Trade War between US and China And its Impact on the Global Economy

What is a Trade War?

A trade war happens when one country retaliates against another by raising import tariffs or placing other restrictions on the opposing country’s imports. Trade wars can commence if one country perceives a competitor nation has unfair trading practices [1].

Trade War between the US and China

It all started with the US president, Donald Trump, imposing tariffs on the foreign solar panels [2]. When a government levies tariffs on imports, it is either to raise revenue or to protect domestic industries. The imposed tariffs raise the price of the imports, making it expensive for the domestic buyer and forcing them to switch to alternates such as more domestic products. As a result of Trump’s tariffs on foreign solar panels, China being the leader in solar panel manufacturing was hurt the most. And it did not end at solar panels – the US also placed tariffs on all steel and aluminum imports which, again, was one of the industries in which China was a top producer. This forced China to react by announcing tariffs on 128 types of US products worth up to US$3 billion [3]. Since then, both countries have been involved in a series of retaliations resulting in an increase in trade tariffs on each other.

Its Impact on the Global Economy

When a trade war takes place, it can have a ripple effect throughout the global economy as these nations are a part of the world’s export supply chain. This has been a cause of concern due to which International Monetary Fund has called for a speedy end to this deepening trade war between the United States and China after calculating that the tit-for-tat tariffs will cost $455bn (£357.5bn) in lost output next year – more than the size of South Africa’s economy. [4] But as the trade war continues, it affects other economies negatively but there are also some economies that can end up benefiting from the situation.

Some of the countries that can face major collateral damage in the process are the African countries. As these countries are rich in resources, they depend on commodity exports, especially to China. Accordingly, the African Development Bank (AfDB) warns that the trade tensions could cause a 2.5 per cent reduction in GDP in resource-intensive African countries [4]. Countries which supply raw material to Chinese firms are also the most affected due to higher US tariffs on China as the levies target not only the assembler of the product but also impact the supplier part of the value chain. South Korea, Taiwan, Vietnam and Malaysia, all of which export goods – such as machine parts and components for communications equipment – used in the production of items that China then sells to the US, are vulnerable [6].

When tariffs are levied on imports from one country, it forces firms to opt for alternative sources for their products. This, as a result, gives other players in the economy an opportunity to become those alternatives and benefit from the situation. For example, China being the largest importer of the US soybeans, imposed tariffs on its soybean imports, turning its attention to Argentina and Brazil to fulfil its gap for the time being. [7] With agriculture making up the majority of Argentina’s exports and Brazil being one of the top exporters of soybeans, this allows both these countries to reap the benefits until US and China decide to find a middle ground.

Conclusion

The global economy is very connected and when two major players in the economy go head to head, it can have major impacts throughout the world. The current trade war between China and the US is hurting their local economies impacting different industries and their growth. If this continues in the same direction, the short-term effects will linger on, hurt other export-reliant economies leading to devastating effects in the long run. Therefore, it is in the best interest of not just the US and China to avoid any future trade conflicts, but also the global economy.

References:

[1] Chen, J. (2019, May 23). What is Trade War? Retrieved from https://www.investopedia.com/terms/t/trade-war.asp

[6] Zheng, S. (2018, April 06). Who will be the winners and losers in a China-US trade war? Retrieved from https://amp-scmp-com.cdn.ampproject.org/v/s/amp.scmp.com/news/china/diplomacy-defence/article/2140310/who-will-be-winners-and-losers-china-us-war?usqp=mq331AQA&amp_js_v=0.1#referrer=https%3A%2F%2Fwww.google.com&amp_tf=From%20%251%24s&ampshare=https%3A%2F%2Fwww.scmp.com%2Fnews%2Fchina%2Fdiplomacy-defence%2Farticle%2F2140310%2Fwho-will-be-winners-and-losers-china-us-war

[7] Chatzky, A. (2019, June 5). Will There Be Winners in the U.S.-China Trade War? Retrieved from https://www.cfr.org/article/will-there-be-winners-us-china-trade-war