INTERNATIONAL TRADE & WTO

4-JULY-2021
CASE STUDY OF CHINA UNDER WTO AND INTERNATIONAL TRADE

SUBMITTED TO
SIR MUDASSAR NUSHAHI
SUBMITTED BY
MISBAH JAMIL E18MBA-048
SAIRA NADEEM E18MBA-046

DATED: 4 July, 2021

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CASE STUDY OF CHINA’S ECONOMY UNDER INETERNATIONAL
TRADE AND WORLD TRADE ORGANIZATION

HISTORY OF CHINA’S ECONOMY

Historically, China was an economic power in the world for most of the two
millennia from the 1st until the 19th century. When the industrial revolution was
beginning in Great Britain, China was marked as one-quarter of the global GDP until the
late 1700s and approximately one-third of the global GDP in 1820. China had largest
economy in Europe because China's GDP in 1820 was six times as large as Britain's
In 1978 China’s government began its economic reforms under the leadership of Deng
Xiaoping. Resultantly, over 30 years China became the world's fastest-growing major
economy, with growth rates averaging 10%. Chinese economy has been described as a
"socialist market economy with Chinese Characteristics" from the 12th National
Congress of the Chinese Communist Party in 1982.

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The first two decades following the founding of the People’s Republic of China.
Between 1962 and 1966 reforms were unfounded, prominent to another passé of
productivity and per capita GDP growth, before the events of the Cultural Revolution
(where strikers clashed with the authorities) China set the economy back once again.
December 1978 was the defining moment in shifting the country from its instable early
economic path on to a more sustainable path. It introduced reforms that allowed farmers
to sell their produce in local markets and began the modification from collective farming to
the domestic responsibility system.

INTRODUCTION
China is the exporter of goods and it is the world's largest manufacturing economy. It is the
world's fastest-growing consumer market. China is the second-largest good’s importer
country and a net importer of service products. It plays a vital role in international trade as
it is the largest trading nation in the world.
Since the global financial crisis and the gross domestic product (GDP) growth rate dropped
from 14.2% in 2007 to 6.7% in 2016 China’s economy had dropped. As the economy
slowed, the debate about the sustainability of China’s economic growth strengthened. It
was the exceptional success of the Chinese economy in the 1st decade of the twenty-first
century. That time many developed economies experienced two recessions. Chinese GDP
growth was upheld at a high level, even in the serious global financial crisis of 2008–2009,
GDP fall to 6.6% while the annual growth rate was sustained at more than 8% within one
quarter. Then Chinese Government introduced a large scale fiscal package of 4 Trillion
Yuan. Although the excessive incentive caused high inflation in that year, the government’s
macroeconomic policy is considered to be fairly successful by many mainstream
Keynesian economists.
China has become the world’s fastest growing economy by the opening up to foreign trade
and investment and implementing free-market reforms in 1979. World Bank has
described it "the fastest sustained expansion by a major” because of its real annual gross
domestic product (GDP) growth averaging 9.5% through 2018.

EFFECTS OF INTERNATIONAL TRADE ON CHINA’S

ECONOMY
China has experienced rapid growth in international trade with its economic growth which
helped the country to target the whole world as its market. Its stable political condition
and huge natural resources has made it a global factory.
According to a report it is stated that the countries who are internationally active are more
productive than those countries who only produce for their domestic needs.
After the initiation of economic reforms and the adoption of the open door policy,
international trade and China’s economy have experienced histrionic growth. Its
integration into the global economy has helped it to grow economically. In china some

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countries specialized in comparative advantages which increased the GDP of china and
also increased the level of employment. Furthermore, productivity of domestic industries
and advancement of technology has improved due to the participation of China in
International trade.
In early 1990s large import of machinery goods had an impact on productivity, through
the advanced technology production was increased and cost was reduced. China had a
concept of “learning by doing” so the level of science and technology increased in china
historically.
Different changes in Chinese trade sectors and policies have various effects on the nation’s
economic growth. China has converted itself from an inward-oriented country to outward-
oriented.
The evolution from a closed economy to an open one go with it various experiences.
According to trade policy, China experienced a number of growth periods, such as reliance
on the Soviet Union, absolute isolation, and opening doors to the world. WTO enabled
China to take part in world trade by improving its system. It was a new milestone in
China’s trade evolution.
China had planned economic strategy and inward-oriented policy before 1978. That
resulted in the inferior status of international trade in the national economy. China had
only slight trade with the outside world. It was exporting just surplus raw materials and
simple manufactured goods to cover payments for imported goods, including deliberate
minerals and other necessities that were not available in the local market.
Since 1978, China has pursued unparalleled trade liberalization. China has gained many
benefits in the international trade since then. Third Plenary Session of the Party's 11th
Central Committee begun a new period in China's economic relations with foreign
countries by introducing the political line and open door economic strategy. Since the
marketing economy and the transition of the Chinese economy and society has been
established, tremendous changes have been taken place. Towards the contribution of
economic growth development of the national economy and the increase of the average
income present a great need for international trade.

