US - China Trade War

Bhaveek Ostwal
19P132
 Start of the current trade war
Background:
• On March 8, 2018, it all started with President Trump announcing a
25% and a 10% tariff on steel and aluminium imports respectively
• Trump used a special power granted by Congress in 1962 that allows a
president to curb imports that threaten national security
• Global stock markets tumbled in fear of a trade war between the
world’s three largest economies
• Trump made a big point on his presidential campaign trail about cutting
the country’s trade deficits.
• He’s convinced it hurts US manufacturing
• US has a massive trade deficit with China ($375Bn for ‘17 – refer table)
• Trump’s initial list of demands were:
 End subsidies to tech companies.
 Stop stealing U.S. intellectual property.
 Cut tariffs on U.S. goods by 2020.
 Open China to more U.S. investment.
 Reduce the trade deficit by $200 Bn by 2020.
Trumps agenda:
• Continued domination of US$ as Reserve Currency:
• 70 per cent of world trade happens in dollars but the US share in
world trade is less than 15 per cent
• The US manages this by ensuring that large trade contracts for
commodities like crude oil are always denominated in dollars
• Countries like China are taking steps to denominate their trade
contracts in local currency and reduce dependence on the $
• China plans to denominate all Belt and Road Initiative (BRI)
contracts in local currencies. Hence, China is the primary target
• Threat to Digital & high-tech space:
• US lead in digital and high-tech space is under threat from China
which is going all-out to become a leader in Artificial Intelligence
and high technology by 2025
• Many of China’s home-grown firms are large unicorns ready for
global operations in direct competition to the US firms
• The China model of not allowing entry to Google and Facebook is
being copied by others threatening dominance of the US firms
 Important Timelines and Current Status
• March ‘18 : Trump authorizes tariffs of 25% and 10% on steel and
aluminum imports from China, respectively citing national security threat
• April 1, '18: China takes its first shot; China retaliates with tariffs on about
$3 Bn worth of U.S. goods.
• May 3, '18: Talks fail to end trade war; U.S. and Chinese delegations hold a
round of trade talks that do not yield a resolution to the disputes.
• June 15, '18: New tariffs escalate tensions; Trump says he will slap a 25%
tariff on $50 Bn. Beijing swiftly retaliates, announcing tariffs on $50 Bn.
• Sept. 17, '18: Trump ups the stakes; Trump announces 10% tariffs on
$200 Bn in Chinese goods, with plans to hike the rate to 25% at start of '19;
Threatens additional tariffs on $267 Bn if Beijing retaliates.
• Sept. 18, '18: China fires back; China says it will slap tariffs on $60 Bn in
U.S. products in response to the latest U.S. duties.
• Nov. 1, '18: Trump and Xi reconnect;
• Nov. 26, '18: Trump threatens wider tariffs; Trump says he will not delay
the tariff rate increase on $200 Bn in Chinese goods past Jan. 1; suggests a
10% tariff on Apple iPhones & laptops imported from China.
• Dec. 1, '18: Trump and Xi strike truce; The U.S. agrees to delay increase in
tariffs. Both countries set out to strike a trade deal within 90 days.
• Dec. 29, '18: Trump touts ‘big progress’;
• Jan. 7, '19: Trade talks resume;
• Feb. 24, '19: Tariffs delayed again; Trump again delays tariff increase plans,
citing “substantial progress” in the most recent round of trade talks.
• April 10, '19: ‘Making progress’; US says they are making progress on a trade
deal, incl. resolving a key point that had been dragging the process.
• May 5, '19: Talks fall apart; Trump suggests increase in tariff rates as talks
move “too slowly” and China attempts to “renegotiate” ; Accuses China of
backing out of major commitments in a developing agreement.
• May 10, '19: Tariff rates jump; Tariff rates on $200 Bn increases to 25% from
10%. China then hiked duties on $60 Bn to as high as 25% on June 1.
• May 16, '19: US bans Huawei; puts it on ‘entity list’ effectively banning US
companies from selling to Huawei without prior govt. approval.
• May 31, '19: China retracts; announces plans of its own ‘unreliable entities’
Current Status
• Ahead of the G20 meeting, Trump and Xi reignited trade talks and agreed to
meet in person during the summit to discuss further
• June 26, ’19: Tentative truce reached; US threats of increased 25% tariffs on
$300 Bn goods halted as talks of agreement are being drawn up ahead of G20.
• June 29, ’19: Trade talks resume, Huawei ban relaxed; no deadline imposed
• As of today: US tariffs applied exclusively to Chinese goods: US$250 Bn and
has threatened tariffs on $235 Bn more
• Chinese tariffs applied exclusively to US goods is US$110 billion and it is
threatening qualitative measures that would affect US businesses in China
• With neither Trump nor Chinese President Xi Jinping willing to back down, US-
China trade tensions could erupt into a full-blown trade war
Impact of trade war on US, China & India
On US: On India:
• The trade war has raised the prices of consumer goods that • India’s trade surplus of $21 Bn with the US has often
use steel and aluminum. Half of all Chinese imports are attracted the attention of US
