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Impacts of Trade Wars: Case Study of USA and China

Updated on July 6, 2020

Impacts of trade wars: Case study of USA and China

Introduction

Since the commencement of 2018, the multilateral trading system has encountered challenges due to the unilateral decisions undertaken by the US escalating import tariffs for some trading partners, particularly China. The background to these US measures is the escalation within the nation's trade deficit lately, especially with China. In the year 2017, the US trade deficit with China escalated to corresponding $363 billion representing 42% of the entire US trade deficit stands at $861 billion and deemed to be the highest bilateral trade deficit ever documented (Goldberg & Pavcnik, 2016).

Arguments

US-China trade tensions have adversely impacted on the consumers and numerous producers within both nations. The tariffs have typically decreased trade amidst the US and China, but the bilateral trade deficit still remains largely altered. Whereas the effect on the global growth is deemed to be relatively uncertain presently, the latest intensification could considerably dent business and financial market sentiment, interrupt global supply chains, as well as threaten the predictable recovery within the global progress within the year 2019 (Cohen, 2019).

The escalation of the US tariffs to 25 percent that is equivalent to the $200 billion on the yearly Chinese imports coupled with the announcement of the Chinese retaliation, massively marks the newest intensification within the US-China trade strains (Cohen, 2019). The effect of the formerly enforced tariffs by the US coupled with the successive retaliation by China is now evident in terms of the trade data. Both the countries unswervingly involved and their respective trading partners have been impacted through escalating tariffs.

Subject matter

There has been progressively difficulty in fixing the underlying global due to its massive trade imbalances. Moreover, mechanisms that resulted in such trade imbalances also make them relatively harder to absorb because trade surpluses, as well as deficits, are mainly the outcome of the domestic savings surpluses coupled with the deficits, which emanate from the underlying domestic income inequality. Thus, until such inequality is considerably reversed, elevated saving nations will continue to utilize trade as means of passing the impacts of their respective distortions onto supplementary nations, like the United States (Goldberg & Pavcnik, 2016). This typically makes international trade conflict almost inevitable regardless of the order of the Oval Office. In a bid for the United States to navigate the situation, they ought to reconsider the way it is the willingness to absorb everybody else's excesses.

Contrary to the renowned conventional wisdom, present trade surpluses are not due to the underlying outstanding manufacturing efficiency as well as extraordinarily hard-working coupled with elevated saving workforces. For instance, the household savings rate within Japan since the country is the world's second-biggest trade with zero surpluses for approximately the previous 15 years (Amiti, Redding & Weinstein, 2019). Conversely, within nations like Germany, Japan, as well as South Korea, massive trade surpluses were major because of the natural consequence of the existing policies that are they were due to the competitiveness, competently decreased citizens' acquiring power emanating from the outcome of the benefit from banking, business, as well as the political elite and the companies they administered.

Findings

The new US trade policy is deemed to be a battle of supremacy within China they aim at efficaciously decreasing its underlying trade deficit even within the scenario of Chinese undertaking retaliation. Moreover, it would also warranty relatively better market access for the existing US companies since the trade balance would lead to majorly positive within the elevated technology sectors attaining intellectual property rights that had been a concern of the present US administration (Amiti, Redding & Weinstein, 2019).

Regarding the escalation in protectionism amidst US and China, certain sectors within emerging nations, not directly involved within the trade war, could benefit through shift within demand, notwithstanding the underlying inclusive losses in the form of the welfare for the US as well as China and for the world as a whole (Goldberg & Pavcnik, 2016). Consequently, all emerging nations would assess the encounter welfare gains within both situations, particularly Mexico and Brazil. The situation about the unilateral imposition of the tariffs on the steel as well as aluminum would affect the US and its corresponding trading partners negatively.

The effects of the tariffs wars amidst the two nations will results in the alterations in the production, exports, imports, trade balance as well as welfare. Moreover, the US unilaterally typically charges numerous nations, particularly China, which react against the US. There would be shocks on the existing production of the nations. Upon imposition of tariffs by the US, there will be relatively greater escalation within the production of the iron and steel, electronic equipment as well as aluminum within the country (Amiti, Redding & Weinstein, 2019).