EFFECTS OF WTO ON CHINA’S ECONOMY

China improved its laws and regulations of foreign trade and economic operations in 1999
to become the part of WTO. Laws and regulations not in agreement with WTO regulations
were reviewed or nullified. China had revised 2,300 corresponding laws and regulations at
the end of 2001 including the Copyright Law, the Trademark Law, and the Law on Joint
Ventures with Chinese and Foreign Investment.
China has devoted much time and efforts to reducing trade barriers since entering n WTO.
China depressed its average tariff rate by 0.6% to 10.4% in January 2004, and in 2008, the
normal tariff rate was under 10%. Later, China decided to eliminate import quotas,
licenses, selected trading practices and other non-tariff barriers. Moreover the products
which had strong Government protection before (like automobiles, chemicals and

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electronics industries) are restricted because of trade barriers in 2004.
Due to fast increase in WTO shares China has become the world’s largest exporter, just
after joining the WTO in 2001. Entering in WTO China gained a lot of incentives, between
2000 and 2006 its entry reduced the US manufacturing price index by 7.6% and it also
reduced china’s own tariffs. It helped china to increase its industries without burdens.
China gained US consumers who paid less for manufactured goods and because they had
access to more varieties of goods.
When China entered in the WTO, two key policies were changed that helped China to boost
its exports to the US. First, these policies reduced tariffs on all the imported goods from all
over the world and secondly, these policies helped China to face no longer the uncertainty
of being hit with very high tariffs on its exports to the US.
As Shown in Figure 1 China’s spectacular export growth post-2001 has many

inferences for the rest of the world

According to new study, China’s global rise also creates gains to consumers in the US.
China is lowering its own import tariffs that is most important channel. China reduced its

tariffs in almost all categories which are part of WTO commitments. Lower tariffs on
intermediate inputs helped Chinese firms’ to produce goods at cheaper because of access
to cheaper intermediate inputs. More varieties of inputs boosted their total factor
productivity.

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Chinese firms charged lower prices on goods exported to the US and increased their
market shares in the US due to reduction in costs. China gain a large part of the market-
share because of newly entered firms in the US export market which exported new
varieties of goods. Between 2000 and 2006 Chinese firms are exporting to the US more as
compared to previous years.

We see in figure 2 there is a link between lower input tariffs and stronger export growth in

which we complete Chinese firm-level exports to the US into two groups:

With both indexes 100 in 2001, the industrial group that faces large tariff cuts on imported
inputs (average tariff cuts above median, equal to 4.6 percentage points, or 43%), and the
other group containing the industries that experienced input tariff cuts below the median.
We can clearly see in graph, the industries that experienced the largest drops in input
tariffs, Chinese exports grew more rapidly in those industries of US.
After joining WTO, China practiced volatile trade growth. Tariff reduced, China's trade in
goods increased from $516.4 billion in 2001 to $4.1 trillion in 2017. China's average
weighted tariff rate of 32.2 percent far exceeded the global average of 7.2 percent in 1992.
Entering in WTO helped China to remove technological gap with developed countries. It
provides access to domestic industry to modern foreign equipment and technology.
WTO enables China to enjoy increased overseas market access. Now WTO members give to
China the most-favored-nation treatment, it’s beneficial for China to normalize its trade

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relations. While many trading partners have removed barriers on imports from China that
is effective to promote China's labor-intensive exports in a large number of industries.

REGIONAL EFFECTS ON ECONOMY

Mostly industrial countries get benefits by trading with developing countries in trade
which are growing at a rapidly, on the other side developing countries get benefits by
trading with developed countries which have a relatively high level of income and
improved and advanced technology. According to analysis both intra-industry and inter-
industry trade are dangerous in China’s international trade patterns.
A leading trade countries analysis in 2008 stated that Europe, United States and Japan
were top 3 countries according to their shares in Global trade volume with 17.14%,
14.08% and 6.29%, respectively. These three states had combined share of 37.52%, and
also had a dominant position in the Global trade. China has OECD members as its major
trading partners for a long time. The dominant states shares were 40% of total trade. And
the share of relevant trade with top 10 OECD countries seized up 75.9% in 2008. The
following table shows the top 10 trading partners of China in 2008 in positions of trade
volume and share. The trading partners of China are largely the important trade countries
in the world.
Table 1. Top 10 trade partners of China in 2008

Country Trade volume (Billion $) Share

(%)
European Union 425.58 16.60

United Sates 333.74 13.00

Japan 266.79 10.40

ASEAN 231.12 9.00

Hong Kong, China 203.67 8.00

Korea 186.11 7.30

Taiwan, China 129.22 5.00

Australia 59.66 2.30

Russia 56.83 2.20

India 51.78 2.00

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China is a big country which have one fifth of world’s total population and also have region
of 9.60 million square kilometers including 22 Provinces, 5 Municipalities, 4 Autonomous
Regions and 3 Special Administrative Regions. China’s economy has practiced a high-
pitched growth, reflecting special appearances restricting from regional gaps and its trade
piece.
Chinese Government has divided China’s provinces into 3 parts according to their
locations and economic development. East region (eastern costal area) consist on 11
provinces including ShangHai, GuangDong, JiangSu, etc., These are the most gifted regions
according to their infrastructure, technology and also it has much more educated labor
force because of favorable geographical circumstances and historical motives.
Because of its tremendous resources the eastern region attracts more foreign direct
investment, which consequences in active technology transfer and significant economic
growth. On the other side Central region consists of 8 provinces neighboring the east one,
while the western region consists of 12 provinces in the interior western area. These
regions are less developed in terms of productivity and economic growth rate as
compared to the eastern region.
This Figure shows that the GDP per capita varies among these three regions.