goods used by U.S. manufacturers to make other products • President Trump, claims India follows discriminatory trade
• The most immediate effects were felt by companies like practices against US exports.
Walmart, which import Billions of dollars of cheap goods that • India had deferred tit-for-tat tariffs for the third time against
are bought mostly by the people who voted Trump 29 American products by 45 days, but finally imposed them
• China is the 4th largest agricultural export market for US ($9.3 on goods worth $235 million.
Bn in 2018) and thus when it imposed tariffs, American • The move was considered to counter the US’s move to
farmers were put in a bind with huge stockpiles that they unilaterally raise import duties on Indian steel and aluminum
could not sell products.
• Trump hoped that due to the trade war, Americans will start • India and US are now engaged in finalizing a trade package to
buying more US goods, more jobs will be created as firms ease tensions
will expand. But with higher demand, Americans may reduce
consumption and hence serve the objective.
On China:
• Economists expect that the trade war will cut China’s export
growth by almost half to 5.1 % in 2019, putting around 4.4
mn jobs at risk and denting GDP growth by ~1 %
• Chinese consumer discretionary companies bore the brunt
and range of consumer goods like Flat TVs, household
appliances and auto parts seeing immediate drop in demand
• China has recently recorded its slowest economic growth of
6.2% in almost 3 decades due to slump in exports caused by
the trade war
Future Implications for US, China, India & the world
For US:
• China plays an important role in the global automotive
supply chain, which means U.S. producers would spend more
on parts from China when they are taxed at a higher rate and
prices will rise for even US built vehicles
• If the fight for technological dominance continues and the
trade war escalates, China may choose to retaliate with
tariffs and cripple American companies
• Foreign tariffs on U.S. exports will make them more
expensive. U.S. exporters may have to cut costs and lay off
workers(~12mn) to remain competitively priced. If they fail,
they may cut costs further or even go out of business.
For China:
• The trade war comes at a bad time for China, just when it is
attempting to fix its debt situation by curbing credit growth
• China would even have to ease monetary conditions to
support demand and allow the currency to absorb the shock
of the trade war
• The depreciation of the yuan to offset the loss in export
competitiveness for Chinese exporters due to higher tariffs
can not be ruled out
• All this will affect business sentiment, investment and
growth in China
• China would have to rely more on fiscal policy to support
domestic demand and defray the costs of the trade war
For India:
• Initially no direct impact on India was perceived and the impact
was expected to be minimal in the form of slower global trade
• However, concerns grew in India after US terminated India’s
beneficiary designation under General System of Preferences
(GSP) which promotes economic development of developing
countries by eliminating tariffs on a lot of products.
• India has spotted an opportunity to fill in the gaps created to
boost its exports in sectors such as chemicals, pharma and
electrical parts, where India could have a comparative advantage.
• Although the trade surplus that India has with US is very small
when compared to that of China, it will have to carefully draw out
plans for this opportunity to be exploited
• Partnership with US is crucial to Modi govt.’s target of making
India a $5 trillion economy by 2025
Global Implications:
• Trump’s decision to take on China could lead to adverse effects for
consumers in the US and in China, but also worldwide.
• An economic showdown between the world’s biggest economies
doesn’t look good for anyone.
• Consultant Oxford Economics predicted the trade war could cost
the global economy $800 Bn in reduced trade.
• That could slow growth by 0.4%. It’s occurring at the same time
that oil prices and interest rates are rising.
Conclusion
While many believe that the US is winning the trade war (given how it has got other countries to open their markets/ revisit
tariffs on US goods), economists warn that it is too early to predict the long-term impact. While a few individual countries may
gain, the global economy is most likely to be hit hard.

Here’s a statement by legendary economist Gary Shilling:

“When you’ve got plenty of supply in the world, plenty of industrial capability, plenty of raw materials - it’s the buyer
that has the upper hand not the seller. The buyer has the ultimate power and who’s the buyer? US is the buyer, China is the
seller. China isn’t going to collapse obviously, but I think in this trade war, US has the upper hand. I think US-China probably will
settle and China will begrudgingly give ground. They’ll import more US goods, they’ll ease up on required tech transfers, steal
less of it.”

In the long term, trade wars slow global economic growth. They create more layoffs, not fewer, as foreign countries retaliate.

Whatever form this conflict takes, and however long it lasts, there will be no winner.