Decoding the US-China Trade Quandary

The former President of the United States, Donald Trump, had quite a controversial tenure. One of the prominent highlights of this contentious stint was the US-China trade war. He, in 2018 said, “Trade wars are good and easy to win”. This 21st-century war between the two biggest economies of the world was supposed to have come to an end along with the tenure of Trump in the White House, and we might have had a winner. Let us glance at the entire scenario in a proper sequence, but ere all of that, what is a trade war? How did the US and China end up in one? And most importantly, how does it influence other economies of the world?

A trade war is born when there is an imposition of tariffs by one country on the goods and services from the others and in retaliation, the other countries reciprocate likewise. Tariffs are the taxes imposed on goods and services imported from other countries. This idea was based on the concept that- restrictions imposed on the imports make the products from domestic manufacturers more desirable to the consumer. This is done to switch the supply of products to consumers from foreign producers to the domestic ones. Moreover, such imposition of tariffs helps in reducing the trade deficit of a country. In 2019, the US had a whopping deficit of $577 billion. A deficit occurs when imports exceed exports, and this was the problem with the US. To deal with this concern the Trump administration imposed tariffs on global steel, European auto companies and Chinese imports. This occurred due to the buying patterns of the American consumer, who did have quite the enthusiasm for imported goods, especially automobiles, clothing, and other technological hardware. A huge chunk of these imports came from China.

The trade war commenced with the imposition of tariffs on steel and aluminium in March 2018, where the tariff on steel was raised by 25% and on aluminium by 10%. There were immediate consequences of these tariffs- the investors became reluctant thanks to the uncertainty of the situation and the global stock market saw a decline. The capital markets were stagnant, and this led the world into an industrial recession. The equity markets too became heavily reliant on the central banks to boost the liquidity in the market and keep the economic activity going. The European Union, Canada, India, Mexico, Norway, Switzerland, China, Turkey, and Russia filed complaints with the World Trade Organization.

The USA is the largest importer of steel in the world by which these tariffs led to enormous job insecurity as the steel import industry in the country employed around 6.5 million workers, at a time where the steel industry itself employed just 140,000 workers. The steel imported was mainly used for the production of automobiles and aeronautical equipment. These industries suffered a huge blow after these heavy tariffs were imposed, as the cost of production increased but this, in turn, put the consumer in misery as the cost was recovered by increasing the prices of the products.

When it came to China things got quite complicated. The US had the highest trade deficit with China. The main imports were computer hardware, mobile phones and apparel. But the problem was that most of these imports were from the US-based companies who had their manufacturing plants in China. Still, the products were categorized as imports. In 2018 the US trade deficit with China was $419 billion. The US imported $540 billion worth of imports from China and exported $120 billion worth of goods and services to China. In addition to the tariffs, Trump also wanted the US to impose a limit on technological transfers to the Chinese government. In China, it is a mandatory requirement for foreign companies to share their trade secrets with the Chinese government if they want to sell products in China.

In May 2019, the Trump administration raised tariffs to 25% on $200 billion worth of imported goods from China. A few months later China raised the tariffs to 25% on the US goods worth $60 billion. Along with the tariffs the Trump administration has blamed the Chinese government for unfair trade practices and stealing the intellectual properties as well as technologies of the US companies. As far as trade practices go, China does heavily support its domestic industries in various ways such as extremely low to no taxes, the land required for the manufacturing units are given at exceptionally low prices or completely free. It also provides highly subsidized services to the domestic producers which are required to conduct business, whereas the foreign companies manufacturing or selling in China do not get the same advantages. Thus, according to the US, China is providing an uneven ground for conducting business. The circumstances are also in favour of China as it is the No.1 exporter in the world and the standard of living is lower than the US. Hence the companies pay lower wages to the workers resulting in lower manufacturing cost and in-turn a cheaper price for customers.

Now the accusations of intellectual property and technology theft thrown upon China is nothing out of the blue. The Chinese government has been blamed extensively in the past for such data theft and espionage. The Senate Judiciary Committee of the US had heard extensive testimonies and accused the Chinese hackers of stealing US trade secrets and technologies. China blamed the US for the same. The Trump administration made it clear that the data was used for security purposes only and that the Chinese government is using it unfairly for commercial purposes.

China’s retaliation also came in the form of new laws. To deal with the restriction made by the American administration, the Chinese government established various laws which were said to be extremely necessary to protect the Chinese markets in the process of globalization. These are known as the foreign states immunity laws that grants the Chinese citizens and companies the right to sue other companies in domestic courts. The laws were necessary as the Chinese government had been using the legal system of Absolute Immunity, as nothing is owned by individuals and the government owns everything. The new system gives restrictive immunity to the Chinese individuals and manufacturers and grants permission to sue the foreign companies and individuals in the domestic courts, which will help Chinese government fare against US tariffs and protect its national interests and enterprises with legitimate rights.

But after all this, who is winning the war? Trump repeatedly claimed that the tariffs were helping the US and Chinese were the ones paying the heavy tariffs and were incurring losses. Whereas the Chinese government has repeatedly said that the moves made by the Trump administration are politically motivated rather than having any legal implications involved. It was also clear that the demands of Chinese products were high, so much that even after the imposition of tariffs the producers did not lower the prices and the goods were still competitive in the markets. This meant that the duties were mostly paid by the US companies and consumers and in result, this led to income loss to US consumers. The growth in US manufacturing jobs flatlined in 2019, due to falling exports. There is no evidence that the tariffs benefited the workers and the disruption in the global economy due to pandemic made things worse. It is to be noted that the Chinese exports have been growing each year since Trump became the president. The whole event shows China's resilience and grit in the manufacturing capacity.

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