4500

4000

3500

3000

2500

2000

1500

1000

500

0
East West 2002 2003 2004 2005 2006 2007
Middle Year

DISTRIBUTION OF GDP IN CHINA

China’s unequal transportation system has combined with important differences in the
availability of natural and human resources and in industrial infrastructure. It has
produced important variations in the regional economies of China.
China’s Economic Development has been more rapid in coastal provinces as compared to

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the interior. There are great disparities in per capita income between regions. The three
wealthiest regions of china are the Yangtze River Delta , the Pearl River
Delta and Jingjinji region. These areas have rapid development that will significantly effect
on the Asian regional economy as a whole. To remove the obstacles in the growth of these
regions the Chinese government has designed the policies. According to the report of
Oxford Economics till 2035, China's four cities
(Shanghai, Beijing, Guangzhou and Shenzhen) are projected to be among the global top ten
largest cities by nominal GDP.

KEY FACTORS OF CHINA’S ECONOMY

Major Factors of china’s economic growth is to have enough factories that made everything
from toys to mobile phones to reach the demand of consumers throughout the world.
China's entry into the World Trade Organization in 2001 helped it to become as
the world's factory and largest trader.
China’s economy is based on two main factors

1. Large-scale capital investment

(that is financed by large domestic savings and foreign investment)
2. Rapid productivity growth

China took less than 70 years to appear from segregation and develop one of the world's
greatest economic powers. Over the past 40 years, China has acquaint with so many new

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market reforms to reduce poverty and to expose trade routes and investment flows.
High rate of savings has been maintained by China. The percentage of GDP raised at 32% in
1979 when reforms were initiated. Government used savings for domestic investment
which were generated from profits of SOE’s. Economic reforms, which included the
decentralization of economic production, led to substantial growth in Chinese household
savings as well as corporate savings. As a result, China's gross savings as a percentage of
GDP is the highest among major economies. The large level of domestic savings has enabled
China to support a high level of investment. China has become a large net global lender
because its gross domestic savings are grater then its gross domestic investments.
According to economists, productivity gains (i.e., increases in efficiency) is another major
factor in China's fast economic growth. Resources are reallocated to improve the
productivity by utilizing them more effectively specially in those sectors which are
controlled by the central Government (like agriculture, trade, and services).
China's economy has been closed to the existence edge which limits the operation of
economic policy.
Agriculture is its main sector but largely unpredictable because of the non-mastery of
natural impulses which are difficult than industrial techniques.

Agriculture Sector
The main factor of China’s economy is Agriculture. China doesn’t have enough resources as
it is limited in natural resources like land and water resources etc. which are not even the
average of the world. Demand for agriculture products have increased that forces China to
improve the farmers Income to enhance the competition between agriculture products. The
agriculture sector of china remains poor because of weak industrialization and low value-
added products.
So the Economic reforms are smeared in China’s agricultural sector. It leads to a high
income growth that helps China to show up as a major leader of global economic growth.
China has rapidly improved its agriculture sector, according to the new report, it is
producing 18% of the world’s cereal grains, 29% of the world’s meat and 50% of the world’s
vegetables. Resultantly China has become the world’s largest agricultural economy, and the
largest global producer of pork, wheat, rice, tea, cotton, and fish etc.

Industrial Performance of China

Foreign firms and Chinese efforts for gaining technology helped the rapid industrialization
of China. According to some optics Chinese industry has jumped directly from imitating
country to innovating country. As the industry of China raised its requirements to import
aircraft, machinery, production equipment, Telecommunications technology, and various
raw materials has also raised. This development of china is advantageous for the rest of
country but it is also inconvenient to International business. Since the improvement or
innovation of advanced technology industry cannot grow without the Improvement of the
manufacturing sector because it is related with higher productivity growth and per capita
incomes.
After China’s accession to the WTO, it helped china to become a global manufacturer that’s
why China exports large quantity to Europe the United States, and all over the world. Its

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investment has penetrated.
China’s manufacturing sector participated in trade in 2013 by 35.1% on the gross value
added. It was a huge participation to that of the United States. China economy’s central part
is based firstly on manufacturing than it has for the United States and Japan. China’s gross
value additional manufacturing was comparable to 28.9% of GDP, but it touched 12.1% in
the United States and 18.7% in Japan in 2013.

Employment
China’s working conditions are not being ideal for internal migrants. Working in China does
not provide any legal security or social security, and for sure, it has low and uncertain
income. But it is better in different regions then other countries. Moreover the labor in
China have semi-formal work and he is an informal labor who gets some social security
etc. AS China is the most populated country so it is difficult to solve the problem of
employment, But to resolve this issue China has made many reforms in 2003, 744.32 million
people were employed in China, of which 256.39 million people were employed in urban
areas (34.4%) and 487 930 000 in rural areas (65.6%). Since 1990 to 2003, China has
shaped a total of 96.83 million arrangements, on behalf of an annual increase of 7.45 million
jobs.
China has taken many measures to control unemployment in urban areas compression is
progressively hefty on job creation. In 2003 the unemployment level in urban areas was
4.3% and 8Million people were registered as unemployed but the government set the goal
to provide 9Million jobs in 2004 to reduce unemployment.
With the continuous increase in economic growth and labor market development the
employment level in China has improved.

