US and China Trade War and its impact on US Economy
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US and China Trade War and its impact on US Economy

US and China Trade War and its impact on US economy

Generally we don’t like the sounds of war especially those of this generation who have seen first hand the atrocities and evils of wars. So what is this trade war between China and the US about? Remember the cold war between US and Russia and all the attendant evils, well trade wars sometime can sound scary. This is because it is a war and wars are not nice things. With the trade in front of the war, at least it is not expected to degenerate into an all out blood letting. But then again it won’t be very nice for the economies involved.

So What Exactly is a Trade War

Basically this is the imposition of tariffs or taxes or an increase in them, on certain commodities which are imported from a certain nation. And of course the other country responds also, by doing the same thing, imposing tariffs on goods imported from the other country.

Now the effect is that the exporters now have to spend more money while getting their goods to this country, and the attendant effect is a rise in the price of these goods after they have been imported. With a rise in price there will be a decrease in purchases as people will naturally look for cheaper alternatives.

Therefore imports from other countries who export that same product(s) will be cheaper, and the people will buy it more. So for example China exports electronics to the US, now if Trump puts a tariff on the electronic imports from China, it would mean, US citizens will buy electronics from other countries, because now they’ll be cheaper, so the Chinese companies will make less profits.

Now the Chinese government doing that to the US exports in their country will also lead to the same effect on American manufacturers.

Why is Trump Doing This

So the President of the United states has said they are not in a trade are war with China. In a tweet on April 4 2018. Trump said “We are not in a trade war with china, that war was lost many years ago by foolish, or incompetent people who represented the U.S. Now we have a trade deficit of $500 Billion a year, with Intellectual property theft of another $300 billion. We cannot let this continue!”

As far as Americans are concerned a trade war with China will impact negatively on the economy. The last trade war they had didn’t exactly go very well. A trade war with China will increase tariffs on goods from China, which will make it more expensive of the average American to purchase.

Trump started this whole debacle, If we can call it that, sometime in March this year, he imposed tariffs on Chinese exports of steel and Aluminium. Now his reason for doing this can’t actually be faulted, it was in a bid to protect the American Aluminium and Steel industry. He went further to impose 25% tariffs on somewhere between $50 billion to $60 Billion US imports from China. The affected industries are machinery, aerospace and information and communication technology, and Trump said this is just the “first of many” moves of such actions.  Naturally Xi, the Chinese head of state also responded with tariffs, and these were on apples, wines and scrap Aluminium. After this Trump threatened more tariffs, about 1300 in total and also the Chinese government responded with a threat of more tariffs, this one was going to affect U.S aerospace industry.

The question some would be asking is why is Trump doing this to Chinese imports. First is starts with what Trump thinks is the huge trade deficit between China and the U.S. Trump as said in a tweet

“From Bush 1 to present, our country has lost more than 55,000 factories, 6,000,000 manufacturing jobs and accumulated Trade Deficits of more than 12 Trillion Dollars. Last year we had a trade deficit of almost 800 billion dollars. Bad policies & leadership. Must Win again! #MAGA”

And according to Trump this has been the biggest in years, so he’s seeing this as a weakness on the part of those in power to take certain decisions. There are those who do not agree with Trump that the trade deficit is actually what it is. Seeing that the income from the service industry exports (tourism, banking services etc.) wasn’t included in his considerations. And also the fact that most developing countries are moving from manufacturing to service based economy.

Trump is also against some of the policies of the Chinese governments which forces U.S companies to hand over some “know how” of their products for a share at the huge Chinese markets. And China in turn reengineers these products and starts exporting cheaper ones, this Trump has said is a bad policy for the trade and commerce with the US. Trump said “we have a tremendous intellectual property theft situation going on” with  China affecting hundreds of billions of dollars each year. So this trade tariffs are Trumps recompense for Chinese unfavourable policies. And also in hopes that China will rescind it’s policy of asking for trade secrets from companies for a share of the Chinese markets.

Xi Juping has said that he‘ll match Trump blow for blow if it comes down to a trade war, although, there are doubts if China has the might to achieve this. One thing is certain though, China does have to power to really hurt the U.S economically, even if it cant be done directly (of course it can be done directly). There are many covert ways this can happen, such as disruption of supply chains, which definitely will hurt U.S producers.  However, one thing will definitely happen, the dollar will be hurt in a trade war as we are already beginning to see.

With this announcement equities plummeted, stock indexes from Hong Kong to Tokyo also fell by over 3% and the Yen rose against the dollar. Now this is just the beginning, there’s no telling what effect this skirmish will have on Global trade.

China has said that it doesn’t fear a trade war with the U.S, in the meantime though most of their tariffs are just retaliations. According to Li Yong “The US declared a trade war, but China is acting quite restrained . The list that China has announced appears to be a  retaliation, but still it is very measured,” Li Yong is a senior fellow of China Association of International Trade.

Including the tariffs, China is also suing U.S to the W.T.O court, and the U.S is also suing the Chinese to World trade Organization court also . The bigger challenge, however, is if the WTO is capable and well equipped to face what could be biggest trade war over in 20 years.

During campaign, Trump promised a reduction in the trade deficits they had, not just with China but with the rest of the world, and he’s taking aggressive steps to do that. He also believes that this will bring back jobs to the U.S. This is true and may also not be true. Look at It this way, if Trump raises tariffs on Aluminium, China won’t be able to export as much Aluminium therefore Aluminium companies in the US will fare better, have increased profit, expand and employ more people.

However, China, is in the same vein raising tariffs on agricultural goods, therefore U.S farmers might not be able to export at good prices, this means they’ll lose market, make less profit, and therefore they’ll have to reduce their operations which will lead to a reduction in jobs. So there’ll be a counter balance of job gains and job loses, leaving them most likely in square one.

How Will This Affect the Average U.S Resident?

These are the biggest economies in the world engaged in a boxing match, and as an African adage says “when too elephants fight, it’s the grass that suffers”. With the proverbial elephants here being the U.S and China and the grasses here being masses in both countries, businesses and other smaller economies.

China has levied tariffs on the U.S industrial and agricultural produce, such as steel pipes, airplanes, and cars, and also pork, wines, cotton and soybeans. So basically all the groups who need these commodities will have to pay more to get them. With a tit for tat measures , goods all round will be raised in price, therefore the purchasing power of the average man on the street will be reduced and also companies will suffer with less profit and with more barrier to doing business especially those who also have manufacturing plants overseas.

We believe that this is Trump trying to prod for weakness from her huge trade partner China, this is in a bid for renegotiations of their terms of trade. This is actually a way to get better deals in a negotiation, when you have better bargaining power or you can exploit your opponents weakness.  China though very strong, is the weaker economy, and they have the trade surplus, this would mean that they might actually have more to lose. Does this mean they’ll call for a truce and open up negotiations, we can’t tell.

However, we can tell that everyone, not just the Chinese or the Americans, but the world will be hurt if this skirmish should degenerate into an all out trade war. It would also disrupt the world trade, no one wants that, so everyone is wading in. The 5th and 6th of July will tell us though if this thing will be escalated.

This will be a make or break for Trumps re-election that is if he decided to run. The farmers in California who voted massively for him are on the fence as concerns re-elections, the Republican Party is also against tariffs, but if this should work and U.S should get room for better negotiations, Trump will even be more popular than ever.

 

 

 

 

 

 

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