America and China have sustained good relations since the era of Reforms and Openness under the leadership of Deng Xiaoping. For more than 30 years, China maintained an annual GDP growth rate of an average 10 per cent. In 2011, China surpassed Japan as the second largest economy of the globe. In the previous three decades, China achieved enormous success in the economic domain, particularly consolidating its grip on international trade. Until 2008, US remained an admirer of China because of the liberal nature of economy. However now, both great powers are facing strained relations. The initial footprints of economic confrontation appeared when US announced Trans Pacific Partnership (TPP), which could not be materialised under the Obama administration. During his election campaign Donald Trump accused China for using unfair means in trade. He blamed China for violating international intellectual property rights, currency manipulation and the limiting of specific commodities. When Donald Trump won the presidency, he vowed to not let China violate trade rules but punished her for disregarding set rules and regulations. The US raised this issue in The World Trade Organization (WTO) and warned China that use of unfair means in trade practice, specifically the violation of intellectual property rights would result in the imposition of penalties and other fines.
According to President Trump, investigations showed that the US is losing about $500 billion annually which resulted in enhancing tariffs.
According to President Trump, investigations showed that the US is losing about $500 billion annually which resulted in enhancing tariffs. A series of announcements of extra tariffs was then made. In January 2018, 30 per cent tariffs were placed on solar panels by President Trump. China, being the leader in solar panel production showed its concerns. After this, President Trump imposed 20 per cent tariffs on washing machines. Initially and in totality, the US imposed tariffs worth $50-60 billion on Chinese goods in March 2018. Subsequently, it came up with 13000 categories of Chinese goods to be tariffed. China responded by imposing tariffs on 128 American products. In June 2018, President Trump declared that the US would impose 25 per cent tariffs on Chinese goods worth $50 billion. China declared it the start of a trade war; a war started by America. In July 2018, the US announced that it would impose another 10 per cent tariffs worth $200 billion if China retaliated. China responded that it would impose tariffs worth 50 billion dollars on American goods.
These threatening announcements from both sides materialised the in actual imposition of tariffs. US tariffs on Chinese goods of worth $34 billion came into effect on July 6, 2018. On July 10, the US released an initial list of an additional $200 billion of Chinese goods that would be subject to a 10 per cent tariff. China vowed to retaliate with additional tariffs on American goods worth $60 billion annually, two days later. On August 8, 2018 the Office of the United States Trade Representative (USTR) published its finalized list of 279 Chinese goods, worth $16 billion to be subjected to a 25 per cent tariff from August 23, 2018. China responded with its own tariffs of equal value when said American tariffs were implemented. On September 17, 2018 the US announced that its 10 per cent tariff on $200 billion worth of Chinese goods would begin on September 24, 2018 subject to an increase to 25 per cent by the end of the year. They also threatened tariffs on an additional $267 billion worth of imports if China retaliated, which China promptly did on September 18, 2018 with 10 per cent tariffs on $60 billion of US imports. So far, China has either imposed or proposed tariffs on $110 billion of US goods, representing most of its imports on American products. The aforementioned series of new tariff impositions from both the US and China symbolizes economic power projection under the guise of a trade war which would have serious implications for international trade.
President Trump said that ‘tade wars are good, and easy to win’. To him, trade wars are a zero-sum game however reality has proven otherwise. In reality, the trade balance that Trump demands between the US and China does not hold true with economic principles and would not be beneficial for either country. In this case, the US and China’s protectionism is not only a threat for themselves but also has serious implications for international trade. That is to say, if American and Chinese economies suffer due to trade war it will have direct implications on international trade. The international network of trade is being controlled by three major stake holders, the US, China and the European Union out of whom China is the most dominant player. Let us further look at how much the trade war is affecting US and Chinese economies as constituents to international trade.
In the first place, indeed, China is not afraid of a trade war with the US but it will be dangerous for China’s economic growth because China is dependent on its surplus coming out of the US market. If a trade war persists, China’s surplus will turn into deficit.
In this case, the US and China’s protectionism is not only a threat for themselves but also has serious implications for international trade.
Secondly, from 2001 to 2016, the US exports to China have increased by 500 per cent. According to economic principles, any country that escalates tariff measures will hurt its own citizens and cause unemployment through the impact of retaliatory measures. Ultimately, those that pay the cost of Trump’s trade war are US consumers and workers.
Moreover, tariff measures and other protectionist strategies are detrimental for US Multinational Corporations (MNCs) in China. For instance, in 2016, Chinese consumers bought 44.9 million Apple iPhones and a total of 510 million cars from the big three US automakers namely GM, Ford, and Chrysler, accounting for 21 and 33 per cent of global sales of Apple and these automakers respectively. But after imposition of tariffs, US MNCs faced a one per cent decline in sales.
Furthermore, The World Bank issued a stark warning on the impact of the US and China trade war, which leads towards a global recession by 2020 most likely. According to its warning, the global economy is expected to slow to about 2.9 per cent in 2019, compared with 3 per cent in 2018. Growth in the US is expected to slow to 2.5 per cent this year from 2.9 per cent in 2018, while China is expected to grow at 6.2 per cent this year compared, with 6.5 per cent in 2018. The World Bank reported that, ‘the outlook for the global economy has darkened. Financing conditions have tightened, industrial production has moderated, trade tensions have intensified, and some large emerging market and developing economies have experienced significant financial market stress’. The bank further added, ‘faced with these headwinds, the recovery in emerging market and developing economies has lost momentum’.
Lastly, if protectionist policies persist, the level of global real GDP will be reduced by 0.1 per cent this year and is expected to reduce by 1.4 per cent in 2020. World trade suffers in a more protectionist environment, as countries turn inward and multinational companies move production to end markets to stay competitive. In this scenario, real global exports of goods and services will fall 2.4 per cent below the baseline level by 2020. According to many economists, if global GDP reduces to 2 per cent with continued protectionism, an economic recession will be inevitable.
Furthermore, The World Bank issued a stark warning on the impact of the US and China trade war, which leads towards a global recession by 2020 most likely. According to its warning, the global economy is expected to slow to about 2.9 per cent in 2019, compared with 3 per cent in 2018.
For good reasons, the trade war between China and the US has serious economic implications for international trade. In the first place, it is hurting economic growth of both great powers. As mentioned earlier, the US and China are the largest stakeholders of international trade. The loss will eventually hold grave implications for international trade. Secondly, if this trade conflict escalates further, it will encourage other countries to adopt protectionist policies which will ultimately result in the breakdown of international trade regime. Therefore, the ongoing trade escalation between US and China has great potential to induce an economic recession in the near future.
Khaqan Ahmad has done M.Phil in International Relations from the National Defense University, Islamabad. His areas of expertise are Indo-Pacific region, Middle East, European Affairs, International Political economy, Foreign Policy of USA, China and Russia, Philosophy, Theories of IR and Artificial Intelligence. Currently, he is working as a Research Associate at the CSCR.