Trade
International trade and investment are the source to increase income and decrease the
prices it also facilitates the economic growth. All those countries who are part of WTO get
benefits from the incentives provided by WTO. Countries enjoy the economic stability and
improved living standards who are part of international economy benefit. China has
attained a prominent place in the international trade because of its traditional and
international trade with largest trading states Like USA and Euro Area. China became the
part of World Trade Organization On December 2011, China’s economy started rapidly
growing trade expansion and profound structural change. After accession to WTO, China
reduced tariffs on its imported goods, protracted trade rights and liberalized its
management in order to fascinate foreign direct investment. China became a dominant
country in international trade market its merchandise exports increased with prominent
value from $14 billion in 1979 to $23 trillion in 2014 with an annual growth of 18.0% from
1990 to 2014. In contrary China’s importation of merchandise also increased from $18
billion to about $2.0 trillion with an annual growth of 16.6% in the 2014.

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Financial Sector
From 1978 China has implemented many significant reforms in order to develop its
financial sector. They applied these reforms in different sectors but prominently in banking
sector. After China’s accession to the WTO It established reforms for creation of capital
market, development of bond market and also for the opening of financial system. These
reforms changed the shape of Chinese financial system. China divided many banks into
central bank in order to monitor the monetary policy. It separately created a system of
administered state-owned commercial banking entities.
The banking system improved the non-tradeable shares issues by recovering the systems.
Financial instruments were used to facilitate the international trade. Expansion in large
scale loans helped the investors or producers to produce at large scale, it increased the
trade level of China. Trade finance helped to reduce the global trade risk by reconciling
needs of an exporter and importer.
In 2000 china encouraged its local firs to invest overseas it helped to get technology,
management skills and international brands, it helped Chinese
Firms to become more competitive. In 2014 China’s outward stock was estimated at $646.3
billion. From 2015 China has improved its legal foundation capital markets. It helped China
to remove major barriers to their development. Due to new laws china entered into the
international market. China’s economy has raised rapidly while the others are logging
behind.

GLOBAL CHALLENGES FACED BY CHINA’S ECONOMY

In order to analyze China’s visions for the next several years, following three particular
challenges are striking:
1. the shift from a labor-surplus to a labor-scarce society
2. The shift from investment to innovation as the primary source of growth
3. The shift in China’s global position from a rising power to an established power

GLOBAL CHALLENGES
China got many benefits from globalization but it still has global orders that are out dated,
that need reforms. International environment and economic architecture are the basis on
which china’s ability to meet its social and economic goals depends. The World Trade
Organization is not enough versatile to compact with different modern trade issues like
investment restrictions, cross-border data flows and subsidies. From last few months US is
not in good relations with China that’s why it does not want to increase the weight of China
and other emerging markets. As US influences on many major economies of the world so
these economies cannot agree on expanding the resources of the International Monetary
Fund. This is what their growing role in the world economy dictates. China and Western
contributors have isolated because of clashes now they are tending to finance opposite
programs and infrastructure in the developing world.
It is important to strengthen the economic institutions that provide goods through all over
the world so it is necessary for the world economy to work smoothly. This will help china
and USA to compromise and it will help both countries to improve their relations with each

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other and it will also develop a better condition between developing and developed
nations. As China has a great status power so it needs to fulfill its duties more appropriate.
After Donald Trump administration it is still impossible for China and USA to settle down
the disputes even under Joe Biden’s Administration, no practical compromises between
these two Nations can be seen. New Biden administration seems to be cooperative nut US–
China relations seems to remain difficult. Despite from all facts we cannot say these two
Nations will become enemy of each other. Both countries are dealing in international
cooperation on public goods.

DOMESTIC CHALLENGES
1. Pollution
China’s biggest domestic challenge is Rapid aging. Pollution is a major problem in many
industrialized cities. Increased car ownership has led to problems of smog and worsening
air quality. Pollution also occurs from China's vast industrial sector.
The main issue of china’s economy is pollution in industrialized cities. As cars are
increasing on roads each day the problems of smog and worsening air quality are also
increasing. The other cause of pollution is also industrialization that is untreated sewage
often been poured directly into rivers.

2. Shortage of Power

As the rapid increase in demand of China’s creaking power infrastructure, the need of

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projects like Three Gorges Dam has also increased. China has been criticized by
Environmentalists for creating environmental and social problems, they fear that the dam
will badly effect the natural habitats of many species.

3. Growing Income Inequality

Since China is growing its economic growth has promoted the south and eastern regions
more than other regions that’s why the northern and southern regions are facing disparity
in growing because they are left behind. People of these areas migrate from their regions to
other in order to find better living standard or job opportunities.

4. Property Boom
it is feared by economists, the China has trapped in its own hypothetical property fizz. As
the south east region in Beijing is growing so the land or houses have high prices that are
increasing rapidly. Some concerns states that this property fizz could rupture, creating
negative equity.

5. Inefficient Banking Sector

China’s banking sector is not good in advancing loans or recovering these loans. Its banks
have bad reputation for making bad loans because mostly loans not repaid back. Banks try
to make loans to Government sectors with few favors for free market principles. So it is
difficult for new investor to get sufficient capital funding. But, Mostly in banking sector the
investment is wasted.

6. Unemployment
As, China is rapidly growing so each industrialist is counting on robots and automation to
fill the gaps in the labor force, but all jobs cannot be filled with these machines. It requires
many social safety net and retraining programs that will help people shift as the job picture
shifts.
In contrary, China has growing economy that is growing rapidly but still it has problem of
unemployment. State owns many enterprises which are grossly inefficient. Agriculture
sector also have savior unemployment problem.

7. Overreliance on investment
China is overreliaing on investment that is the biggest weakness of China towards its
economic growth. China is in underperformance on innovation. China will need to depend
less on investment and more on innovation and productivity growth with the passage of
time.
As innovation is a source of growth so the developing countries rely on innovation instead
of imitation or investments. China has devoted its major portion on innovation and also a
large share it has devoted to research and development for the improvement of efficiency
of its products.

