US China Trade War Effect on Global Economy

A trade war is the last thing that any country would want as it weakens the entire global economy and disrupts people’s well-being. A trade war happens when one country retaliates against another by placing restrictions, like raising import on goods imported from other countries. A trade dispute is a controversial topic, and when a war breaks out between countries, some countries face huge losses while others reap the benefits of the fallen competition. The trade dispute is often looked at by critics as a protectionist policy to safeguard the interests of a nation’s domestic businesses. However, in the long run, trade wars or trade disputes, by whatever name they are called, are detrimental for the growth of local companies, consumers, and the economies at large.

Causes of US China Trade War

The trade dispute between the United States and China began long back in 2018 when President Donald Trump started to impose a series of import tariffs on everything, starting from steel to aluminum to solar panels and even for washing machines. These import duties impacted goods from China, Mexico, the European Union (EU), and Canada. To combat such challenges, Canada also retaliated by imposing a series of temporary import duties on American steel and other goods. The EU also imposed tariffs in retaliation on American agricultural imports and other industrial products like Harley Davidson motorcycles.

In early 2018, President Trump imposed a big fine over alleged intellectual property (IP) theft and significant tariffs on $500 billion worth of Chinese products like steel and soy products. To this, again, China retaliated with a 25% import tax over 100 American products.

By May 2019, the United States’ tariffs on Chinese imports impacted nearly $200 billion of imports. China also retaliated and imposed stiff import duties on major American imports. As per reports, the American government shouldered all the tariff costs imposed by China, which ended up as increased prices of goods that the end consumers had to bear; this went against the actual purpose of the war, and the United States’ citizens revolted against this policy. Throughout the year, the two countries continued releasing a list of proposed tariffs on various imports against each other. In September, the American government again implemented 10% new tariffs on Chinese products, but this time it could not impact China’s economy much, as China was already prepared to get such a setback from America, and therefore, they were ready with their own tariffs. However, it did hurt the Chinese manufacturers, which caused a slowdown in the Chinese economy.

Situations came under control in December 2019 when both the nations agreed to halt imposing any new import tariffs on each other and developed a mutual agreement to stop the war. However, this also did not go on smoothly as just before the final talks were about to begin between the two countries. Chinese authorities refused to make any changes in their company-subsidizing laws and insisted that the American government lift the current tariffs on Chinese imports. The American President became furious at such a proposal from the Chinese authorities and eventually doubled the tariff rates from 10% to 20% on $200 billion worth of Chinese imports. In retaliation, China halted all American imports of farm products, and the raging war continued.

The Chinese central bank also weakened the Chinese currency “yuan” above the 7 per Dollar reference rate, thereby hinting towards a raging currency war between the two countries. To this, both the nations realized that the aftermath of the currency war would be mutually destructive for both the nation and, therefore, both America and China agreed to a deal on January 15, 2020, to stop the war. However, the ongoing COVID-19 pandemic is yet again threatening further escalation of trade tensions between the two nations.

Impacts of the United States-China Trade War

1) Slow Global GDP Growth

The trade dispute escalated as the United States continued to impose tariffs one after the another on Chinese imports.  In retaliation, China released its own tariff rates, and end results are falling on the customers, which is ultimately leading to a slow GDP growth rate. Amidst all these confusions, America yet again introduced some fresh set of tariffs on new product categories. Then again, in mid-December, the increased tariff rates were imposed on the remaining imports from China. The current tariff rates were increased by 5 % in October. The trade dispute now included business restrictions on individual companies, along with high tariff rates imposed by the American government on Chinese products. Then there are accusations of currency manipulation, which altogether is proving detrimental to the global GDP growth. If the trade dispute between the two most powerful nations continues this way then there is a high possibility that it will take over to emerging technologies as well, which will take the shape of massive global destruction.

Although there are no signs of immediate improvement with the outbreak of the COVID pandemic which has further escalated the trade tensions, both the nations are trying to move ahead to settle their disputes.

2) US Manufacturing Suffered 

With the adverse effects of tariffs on the American manufacturing sectors as a way of retaliation by the Chinese government, the American manufacturing wings also suffered a lot. Not only the US, but 70% of the entire world also depend on Chinese raw materials and inputs to manufacture their final products. With the increase of the tariff rates, these inputs’ costs have risen, and the US manufacturing wings are suffering. Then again, the US manufacturers lost a huge share in the Chinese market, as after the US imposed high tariffs on Chinese goods, China retaliated this move by introducing their own tariff rates. So, these manufacturing companies are losing sales everywhere; they are losing the US’s domestic market and the international market in China. Yet again, they are losing to third world countries because of high costs of their products which they cannot adjust owing to the increased price of the inputs. Therefore, they are proving to be less competitive as compared to the alternative sources of supply.

3) Reduced Trade Flows between the US and China

The war between the US and China has significantly reduced the US market share of Chinese imports because of the reduced trade flows between the two nations. The trade war has already weakened the economic developments in China in the last two years, thereby resulting in the decline of foreign trade in both nations. China’s goods imports from the US manufacturers also decreased drastically by over 25% than what was last year. Due to the rapid fragmentation of production chains and the low demand of goods caused by trade disputes, foreign trade flows of goods from China’s neighboring countries have also been reduced to a great extent. The value of imports from the European Union (EU) has almost come to a halt, which used to grow by more than 10% on an average every year. Overall, the increased tariff on businesses in both the US and China had negative impacts on their respective companies; the booming companies turned into skeletons. As a result of these massive disruptions, around 40% of respondents decided to relocate their manufacturing units outside China.

