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Trade war between US and China: origin and consequences





Imagen tomada de Foundation For Economic Education

Written on november of 2018


In recent months, the United States - the economic power that represents about 24% of world trade according to the World Economic Forum - has started a trade war with China - which in turn symbolizes 15% of the world trade-. Two economic giants that represent almost 40% of the world trade face each other. With their clash they shake the world economy, because numerous countries depend on their economic policies and their imports or exports.


The confrontation officially began in March, when Trump imposed tariffs of 25% on steel imports and 10% on aluminum with the excuse of guaranteeing the national security and protecting the economic interests of the nation. The president made use of section 232 of the Commercial Expansion Act of 1962, "which allows action in the event of a threat to national security." In this case, it was argued that the armed forces and certain industries required a national supply of steel that imports were putting at risk. However, Gary Hufbauer - of the Peterson Institute for International Economics - points out that even if national steel producers worked at 80% or more of their capacity, they could not produce the special steel currently required by the defense department. Interestingly, the sanction excluded Canada, Mexico, Argentina, Brazil, South Korea and the European Union, which are the US main steel suppliers. Not to mention that Russia and China, the most affected by tariffs on aluminum, export less than half of steel than pardoned countries. Given these data, the official reasons for the increase in rates falter, revealing that there is perhaps an unofficial reason behind this economic measure. To discover it, just look at the consequences.


These measures, described in an article by The Economist, were pointed out by China as a violation of international trade rules. The Asian country made a formal complaint to the World Trade Organization (WTO), the organization that regulates international trade according to standards agreed by member countries. However, the WTO could not intervene because Trump made use of Article XXI of the regulation of that organization, which “allows a member to increase any rate if it considers it is necessary for the protection of his interests, even if there is no evidence that imports - from a foreign country - are being subsidized or sold below the standard price. Since "what threatens the interests of a country" is a very relative notion, the one who invokes this article can do whatever he wants in terms of economic rates. This action commited by the United States sets a precedent that endangers international trade. If each country can change the rates at will, there will be no confidence in the market.


The words have passed to actions and economic sanctions rain from both sides, the United States increases the tariffs and China responds immediately with similar measures. This has generated a chain reaction. The trade world can be seen like the ocean - in which all the ecosystems are connected -, and these two countries are two titanic whales that occupy 40% of the space. The slightest movement of these two giants may produce strong waves that may reach the most remote places of the ocean.


On March 22, the Trump administration published a report stating that Chinese economic policies were harming the country, so it commissioned the Office of the United States Trade Representative (USTR) a list of Chinese imports on which apply higher rates as a form of penalty. This first list, with more than 700 products valued at 32.3 billion dollars, included machinery, computers, printers, plastics and car engines. It entered into force on July 6.


According to The Economist, the USTR thought carefully about this list in order to reduce the impact on consumers and increase it in Chinese exports. That is why 95% of the items on the list were intermediate goods, that is, materials that would be used in the production of other products; "This would diminish the immediate effect on the price for American consumers". Likewise, the article indicates that the USTR made sure that affected companies could easily find other suppliers to avoid costs. According to the International Trade Center, China accounts for only 8% of total US imports of the products affected. However, changing suppliers and rebuilding the supply chain could be easier said than done, costing American companies time and costs that their competitors would not have to face. Not to mention that, according to Yang Liang of the Peterson Institute for International Economics, the 3.6 trillion dollars in semiconductors imported from China, come mostly from US subsidiaries in that country. The same applies to other affected intermediate products, an important percentage of these are produced by US subsidiaries in China.


On June 15, China responded with sanctions on a list of US imports valued in 29.6 billion. Soy, oil and car engines were the most affected. The measure came into effect on July 6, the same day as Trump's list. The products of the Chinese list, in contrast to his rival's list, were mostly food, many of them exported from states of republican tradition. Since a good majority of the US president followers are in rural areas, the increase in taxes on imported agricultural products may had been focused on weakening the president's authority and motivating farmers and producing companies to persuade him to stop the trade war. In a diplomatic tone, the Chinese government has announced that it will not step back on his demands and it will respond with equal force to the sanctions on its exports.


However, in a tariff war, China is the one with the least margin of action. While the United States imported 505 billion in Chinese products in 2017, the Asian country imported 130 billion dollars in products from the North American country. This does not mean that it cannot retaliate by other means. According to CNN, Beijing could implement various “techniques” to retaliate against American companies: delay its importation in customs, intensify regulatory controls of its operations, launch campaigns to discourage consumers from buying their products and make agreements with Chinese companies to replace products of American origin.