8. Overheating Economy.
As the Chinese economy is growing so quickly there are apprehensions that this could
effortlessly lead to inflationary compressions. This is principally a delinquent because of:

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 • moderately loose monetary policy
• Growth in consumer debt.
• unrecognized exchange rate
• Property Bang.
• Inflation is currently 3.8%, but, there are rising compressions.

9. Huge Balance of Payments Surplus

The US sees the huge balance of payments as generating a great disequilibrium though it is
not a serious problem for China. The US would like to see China uses its balance of
payments surplus elsewhere.

10. Demographic trends

AS China is the most populated country and it had made many reforms to control its
population its one-child policy states that in future years, China will face a demographic
lump. Already its population has doubled since 1988 in a short-time, but it is
possible that its population will continue to increase over the next 20-30 years.

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PROBLEMS OF CHINESE ECONOMIC GROWTH FOR THE
REST OF THE WORLD
Since China has entered into the global market and it has attained dominant place its
growth is causing some problems for the rest of the world some of them are following:

Decline in Manufacturing Sector

As China is a growing country with innovative products and it has also improved
manufacturing sector so the manufacturing of UK is declined. The Government of China is
applying better and better policies to improve the productivity of industry and to compete
its competitors. The changing structure of the economy might be accepted by the
Government of China. The other countries might be enhanced concentrating on the
potential of service sector industries, such as education etc.

Environmental Problems
China is a producer of carbon and its growth is increasing rapidly it can cover the demand
of global markets which UK covers. This raises the importance of China and also raises the
importance of creating global agreements to limit environmental pollution.

Current Account deficit

as per latest report of the State Administration of Foreign Exchange deficit of China in
the period of Jan- March was $33.7 billion and the Current-account balance at the end of
June was $119.6 billion it was recorded as the highest since 2008. Most of the deficit is
caused because of over consumption and low savings. It seems that economies are at their
different stages of development. As the US and UK have large have a large current account
deficit with China that’s why China is blamed.

US-CHINA TRADE RELATIONSHIP

The U.S.–China trade relationship, particularly the tariff war, has recently drawn the most
interest in the global landscape. Since 2018, the world's most powerful nations are
discussing issues of trade. In addition, the United States slapped a tax on various countries
in the first quarter, including Canada, developing Asia, India, and China. We will evidence
the facts of trade wars between the U.S. and China and the significant reasons for this conflict
and try to figure out the impact of this conflict on the U.S.

CHINA-US WAR

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This call started back in 2018. Then, conflict was between China and the U.S. when President
Donald Trump imposed tariffs on trade and said that China is property theft. The Chinese
government accuses Trump, and the war began. Nearly all experts who replied to the
Associated Press and Reuters surveys predicted Trump's tariffs might do more damage than
good to the American economy. Other analysts called for different ways to resolve trade
deficits with China.

This battle has influenced both nations, and significant changes in other countries' financial
and manufacturing lines have been noted. The United States is dealing with rising
commodity prices, as well as difficulties for farmers and businesses. Supply was moved from
China to other nations by several U.S. trading businesses.

China, on the other hand, has seen a drop in trade. On the other hand, many countries took
advantage of the chance and partnered with both nations to maximize their earnings. While
the Trump administration's goal of pushing China to reform its trade policies has received
broad popularity, the use of tariffs and the trade war's poor economic consequences have
been heavily criticized. American corporations and agricultural industries have opposed the
trade war, yet most farmers have continued to support Trump. As a result, they contributed
significantly to their financial well-being. Biden evaluated tariffs and sought a time scale with
partners to challenge China when his government started in January 2021.

China’s response

China accused the United States of the escalating problem, adding that disagreements make
negotiations impossible. They justified themselves in front of the WTO by claiming that these
claims are unfounded, devoid of facts, and solely on supposition.

These conflicts are affecting the world and creating an imbalance economic conditions in the
world.

According to the United States, China's rise impacts every country and will cause several
challenges in the future. However, some economists disagree with this view, claiming that
China's growth can be beneficial in various ways because it is advancing in the technology
arena, which can benefit other countries as well.

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Criticism

After knowing all the facts and figures, I would say that the U.S. war with China is baseless as
the U.S. depends on China more than China depends on the U.S. I am not convinced that
China's economic expansion threatens the U.S. and other Western economies. China's
economic growth, in my opinion, has numerous advantages.

A concept of free trade that is only in favor of one nation is not possible as we have studied
before in the theory of Adam’s Smith “Wealth of Nation” (1776).

On the other hand, David Ricardo, a classical economist, proposed the theory of comparative
advantage. A free flow of commodities and services, in general, promotes competition,
innovation, effective resource allocation, and output maximization by diverting resources to
their most productive uses.

Tariffs are imposed to protect a nation's domestic industries and generate the revenue that
will give a helping hand to the country. If tax is cut off, it will be difficult for a nation to profit
from the trade sector. If China is adding tariffs on commodities, then they are providing
goods that are worth buying on the same ground.

According to Baptist, the Chinese economy would overtake the U.S. economy in nominal U.S.
dollar terms around 2032 and become the world's largest. However, because of the Covid-
19 epidemic, that estimate was pushed ahead from 2034, he explained.

