A trade war happens when one country retaliates against another by raising import tariffs or placing other restrictions on the other country’s imports. Trade wars can commence if one country perceives that 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. Against the backdrop of threats of further tariffs and retaliation, the tension between China and the US, the top two trading countries in the world, inevitably intensifies. The International Monetary Fund (IMF) (2018) simulates the economic consequences of mounting China-US trade tensions and warns that should these trade threats materials, the GDP of the US and China will be reduced. A report from the European Commission in July 2018 also downgraded its economic growth forecast for the European Union (EU), suggesting that the effect of the trade disputes is not restricted to China and the US (European Commission, 2018). Some journalists and commentators also suggest that the China-US trade war might eventually evolve into a new Cold War, which will severely imperil the stability of the global political and economic environment.
Significant Causes of US-China Trade War
It is considered that March 23, 2018, was the formal date when the trade war began with Donald
Trump signed the “Presidential Memorandum Targeting China’s Economic Aggression” and
introduced tariffs on steel and aluminum. However, the tensions in the economic relations of
the US and China had appeared and were discussed earlier. The WTO granted China the status of a market economy in 2017, which aroused criticism from the US because the decision limited
opportunities for protectionism against companies from China.
The US refused to recognize China as a market economy, which was the first step towards the
confrontation within the “Group of Two”. Trump’s confrontational policy was reflected in the
National Security Strategy, adopted in December 2017. It introduced restrictions on China’s
investments in American technology, tightened exports control, and expanded the list of dual-use products that could not be shipped to China. The Entity List was introduced: US companies were banned from doing business with unlisted companies, including the ZTE Corporation which was accused of violating US sanctions against Iran
Four main causes or incentives for the trade war between the US and China:
1. The trade war is supposed to reduce the deficit of bilateral trade and bring American jobs back
home. Out of the $796 billion worth of US trade deficit in 2017, China accounted for $376 billion, or 47%, almost a half. The US acknowledges several problems in the trade with the PRC, the trade balance deficit being the most important one. The issue has been emerging for decades and still has an increasing trend (although the US trade deficit with China reached a historic low in May 2019). The US does not consider trading with China “fair”.
2. The trade war is supposed to reduce the high-tech capacity of China. The US is not satisfied with China’s requirements on creating joint ventures for technology transfer as a contribution to
the authorized share capital of local companies. Another sensitive topic is Chinese public investment creating unfair competition in global markets. The US has been alerted by China’s success in implementing a strategic plan for production modernization, increase in production of robots, lithium batteries, network equipment, etc. The US has increased import tariffs up to 25% on electronic products from China, including telecommunication and network equipment.
3. The trade war is supposed to prevent the growth of China’s military strength. Markov believes
that it is absolutely unacceptable for the US to let China achieve superiority in the military sector, even in the long run. Consequently, the US is taking measures to ensure its competitive
advantage in the national security sector and to prevent China from using American dual-use
4. The trade war is supposed to cut the federal budget deficit. According to Dongsheng Di, Gal
Luft, & Dian Zhong, “the US will need additional sources of income like tariffs in order to
balance its budget, and tariffs on Chinese products is viewed as the main source of such income”.
The budget deficit of the US federal government grew and exceeded USD 21 trillion, which was
attributed partly to tax cuts in December 2017. The Chinese government also has a much
healthier fiscal position and is free to compensate for any industries harmed by a trade war. By
contrast, the US government is facing a large budget deficit of some 4 percent of GDP that is set
to rise in the next few years.
Impacts of US-China Trade War on International Trade:
The US-China trade war has been the main reason behind the uncertainty in financial markets
during 2018 and 2019, which has affected investor confidence globally. For the US, their change
in trade policy with China was aimed at reducing the US trade deficit with China and
encouraging industries to invest in the United States rather than in China. The move is also
aimed at bringing back manufacturing jobs to Americans.
The trade war has had significant impacts on the economic indicators globally. The global economic growth slowdown and international trade barrier resulting from the US trade policies have led to reducing demand for many industries around the world and raised the possibility of a global recession. The flow of foreign direct investment has shifted away from China to other countries. Many companies with bases in China have already relocated or are considering relocation to other destinations as they do not see any resolution to the dispute in the near future.
Not all countries have been affected in the same manner by the trade war. For instance, it has
presented Vietnam with considerable advantages, opening up the possibility to attract
investments from across the globe, including China. In fact, Vietnam has been the biggest
the beneficiary of the US-China trade war in the world so far. However, there is reason to anticipate changes in the US trade policy on Vietnam, as the US trade deficit with Vietnam is becoming wider. While Malaysia can be considered as an alternative destination for companies relocating from China, Singapore’s manufacturing industry, especially the semiconductor industry is suffering from the changes in demand for chipmakers, which has negatively impacted its economy. Finally, the report discusses the new phases of the trade war, such as the recent currency war, and considers the possible future of the dispute. This report equips the investors with the required information to aid their decision-making process.
The US-China trade war also creates new opportunities for the EU. China may need the EU even
more as an export market and partner for its technological development. The EU may thus find it
easier to negotiate an ambitious investment agreement with China to ensure access of European
firms to still be protected sectors such as financial services, infrastructure, or utilities. What is
more, the EU may position itself as an intermediary between Beijing and Washington to increase
its political influence in the world. The incoming Von der Leyen Commission seems indeed
determined to strengthen the EU’s profile in world politics.
The greatest trade war in economic history can result in a change in the international trade
architecture, slow-down of financial markets. The countries can be divided into two blocks
supporting the US or China, and at the same time, forming the mega-alliances of economies, as
well as regional currency zones. Asia’s role in globalization processes and the development
of global supply chains is likely to strengthen.