As an additional sanction it has been mentioned that the Chinese government could impose higher tariffs on exports to the United States that come from a third country, although this practice is considered illegal by the WTO, China notes that since Trump does not follow the rules, there is no reason for them to do it either.


Trump's response was swift, in July he threatened to increase import tariffs over 200 billion in Chinese products. In spite of the protests of multiple North American companies, the threat became effective on September 24 when the US impossed taxes over 250 billion on products imported from China, this means more than half of the total of the articles of Chinese origin. This measure was implemented with a 10% rate, a percentage that will increase to 25% by January 1. On this occasion taxes will have an inevitable impact on consumers. "These fees will have to be paid by working families that boost our economy", said Jonathan Gold, a spokesman for a business group called Tariffs Hurt the Heartland that opposes rising rates; “Tariffs are taxes, as they increase, the cost of managing a farm, a factory or a business will increase as well.


On the other hand, China has promised to retaliate with new taxes on 60 billion in products of American origin. According to The Washington Post, Trump has said that if that happens, the president "would immediately begin the process of approving tariffs over 267 billion in Chinese imports". In short words, special tariffs would be applied to all the importations from China.


The president has said that these sanctions could be withdrawn if China agrees to his demands, which include an opening of the Chinese market, reduction of importation tariffs and changes in the Made in China 2025 plan. As described by international economics expert Kristen Hopewell , he wants to intervene on its Made in China 2025 program. That program aims to make the Asian country go from being a producer of low and medium quality manufactures, to a producer of high tech items. According to The New York Times, many companies in Europe and the United States fear that the program will boost state-subsidized companies, this fear has echoed in the Trump administration. This does not suit him because the country specializes in the development of high-manufacturing items and if China continues to grow, it could become a serious competitor.


According to The Washington Post, while Chinese imports amount to 505 billion, an increase in taxes on these products does not pose a serious threat to China's economic development. As economist Kristen Hopewell says, the United States has no longer the power to control the Asian market, "Trump's strategy overestimates China's dependence on the US market, which only accounts for 18 percent of its exports —more than 80% go elsewhere—”.


This does not mean that eventually the president's objectives won't be achieved. As an article in the World Economic Forum describes, maybe Trump has only unleashed a confrontation that it had been there for some time, an ideological conflict. The United States has complained about Chinese industrial policies, the impediments to acces to their market , the fiscal deficit, and that the country has stolen intellectual property from US companies. “From the perspective of the United States, in China's economic model, the State leads economic development in many key sectors of the economy,” this goes against the fundamentals of the World Trade Organization, against liberalism and the reduced intervention policy of the state in economic development. According to the publication, these differences would lead the American country to separate commercially from his trade partner.


This separation can be counterproductive. While the economy of the United States is the largest in the world, it is not susceptible to failures; the shot can go the wrong way. Unlike China, the US economic model depends much more on external suppliers to manufacture its final products. If the US is not careful with its international trade exchange policies, the government could end up stopping economic development and generating the dreaded phenomenon of inflation. According to Dmitry Grozoubinski of the International Center for Exchange and Sustainable Development, a commercial war entails "exploiting your own cities and blowing the resulting smoke across the border in the hope that their eyes will sting."


Against this background, the future of the world economy is uncertain. "Tension, anguish and mistrust invade the international trade landscape", describes an article in the World Economic Forum. The system of exchange based on rules of common agreement worldwide is in danger. What generates more uncertainty is that “the United States, the traditional guardian of the system, is the one who is making a fuss; raising rates and asking countries to buy more and export less, the Trump administration makes it clear that it does not play according to the usual rules, ”says Wendy Cutler, vice president of the Asia Society Policy Institute.


This may be the prelude to a crisis or an opportunity for other countries to enter the scene and take the lead, a change in the world economic order. As prices rise —presagging inflation —, and old trade relations disappear, new trade routes are born and new links are forged.


Returning to the metaphor of the ocean, the effects of the confrontation echo the global economic ecosystem, destroying and converting old schemes into debris that may submerge the ecosystem in a dark time or perhaps leave room for new systems to be created. The only certainty is that the side effects of this economic war will remain visible for years, perhaps decades.

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