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According to Baptist, the U.S. economy "ultimately will become smaller merely because
China's population is so much larger." "It doesn't mean anything when your GDP dollar value
takes over, but it's a bit of a turning point.

Challenges for the U.S.

U.S. imports will have to be sourced from foreign nations in the amount of 43M USD (0.22
percent of GDP) if it bans trade from China. The total trade balance of the United States will
improve by 0.21 percent of real GDP, while imports worth 0.22 percent of real GDP will have
to be supplied from other nations. It will be a great challenge for the U.S. to arrange supplies
from other countries. As a result, the volume of trade between the United States and China
will decrease. Furthermore, the welfare state in the United States will fall by 0.011 percent
of real GDP.

The trade gap between China and the United States is likely to worsen anytime soon.

For various factors, China's entrance into the WTO is unlikely to lower the bilateral trade
imbalance or remove trade friction with the United States. An increase in the bilateral trade
deficit with China due to the displacement effect will be offset by lower deficits elsewhere
globally rather than contributing to the rise in the U.S. global trade deficit.

Increased market access is provided by the bilateral agreement between China and the
United States, which will become part of China's multilateral obligations.

Although the decreased tariff and nontariff obstacles associated with China's entrance into
the WTO may result in a substantial rise in U.S. exports of a few highly protected items, the
overall pace of growth of exports to China is unlikely to accelerate much.

The U.S. depends on China:

Here are some points that will clearly state that the U.S. depends on China under various
factors.

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1. China has a master in producing cheap, affordable, and works minimal gadgets that
increase the demand for Chinese devices in the world. The U.K. is known as one of the
busy states in the world. Chinese gadgets help them in many ways that create demand
for Chinese products. The United States is strongly reliant on China for the low-cost
commodities that help low-income Americans make ends meet.

2. The United States also relies on China to fund its exports; China is America's third-
largest and fastest-growing primary export market, after Mexico and Canada. China
has shown a tremendous lead in the export sector. And it is well known for its export
reputation. So, U.S. relies on China for funding. If the U.S. bans trade from China, it will
face significant issues in the trading sector.

3. Furthermore, the United States is reliant on China for money to cover its fiscal deficits.
It owns $1.3 trillion in direct Treasury assets and at least another $250 billion in the
quasi-government paper, making it the largest foreign holder of U.S. Treasury
securities. Thus, a lack of Chinese demand could result in a rout at the next Treasury
auction.

4. America relies on China due to a fundamental flaw in the American economy's

structure: a severe and concerning shortage of local savings. The net domestic saving
rate (depreciation-adjusted savings of individuals, companies, and the government
sector combined) was barely 1.3 percent of national income in the fourth quarter of
2017.
This gap is covered in part by Chinese capital flows. Except for Japan, China owns
more U.S. Treasury securities than any other foreign country. According to the
Treasury, as of September 2020, China held $1.06 trillion in U.S. debt instruments.

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5. China can continue to contribute to the expansion of our overseas trade and the
corresponding economic benefits. Imports from China may contribute to low price
inflation in the United States because China is an efficient producer of a wide range
of commodities.

6. It is observed that when a nation bans trade with a growing country, it has faced
problems. China is well known in the technological field in the world. If the U.S. bans
trade with China, the competition will increase, and the U.S. has to fight it along with
social and economic challenges. There are many commodities produced in China
easily compared to other counties because of their labor, technology, and climate
factors.

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 7. After COVID 19, the economic condition of every state is fragile. But, China has
stabled its condition. So by observing this fact, the U.S. depends on China until its
financial situation doesn't get better.

Trade tariff rates:

Import tariffs were applied in numerous waves throughout 2018 and 2019 as part of the US-
China trade conflict. The lists of existing effect trade tariffs are extensive and difficult to shed
light on. In 2019, Li created a harmonized database CARD Trade War Tariffs Database that
includes any tariff increases during the U.S.-China trade war.

President Donald Trump versus China

Yes, the trade battle between the United States and China is still ongoing. Donald Trump
began his administration by probing China's unfairness. Unfortunately, president Donald

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Trump continues to portray China as the culprit in the great American tragedy when he
should look in the mirror first.

1. To begin with, he continues to claim that the US-China trade gap is $500 billion, more
than a third more than the Commerce Department's official number of $375 billion.

2. According to the OECD and the World Trade Organization statistics, supply-chain
impacts of assembly operations manufactured other than China, but assembled
within China account for at least 40% of the bilateral imbalance. That is to say,
depending on the value-added of what is produced within China.

3. Donald Trump blames China for the wave of COVID. Because of his words, China was
assumed as a culprit state, which ultimately reduces the trade from China worldwide.
But, soon, China again emerges as a newborn state and fights the battle with COVID.
They resurrected the manufacturing and production sectors and proceeded to
manufacture goods for the people of COVID. China not only leads in the manufacturing
of mobile phones and machines, but it was also evident in the COVID wave that China
is a critical player in the production of medicinal instruments (surgical masks, gloves,
aid kits, vaccines, and much more). The production, on the other hand, until now, the
output of other countries throughout the world have been seriously impacted. Words
of Donald Trumped fire backed him.

4. Thanks to Trump tariffs, China's trade deficit will now be shared among the other 101
countries that make up America's multilateral merchandise trade deficit. These are
higher-cost producers compared to China, so the anticipated response to this
retaliation would tax the same families Trump claims to be defending. The Chinese
economy has weakened since the outbreak, but it is still more potent than the rest of
the globe as the United States, which is falling behind China in COVID-19 containment
and re-introduction. This power shift might influence China's foreign policy.

