The US, Canada, and EU have implemented fresh tariffs on Chinese-made goods citing unfair international trade practices by China, which has muted severally that the tariff gesture will be reciprocated. Bottom line, there is a trade war set to struck in few months if China maintains its tit-for-tat course.
From 2018 to 2020, there was a trade war between the US and China. The US had imposed tariffs on Chinese goods, particularly technologies coming out of China, as Donald Trump claimed that Chinese companies were ‘stealing’ innovations from the US and creating market-affordable duplicates. These duplicates were believed to have crowded out the market share of American companies, both in America and America’s export markets. The two-year long spat was largely defused with the signing of the “Phase One” agreement on January 15, 2020. The agreement was rooted on four consensuses:
- China and US mutually agreed to cut tariff, with the US agreeing to cut tariffs on $120 billion worth of Chinese goods from 15% to 7.5%, while maintaining 25% tariffs on approximately $250 billion worth of Chinese imports
- China committed to purchase additional $200 billion worth of US goods and services over the next two years
- Design of protection plans for intellectual properties. Specifically, that China would refrain from intellectual property theft and forced technology transfers.
- China agreed to open up its financial service sector to more US firms and included commitments to avoid competitive devaluation of currencies.
The “Phase One” agreement is touted as a temporary truce, with little or no progress recorded as most of the tariffs were not reversed; there were notches of the Yuan devaluation; and the brawl about intellectual property theft remains unresolved. What makes the latest round of tariffs interesting is that it is not coming from the US alone; Canada and EU are also in play citing concerns on the need to protect domestic industries from cheap Chinese imports. The tariffs are mostly targeted at electric vehicles, semi-conductor chips, aluminium and steel. How are Chinese goods so cheap abroad? Simple, the government subsidize the cost of production for local manufacturers. With the subsidies in place and the previous low tariffs, it was cheap, for instance to buy an electric car made in China than its US counterpart. Local manufacturers abroad would definitely have lobbied through their unions to raise the tariffs on Chinese imports. Another side to this story is political, which would be the case for semi-conductor chips, an input used to develop military arsenals. The US wants to tame this industry in China by reducing the demand for its output abroad and substituting it with US-made chips. This likely has a way of sustaining US dominance in the supply of military equipment.
The erstwhile US-China trade war had some dire impact. For instance, global real GDP growth slowed down from 3.8% in 2017 to -2.7% in 2020, effectively contributing to the global recessionary plunge. Over the same period, China’s growth declined from 6.9% to 2.2%, while US’ dropped from 2.5% to -2.2%. Trade deficit in the US expanded by 26% from $516.9 billion in 2017 to $652.9 billion in 2020. China experienced a 39% slowdown in trade surplus from $217.0 billion in 2017 to $131.8 billion in 2019 before recovering to $358.6 billion in 2020. From a bilateral trade view, Gorman et al (2022) reported that US exports to China fell by 26.3% while exports to the rest of the world increased modestly by 2.2%. China’s export to the US declined by 8.5% and its exports to the rest of the world rose by a statistically insignificant 5.5%. This finding is not surprising given China’s edge over US in manufacturing. Global inflation spiked to 3.5% in 2019 from 3.3% in 2017 before retiring to 3.2% in 2020. In the US, inflation rose momentarily to 2.4% in 2018 from 2.1% in 2017 before declining to 1.2% in 2020, while China inflation surged to 2.9% in 2019 from 1.6% in 2017 before slowing down to 2.5% in 2020. We can attribute most of the disinflation in 2020 to the weak consumer demand spurred by the COVID pandemic. Overall, in terms of impact, we note that trade wars would generally result in a slowdown in global trade; lead to downgrade in growth forecasts; cause more frequent stock market volatility; restructure supply chain agreements; drive higher inflation (even if it is momentarily); and higher operating cost for businesses relying on international trade.
In conclusion, there is a high likelihood that China will retaliate the current tariff hikes in a few months, resulting in a full-blown trade war. How long the trade war will last will depend on how soon all the parties are willing to come to the table, but given that the “Phase One” agreement was largely ineffective; designing a new agreement will likely be a lengthy process. This is also corroborated by the fact that China will have to negotiate with multiple countries and not just the US. Based on this thought, we can anticipate a low to medium global economic slowdown.
Written by Michael Ogunremi
Ref – Gorman, L. (2022). How the US-China trade war affected the rest of the world. National Beurau of Economic research.
Image credit – Euromoney
