by Vedika Bhagat
Trump’s trade war against China has gone on for nearly two years, deeply affecting the world economy. The U.S. imposed taxes on $250 billion worth of Chinese products last year. Beijing struck back by imposing duties on $110 billion worth of American products.
In simple terms, trade wars lead to higher prices, and increased costs of living for consumers, benefitting the inefficient domestic producers.
The U.S-China Phase 1 deal that Trump signed on January 15th does reduce some of these barriers. China has agreed to buy about $200 billion worth of U.S. goods over the next two years, and U.S. companies will get more access to Chinese markets and stronger intellectual property protection.
However, the tension between the two countries has been reignited, threatening to break what was already a fragile truce on trade between the world's biggest economies. In this article, I will not only discuss the impacts of the trade war but also assess whether or not this was beneficial for the US economy.
Firstly, I would like to briefly summarise the timeline of the bitter trade war in which two of the world’s largest economies have been locked.
Why a Trade War?
There are a myriad of reasons as to why US President Donald Trump waged a trade war against China: augmented balance of payments (BOP) deficit, unfair subsidies, intellectual property concerns.
China states they are still a developing country and need the flexibility to grow- despite being the second-largest economy in the world. Understandably, President Trump is nervous since China could undeniably overtake the US to become the world’s leading economy by following “unfair” trade practices.
Additionally, the US currently has a large trade deficit with China ($419 billion in 2018), which is ever-expanding. Striving to protect American companies from their Chinese rivals, Trump aims to circumvent the loss of jobs and sustain the creation of jobs for American citizens.
Impacts on the US Economy
From an outside perspective, the negative effects of the tariffs seem to outweigh the positive ones. For instance, the prices of the raw materials imported by the US manufacturers became more expensive, increasing the costs of production and subsequently the cost of US products, reducing their competitiveness in the market.
Consequently, some of the key sectors experienced a period of contraction. According to the Washington Post, "a sharp contraction in business spending is slowing the U.S. economy and could cause deeper pain going forward.”
US exports are steadily decreasing. From 2017 to 2018, the American agricultural industry has seen a $10.4 billion decrease in product demand from China. China has also strategically targeted products made in Republican districts and goods that can be purchased elsewhere.
For example, the exports for soybean - otherwise frequently produced in countries like Brazil - decreased by $1.035 billion between August 2019 to September 2019. Furthermore, automotive vehicles, parts, and engine exports declined by approximately $1 billion from August to September 2019.
2. Tech Companies
The US has banned its domestic companies from continuing their businesses with Huawei, a leading smartphone, and high tech company in China. This has led to a zero-sum game in the sense that Huawei has lost its access to essential products and services that it used to receive from US companies like Google which provided its Android operating system, as well as Intel and Qualcomm which provided the smartphone chips.
After 2018, the tech industry has borne the heavy cost of the $10 billion tariffs. These tariffs have also had a sizable impact on Apple, Cisco, and Boeing. With most of its products such as AirPods and Apple Watch subjected to punitive tax, Apple found it extremely difficult to sell phones within the Chinese market.
Therefore, it is evident that consumers and many US companies will have to absorb the after-effects of the tariffs imposed by the US government, putting them at a very disadvantageous position. American exports are on the decline, as the index of new export orders “plunged 4.8 points to the lowest level since April 2009”
3. Manufacturing Sector
The US saw a contraction in manufacturing activity in the fourth quarter of 2019 for the first time since 2016 due to the escalation of the trade war. The Purchasing Managers’ Index (PMI) has dropped below the 50-point level, indicative of the slump and mild recession in the manufacturing industry.
The trade war has led to a reduction in US manufacturing employment and an increase in the costs of procuring materials and components for American manufacturers. As we can see from the graph below, the employment rate began to drop in September 2019, following the contraction in the manufacturing sector in August in the same year.
4. Stock Markets
The stock markets have become extremely volatile since the trade war began. The Dow Jones Industrial Average fell about 6% in 2018 and then shot up by 11% in 2019. Whereas, the yuan fell about 5% against the US dollar last year, before becoming mildly stable in 2019.
Was The Trade War Beneficial for the US?
I do believe that the trade war inflicted a lot of pain upon the US economy: slowing down economic growth, freezing business investments, causing widespread unemployment. Farmers in many parts of the US went bankrupt and the key sectors of the economy were hit hard. The US economy will see a 0.26% drop in long-run GDP and 0.16% in wages. The trade war did not do any good to either of the two nations.
If these tensions continue to escalate, the dispute could morph into a damaging threat to economic recovery that not only weakens the world's recovery from Covid-19 but also risks slowing important technological innovations.