Case Study

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Some studies are microeconomic and focus on each industry and the impact of trading tariffs.
That makes sense since, after the Second World War, tariffs steadily declined, and only
certain industries were targeted subsequently. But the battle between the U.S. and China
demands macroeconomic impact assessments. The import tax increases the domestic price
of the imported products and lowers the import demand. This decreased demand might even
lower the global price of such goods when the local economy is large (Metzler, 1949).
Suppose imports have a completely elastic supply and the foreign export supply curve is
horizontal. In that case, the rise in tariffs does not affect foreign prices and is entirely
complied with by household customers. In the case of Brazil, which imposed higher import
duties on more than 100 products between the years 2010 and 2013 and found that 20% of
the shock of the import tariff increased the domestic cost of imported products by 15%,
Macera and Divino (2015) employed a dynamic stochastic general balancing system (DSGE).
This shows that import taxes are not fully passed through to national prices. Commercial
tariffs also affect genuine GDP. In the estimation of the economic impact of the U.S. import
tax on steel and aluminum, Kawasaki (2018) utilized the Computable General Equilibrium
(CGE) model and determined that the real US GNP would decline by 0,2%. Bollen and Rojas-
Romagosa (2001) utilized a World Scan model to predict the full-scale conflict scenario
between the U.S. and China. Their analysis showed that China and the U.S. would have real
GDP losses of 1.2% and 0.3%, respectively. When import tariffs are implemented, there is a
loss of mortality and welfare because the participants are driven to abandon or misuse
resources owing to the transition to less efficient market results (Evans, 2019). In theory, an
optimum tariff can lead to higher national welfare if the domestic economy is big and has an
oligopoly in the market, forcing exporters to cut prices to retain the same size and allowing
importing nations to collect income formerly earned by exporters (Irwin, 2014). In this
instance, the marginal trade benefit is equal to the marginal loss from consumer and
productive distortion (Krugman & Obstfeld, 2009). According to Amiti et al. (2019), the home
economy is entitled to an import tariff tax when trade gains outweigh welfare losses. Tou et
al. (2020) utilized the SMART model and projected the US-China trade war would result in a

24
welfare loss of U.S. $1,437 million and 2.193 million in both the U.S. and China,
correspondingly. The SMART model is a single market partial equilibrium simulation tool.

The hypothesis does not produce factual findings of the influence on the balance of trade
tariffs. The tariff will change expenditure from foreign products to national goods, which will
improve the trade balance in response, using the income-expenditure method (Ostry & Rose,
1992). This strategy, however, assumes the absence of tariff reprisals from outsiders. If this
is the case, the implications for the trade balance are generally unknown. A monetary
approach to Mussa's balance of payments is an alternate way (1974). The Heckscher-Ohlin
model implies the long-term balance of the economy. This approach increases the import
taxes for some items and the relative pricing of domestic goods which compete. Rising
domestic goods prices increased domestic output while decreasing import consumption. As
a result, tariffs lower both import and export volumes, according to the monetary method,
but the entire trade balance is not affected (Mussa, 1974). Finally, the Razin and Svensson
(1983) intertemporal method estimates the impact of trading tariffs on whether the tariff is
provisional or permanent. Temporary tariffs influence the relative pricing at inter temporary
levels and cause customers to cut current expenditure on future increases. Permanent tariffs
do not lead to the replacement of inter temporary consumption and, hence, the tariffs have
a minor trade balance impact. Kawasaki (2018) found that the U.S. steel and aluminum
import tax will enhance the U.S. trade balance by USD 59.4 billion. The exports of cars,
electronics, and other machinery are down respectively by 3.4%, 5.1%, and 5.8%, however,
and therefore a minor overall improvement in the trade balance is possible (1.3 billion USD).
Tu et al. (2020) projected that the trade war between the U.S. and China would decrease U.S.
imports of 91,459 and 36,706 million dollars, respectively, from China and China's imports
from the United States. They also observed that commercial tariffs enhance the diversion of
trade. The overall projected re-direction from China or the United States to other trading
partners was 36,783 million U.S. dollars of imports and 17,207 million Chinese imports.
Various economic parameters determined the impacts of tariffs by the researchers. Furceri
etc. (2019) showed how big import tariff economies experience more dramatic declines in
internal yield and labor productivity than emerging and developing economies. Furceri et al.

25
(2019) show that the hike in tariffs also affected medium-term production and labor
productivity losses that tended to be more substantial when the economy was in an upturn
than a recession. Furceri et al. (2019) noted that the U.S. is a significant economy that
achieved its peak in February 2020 and is currently declining, according to the National
Office for Economic Research (NBER). Therefore, it might be less severe than it would have
been if the worldwide COVID-19 outbreak had not impacted the economy because of the
trade war with China.

An examination of the situation between China and the USA

Donald Trump accused China during his 2016 campaign of being the world's biggest robber
and pledged to combat the tactics of unlawful trade partners if he was elected. Following
Donald Trump's election in June 2017, an investigation into Section 232 of the Trade
Expansion Act of 1962 was launched, which found that the import of steel and aluminum "is
dangerous for affecting national security," and recommended actions to "protect the long-
term viability of the nation's steel and aluminum industries" (Presidential Memorandum,
2018). How unfair trade partners – import tariffs – have been combated has violated
international trading regulations and has tested the notion of free trade. In March 2018,
import taxes for all imports of steel and aluminum totaled about USD 18 billion. After
examining Section 301 of the Trade Expansion Act, 1974, on July 6, 2018, the first China-
specific tariffs were levied.