The equilibrium models founded on the perfect competition possessing fixed endowments as well as technology depicts that there would be an escalation of the welfare through decreasing excess burden resulting from the distortions with alterations within the allocative competence emanating from the interaction amidst tax and quantity alterations. The efficiency gains are considered to be closely associated with the degree through which a nation decreases its underlying tariffs. Relatively cheaper (Lu, 2018). Imported products normally result in gaining in the consumption of domestic resources. Alterations in welfare are not constricted to the corresponding allocative alterations, but also encompass alterations in the form of trade as well as corresponding e relative price of saving coupled with the venture.

Implications

The U.S.-China trade war has typically reached a perilous new phase. Tariffs are considered to be elevated and extra threats are still emerging. A swift fix is deemed to be still possible, but presently it looks more probable that the trade war will be lead to extensive, messy, and expensive implications amidst the two nations.

In case the tariffs enlarge to cover entire U.S.-China trade, the corresponding markets slump in terms of the global GDP will be standing at $600 billion by the year 2021 as its pear effects in the global markets. When the U.S. Imposed tariff rates on the $250 billion of the underlying Chinese exports to 25%, there was instant vengeance by China by escalating tariffs on some of the U.S. goods within a range from 5% to corresponding 25%. The trade war depicts that the output within China and U.S. would be relatively lower by 0.5% as well as 0.2% correspondingly, which is deemed to be relative to the no-trade-war situation (Amiti, Redding & Weinstein, 2019). Moreover, this has led to the reduction of global output. In case the threatened tariffs is escalated by the U.S by 25% tariffs on the entire Chinese imports if a quick deal is not accomplished there would similar revenge by China, which will corresponding plug the entire bilateral trade in disarray thus making the output to decrease by 0.8%, 0.5% and 0.5% up to 2021 for China, the U.S. as well as the entire world (Goldberg & Pavcnik, 2016).

Financial markets are already shaking with every new trade-war headline, and China's stock market specifically has realized an epidemic of sharp daily moves. Nevertheless, equities within both China and the U.S are deemed to be still strong meaning that investors are still confident that the two nations will have a deal (Handley & Limão, 2017). In case the deal is reached, there are impending implications for the market leaders such as Apple of getting slapped with tariffs.

The trade war has resulted in a reduction of 10% in the equity market across the board. If the tariffs war continues, China, U.S. as well as world GDP are expected to reduce by 0.9%, 0.7%, and 0.6% by 2021. Consequently, the equity market decrease serves as an additional headwind to the underlying consumption and asset thus compounding the effect (Davis, Fuchs & Johnson, 2019).

Moreover, the fallout emanating from any of these underlying scenarios would extend well past the U.S. and China, the globe's two principal economies. The worst implication is the decrease in China's exports to the U.S will also decrease in Taiwan, South Korea as well as Malaysia with all the nations embedded within Asia's export supply chain (Lu, 2018). Moreover, 1.6% of Taiwan's output is typically linked to corresponding China's exports that are normally taken to the U.S, with the underlying computers and electronics contributing to the biggest share. Moreover, in the situation of South Korea and Malaysia, the figures would be standing at 0.8% and 0.7% respectively with similar industries within the crosshairs (Goldberg & Pavcnik, 2016).

The tariffs impact the consumers via two major avenues namely escalation in the prices for the underlying consumer goods as well as a deadweight loss within the economy. Moreover, U.S industries, as well as manufacturers, can be more competitive with the producers situated within China since they function at a relatively lower cost. The imposition of the tariffs has led to the escalated average price of the goods manufactured within the US by one percent, within the industries that utilize and compete with beleaguered imports (Amiti, Redding & Weinstein, 2019). Consumers have not been affected by the price escalation directly as relatively bigger companies have been capable of absorbing the costs. Nevertheless, a reallocation of the costs is deemed to be inevitable (Lu, 2018). Moreover, extensive consequences coupled with the final escalations in terms of the prices remain to be recognized since the companies have not adopted mitigation strategies that pertain to seeking alternative sources for their respective materials. Effecting the change is likely to escalate US prices further as the industries shift their respective venture investments from China to supplementary nations.

