we are left with lesser and
lesser reserves. Sensex and Nifty also show stagnation.
India can capitalize on this situation by increasing exports to other nations and these two, the
only obstacle it needs to be worried about is currency exchange. Recently rupee has been
adjudged as the weakest performing currency in Asia. Tough competition can be seen from
Taiwan and South Korea
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Conclusion
U.S.-China economic relations are at an important crossroads. Developing a durable basis
for mutually beneficial economic relations will require benefits for both economies while
upholding U.S. values of market-based solutions and reaffirming the importance of the rules
based international economic architecture. Failure for the U.S. and China to find ways to
resolve their differences will strengthen the hand of those arguing for U.S. disengagement
from China, with all the costs that would entail for both countries.

The U.S. and China have a complex economic relationship, which has borne benefits and
costs for the U.S. While many U.S. producers and consumers have reaped billions of dollars
of gains from the relationship. What concerns is the role of the state in the Chinese
economy, which systematically tilts the playing field in favor of Chinese businesses
domestically and globally. Furthermore, China’s use of industrial policy, and control over
SOEs and the provision of pervasive subsidies has become of even greater concern for the
U.S. as China has focused its attentions on dominating certain technologies and supplanting
U.S. leadership. To address the challenges China poses, the U.S. should undertake a
comprehensive strategy including bilateral, multilateral, unilateral actions, and work with
allies. Bilateral negotiations should be the key forum for making progress. Here, the
challenges are both agreeing on a substantive agenda and developing mechanisms that create
incentives for Chinese compliance. The U.S. and China should renew efforts to complete a
comprehensive bilateral investment treaty (BIT) with an aggressive nine-month schedule. It
is also important that the U.S. not simply agree to Chinese offers to buy more exports. This
strategy would yield short-term gains but would require the U.S. to co-opt managed trade
with China, at the cost of the U.S. commitment to WTO consistent, market-based
international trade outcomes. The U.S. should work with its allies and China to reintroduce
the China specific safeguard and ensure China’s continued treatment as a non-market
economy for trade remedy purposes. It needs to work closely with allies to develop new
trade rules and to create incentives for China to reform its economy and trade practices.

Finally, the U.S. has several unilateral actions it should also explore to better deal with the
challenges China presents. Targeted use of the foreign investment review process and export
controls will be an important response to China’s quest for U.S. technology. Heightened use
of WTO-consistent trade remedy tariffs should also be in the U.S. toolkit. If the current level
of U.S.-China trade tensions remain for an extended period, bilateral trade and investment
are likely to decrease, which would be a lose-lose for both sides. The U.S. and China have a
historical opportunity to level the playing field between the world’s two largest economies
to ensure not only growth and prosperity for both countries but the world economy and the
global trading system.
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References
1) Ortiz-Ospina, E., Beltekian, D., & Roser, M. (2018, October 29). Trade
and Globalization. Retrieved from https://ourworldindata.org/trade-and-
globalization

2) China Trade Summary. (n.d.). Retrieved from

https://wits.worldbank.org/CountryProfile/en/Country/CHN/Year/2001/S
ummarytext

3) The Growing U.S. Trade Inbalance with China - newyorkfed.org. (n.d.).

Retrieved from
https://www.newyorkfed.org/medialibrary/media/research/current_issues/
ci3-7.pdf

4) U.S. Trade Overview 2016. (n.d.). Retrieved from

https://www.trade.gov/mas/ian/build/groups/public/@tg_ian/documents/
webcontent/tg_ian_005537.pdf