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In general, the present trade imbalance (Figure 1) is seen by economists as a minor reason
for the U.S. to wage a trade war. However, the research published by the US-China Business
Council by Oxford Economics (2017) showed that negative conditions in trade are well
established. Firstly, China is still using around 50% of the intermediate products in its
computer equipment, electronics, and electrical machinery imports from outside despite
enormous efforts to expand its value-added chain. Accordingly, the U.S. trade imbalance with
the value-added content corrected by China is twice as low. Furthermore, despite its product
trade deficits, the United States has a large and growing trade surplus in services. Beijing
aims to broadly open its market to U.S. goods and services to give America's firms more
favorable circumstances and reduce state-sponsored high-tech Chinese industries under the
'Made in China 2025' policy (Ibrahim & Benjamin, 2019).

The trade war that has harmed farmers, a critical electoral constituency for President Trump,
has already had a more severe impact on both countries. For this reason, subsidies have been
established to provide farmers with USD 8.5 and 14.3 billion, respectively, in 2018 and 2019.
For 2020, there were no trade-related subsidies. During the next U.S. presidential election
campaign, the president exerted pressure to establish an agreement with China, and
discussions about phasing down import duties commenced. On January 15, 2020, the United
States and China inked Phase 1 agreements to lower US List 4A1 tariffs by half in exchange
for China's promise to raise American products and service imports in the two years ahead
to at least $200 billion. The tariffs on List 4B2, effective by December 15, 2019, have been
delayed indefinitely, and the Chinese retribution measures against them have been
suspended.

The fundamental characteristics of commercial wars make it a natural experiment to

measure the economic impact of tariffs. First, there was high anticipation of a rise in import
duties. Many analysts expected that Hillary Clinton would win the elections with a so-called
alternative approach to trade policy. Furthermore, import taxes fluctuate widely from
product to time. This particular feature makes it easier to assess the economic impact of
import tariffs using traditional data sets (Amiti et al., 2019). When discussing trade wars,
COVID-19 cannot neglect economic repercussions and asks for a supplementary evaluation.

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The worldwide slump in 2020 is exceptional in a way that was not born of the financial
markets compared to typical recessions. The hybrid intertemporally global model of
available balance was employed by McKibbin and Fernando (2020) to conclude that the real-
world GDP will be reduced respectively by 2.4 trillion USD and 9 trillion USD for a lower-end
and severe outbreak of pandemics by 2020. International commerce is one of the important
strategies for damaging countries' economies with the virus. The pandemic of COVID-19 is
an economic shock (factory shutdown, border restrictions) that will lower exports and a
shock in demand to reduce imports, according to Baldwin and Weder di Mauro (2020). In
the best-case scenario (with a Chinese pandemic with minimal clusters in other countries),
world commerce may drop by 0.9 percent in the 2020 period, but in the adverse scenario, by
almost 3.75 percent by the year 2020. Boone (2020) indicated that international trade would
become considerably weaker. Baldwin and Tomiura (2020) recommended that they depend
on the past lessons of world trade shocks such as the 2001 tech bubble when U.S. imports
declined 2.8% and the 2009 financial crisis, when worldwide imports decreased by 11.79%,
and U.S. imports declined by 13.08%. The authors projected that global commerce might
decline in 2020 from 5% to 15%, based on their results.

Conclusion

The partial balance in the simulated SMART model, the total trade balance of the United
States improved by USD 41,020 million (0.21% of real GDP). On the other hand, USD 43,777
million (0.22% of real GDP) imports from other nations will need to be provided. Benefits
will also be reduced by USD 2 193 million (0.011 percent of real GDP). In the normalization
of bilateral trade flows by total trade and nominal GDP, U.S. trade intensity with China will
drop by 1.13% and 0.29%. The possible economic implications of COVID-19 have been
shown to lessen the relative effects of the trade war. The model estimates followed the
robustness tests. The U.S. is looking to profit from the trade war because of the broader
consequences. This is primarily related to the increased power of the U.S. market and China's
repressive reaction to the problem - a fear of escalating the trade dispute that would further
damage its local firms and labor figures. However, the impact of the trade war is unequal
throughout the U.S. industry. Agriculture and the automobile industries in the United States

28
have been hit harder than others. If the trade dispute continues to develop, specific
industries will suffer even further, not only from rising costs for consumers but also from the
shattered connections between income production and economic insecurity. For
policymakers, given the possible impacts of trade tariffs, this research is highly relevant. The
efficacy of such protectionist tariffs has been shown to depend significantly on the retaliatory
actions of the trade partner. Furthermore, a comprehensive review should be carried out
before any measures are taken of the potential impacts of trade policy on the country's social
welfare, supply chains, and trade flows. Business battles are, after all, neither good nor easy
to win.

References
Bollen, J. &. R.-R. H., 2018. Trade wars: Economic impacts of U.S. tariff increases. An
International Perspective.

Boone, L., 2020. Tackling the fallout from COVID-19. In R. Baldwin & B. Weder di Mauro.
Economics in the Time of COVID-19, pp. 37-44.

Evans, O., 2019. The effects of the US-China trade war and Trumponomics. Forum Scientiae
Oeconomia, 7(1), pp. 47-55.

Furceri, D. H. S. A. O. J. D. &. R. A. K., 2019. Macroeconomic Consequences of Tariffs.

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