Also, it is approximated that $165 billion will be typically redirected within the year 2019 due to the present tariffs in effect. Nations might also source materials from the nations that have been conventionally costlier but are presently considered to be more cost-effective compared to China because of these underlying tariffs. In such circumstances, prices for the prevailing consumers will escalate, but the corresponding tariff revenue will remain unaffected, thus leading to the economic burden loss. Moreover, the Fed approximates that the deadweight loss for every household within the US will be standing at $620, for an entire yearly cost standing at $79 billion (Goldberg & Pavcnik, 2016). Whereas certain costs related to such a shift will be absorbed within the supply chain, the remaining costs will eventually be distributed on to the corresponding American consumers via relatively higher prices as well as Chinese exporters through lowering their respective costs.

Contrasting domestic consumers, US manufacturers coupled with the businesses have been directly affected by the existing tariffs. Massively due to much of the targeted commodities that are classified as intermediate goods. Approximated 15% of the intermediate goods within the US have been impacted amidst 2007 and 2017. Generally, industries that were originally affected are those that undertake transportation, manufacturing, and consumer as well as medical electronic devices (Amiti, Redding & Weinstein, 2019). Numerous big companies have been capable of absorbing escalating costs through accumulating inventory before the tariffs being effected. Nevertheless, this strategy is eventually unmaintainable and will consequently result in the price markups. These markups possess an intense effect on the small businesses that are considered to be more sensitive to the alterations in terms of consumer demand (Goldberg & Pavcnik, 2016). Additionally, they might not be capable of absorbing costs while the economy, as well as consumer preferences, gradually shift. As companies commence to find alternative sources in terms of the inputs, supply chains, as well as production plans, will also alter resulting in massive loss before venturing within China by the US companies.

The intensifying of the underlying bilateral tariffs amidst the US and China possessed a restricted impact on their respective bilateral trade stability. Moreover, in the year 2018, the trade deficit escalated for the US in terms of the imports from China rose, which comparatively depicts the front-loading. As of March 2019, there was a small reduction in regard to the US exports to China (Hughes & Meckling, 2017). The macroeconomic aspects encompassing relative cumulative demand as well as supply within partner nations and their respective underlying drivers that play a relatively larger role comparable with the tariffs in the determination of the bilateral trade stabilities. On the global level majorly envisaged new US-China tariffs to be reduced by 0.3 percent

Conclusion

The tariff war amidst the two nations is also due to the political supremacy in the universe leading to additional impacts on the consumers, and industries. An escalating trade war is deemed to possess an extensive effect on the foreign exchange markets via numerous channels such as shifting trade flows coupled with the expectations about the development and the monetary policy. The background to these US measures is the escalation within the nation's trade deficit lately, especially with China. In the year 2017, the US trade deficit with China escalated to corresponding $363 billion representing 42% of the entire US trade deficit stands at $861 billion and deemed to be the highest bilateral trade deficit ever documented.

References

Amiti, M., Redding, S. J., & Weinstein, D. (2019). The impact of the 2018 trade war on US prices and welfare (No. w25672). National Bureau of Economic Research.

Goldberg, P. K., & Pavcnik, N. (2016). The effects of trade policy. In Handbook of commercial policy (Vol. 1, pp. 161-206). North-Holland.

Gompert, D. C., Cevallos, A. S., & Garafola, C. L. (2016). War with China: Thinking through the unthinkable. Rand Corporation.

Katznelson, I., & Shefter, M. (Eds.). (2018). Shaped by war and trade: International influences on American political development (Vol. 79). Princeton University Press.

Lu, N. (2018). The dynamics of foreign-policy decisionmaking in China. Routledge.

Hughes, L., & Meckling, J. (2017). The politics of renewable energy trade: The US-China solar dispute. Energy Policy, 105, 256-262.

Piccone, T. (2016). The geopolitics of China’s rise in Latin America. Geoeconomics and Global Issues Paper, 2.

Handley, K., & Limão, N. (2017). Policy uncertainty, trade, and welfare: Theory and evidence for china and the United States. American Economic Review, 107(9), 2731-83.

Cohen, S. D. (2019). Fundamentals of US foreign trade policy: economics, politics, laws, and issues. Routledge.

Davis, C. L., Fuchs, A., & Johnson, K. (2019). State control and the effects of foreign relations on bilateral trade. Journal of Conflict Resolution, 63(2), 405-438.

This content is accurate and true to the best of the author’s knowledge and is not meant to substitute for formal and individualized advice from a qualified professional.

© 2020 Michael Omolo

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