4) China’s Yuan Depreciated

The U.S China trade dispute has brought in huge changes in the currency markets as well; the value of the Chinese yuan has depreciated against the US Dollar. On the financial ground, stock markets have become more volatile owing to the news of a  war, which sparked anxieties and confusions amongst the investors. Then again, the news of U.S China negotiation developments disrupted the credit risk prices. The sudden rise in the credit risk prices coincided with the negotiations which were announced by both the nations in the month of May and August this year.

5) Increased Price of Goods and Reducing Demand

The U.S China dispute has already disrupted the global economy, with both the nations at a huge loss. In the US, increased tariffs operate like an increased sales tax on imported goods that are levied on US consumers in the form of increased prices. The customers and the producers are liable to pay this increasing price of goods that ultimately damages the competitiveness, thereby reducing the demands for goods.

However, though the tariffs raise the prices of goods for the China’s government, they have a comparatively less direct impact on the producers due to the exemptions imposed by the Chinese government on some intermediate inputs. For the US markets, both total imports and exports declined following the US China dispute (because of the difficulty in relocating to other locations), but China successfully diverted its exports away from the United States by expanding its reach in other markets and by increasing their total exports. This successfully set a chain reaction in motion; China increased exports to Europe and other countries in Southeast Asia, which in turn increased their total exports to the United States.  

6) The structure of Production Changed

The U.S. China Trade disputes disrupted the structure of production in both China and the United States, though in different ways. Post the U.S. China trade dispute outbreak, the relative production shifted its focus away from agriculture, traded services, and manufacturing towards non traded services. However, for the Chinese government, this relative shift was in favor of the traded and manufacturing services. To adjust to these changing scenarios, the Chinese government excluded tariffs on some intermediate manufactured goods to improve the manufacturing and production sectors. Therefore, the dispute between the United States and China has negatively impacted the global trade economy in every way. The increase in tariffs has slowed down the global GDP growth rate by around 0.7% which is not a good sign for either of the nations. The dispute has diminished trade flows between the United States and China, and with this growth of uncertainty the investment sentiments of people all over the world is changing; people are not willing to invest anywhere which in turn leading to the drastic fall in the global trade stock indices. As a result, both the manufacturing and purchasing indices have weakened in the major United States and China’s markets that yet again resulted in the poor performance of the export order levels. Then again, the news on negotiations between the two nations have caused volatility in share prices. However significant disruptions in the stock market has reduced comparatively with the news of settlement announced by the two nations.

Thus, the effect of these uncertainties and reduced confidence are creating trade disputes between the two powerful nations and weakening the global economy, which is clearly evident from the deteriorating investment sentiments of people all over the world.

FAQs

1. How Does Trade War Affect the Global Economy?

The dispute between the United States and China has weakened the global economic condition, leaving both nations at the worse off. Such a lose-lose trade war (where both the contenders are at their worst) compromises the stability of the global economy, and eventually the future growth prospects lands in a standstill.

However, according to some other trade analysts there is another long term effect of this trade dispute; China’s loss is other nations’ gain. According to the recent trade statistics, of the $35 billion worth of Chinese export losses in the market of the United States, more than $21 billion was diverted to other countries, and the remaining $14 billion were captured by producers of the United States. Therefore, China’s losses turned out to be a boon to many other countries of the world.

For example, the imposition of US tariffs on China resulted in Taiwan gaining $4.2 billion in additional exports to the United States by selling more office machinery and equipment. As China halted its exports to the United States, Mexico increased its exports of electrical machinery, agri-food or transport equipment to the United States by $3.5 billion. Then the EU gained over $2.7 billion due to its increased exports of machinery equipment to the US. Viet Nam’s exports of communication equipment and furniture to the US also swelled by $2.6 billion.

2. How is the trade war affecting the US economy?

The ongoing trade war has left both China and the US economically hurt. The raging war between the two powerful nations of the world has led to a sharp decline in bilateral trade, spiked high prices for the end consumers and resulted in trade diversion effects. Trade diversion means both the nations are now seeking ways to import products from countries that are not directly involved in the trade war.

As per current trade statistics the US consumers are bearing the heaviest brunt of the US tariffs imposed on China owing to the associated costs that have passed down to the US consumers. As a result, they have to import products from other countries at much higher prices. However, China has balanced its position by absorbing part of the tariff costs by creating its own tariff rates and reducing the prices of their exports to other countries apart from the US.

3. How does the trade war affect China?

China is economically hurt in this trade war. All its exports to the US have stopped leading to a huge loss on its economy. However, keeping in mind the mutual devastation, both the nations have now agreed to a negotiation to end the trade war, but unfortunately, that is very unlikely to happen soon owing to the ongoing COVID pandemic disrupting the global economy.

4. Who is affected by the US China trade war?

The ongoing trade war has negatively impacted both the nations but resulted in some advantages to other countries because of the trade diversion. As the US and China halted imports and exports to each other, both the nations began importing from other countries who benefited immensely by exporting products to these two nations at much higher prices. Mexico is at the biggest advantage by exporting products to the US. Trade diversion has also benefited the South East Asian Countries massively.