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Thursday, February 15, 2024

Are China and US marching towards a Trade War?

News Analysis |

On Friday, the Trump administration announced wide ranging tariffs imports from China. China has reacted by imposing some tariffs of its own on imports from the US. Many analysts have expressed concern that the situation is escalating into a trade war.

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Nearly $60 billion worth of goods have been targeted under the tariffs by the US. The major portion of these goods are said to be high-tech. Washington alleges that Beijing has been stealing intellectual property from US companies. These tariffs are meant to discourage consumers in China from importing high-tech products made in the United States.

China has retaliated by imposing tariffs on $3 billion worth of goods made in the US. This move by China is being interpreted as a cautious signal to the US that China won’t stand by idly in a ‘trade war’. The tariffs by China are on about a 120 types of products, including fruit, wine, steel pipes, pork and recycled aluminum.

 We’ve lost over a fairly short period of time, 60,000 factories in our country. Closed, shuttered, gone. Six million jobs at least, gone. And now they are starting to come back.

-POTUS Donald Trump

 “The word that I want to use is reciprocal – when they charge 25 percent for a car to go in, and we charge 2 percent for their car to come into the United States, that’s not good. That’s how China rebuilt itself.”

The Chinese Embassy in the United States in a statement said, “China does not want a trade war with anyone. But China is not afraid of and will not recoil from a trade war”. The statement further said, “The actions undertaken by the U.S. are self-defeating. They will directly harm the interests of U.S. consumers, companies, and financial markets.”

The tariffs announced by the White House are not unexpected. They have been a matter of concerns for some time now that a trade war might erupt between the two largest economies on the globe. At the beginning of March, Trump announced 25% tariff on steel and 10% on aluminum imports, a move which was criticized not only in China but by US allies in the European Union as well. In August of 2017, Trump reportedly said that “I want Tariffs. And I want someone to bring me some tariffs” regarding America’s trade deficit with China.

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In June last year, he was considering putting a 20% tariff on imports of steel a number of other goods. During his campaign for the presidency, he said, “We have to look at trade almost as a war.” In May, he even said, albeit rhetorically, “These dummies say, ‘Oh, there’s a trade. Who the hell cares if there’s a trade war?” At one point, he reiterated that ‘we can’t continue to allow China to rape our country and that is what they’re doing.” In November 2017, Trump had met Xi Jin Ping and gave him ‘credit for taking advantage’ of the US.

The top economic advisor to Xi Jin Ping, Liu He, warned at the beginning of this month that a trade war between the US and China would harm both countries. The Minister of Commerce in China, Zhong Shan, also said in a press conference, “everyone knows trade wars hurt others without helping [the countries that started the trade wars] themselves.” He also added, “China does not wish to fight a trade war, nor will China initiate a trade war, but we can handle any challenge and will resolutely defend the interests of our country and our people.”

The recent tariffs announced by the White House are largely for technology imports. China has previously criticized the US for its tight export rules for these products. It is often predicted by economists that People’s Republic of China will overtake the United States as the largest economy sooner or later.

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In terms of purchasing power parity (ppp), China is already ahead of the US (although, nominally, the US has greater GDP than China). In technology, America still has the edge over China. This is why Washington is sensitive to any possibility that Beijing might gain the upper hand in this aspect as well. Hence the tight-export rules and, now, tariffs on high-tech goods by Trump. Hence strict export regulations existed and now tariffs have been imposed on technology imports.

According the Census Bureau of the United States, trade deficit with China was over $375 billion in 2017, whereas, in January 2018 alone, it stood at nearly $36 billion. To some extent, this is not surprising since America has the largest consumer market while China is known as the “factory of the world”.

Consumer products at competitive prices are produced in factories in China and exported all around the world, including 60% of all shoes in the world, 70% of all mobile phones and 80% of all air conditioners. According to a report by the Economic Policy Institute in Washington, some 3.2 million jobs were outsourced to China from the United States between 2001 and 2013, with job losses in every state. Companies in America preferred shipping production to China because of lower labor costs and, to some extent, lax environmental protection laws.

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What Trump describes as ‘raping’ and ‘taking advantage’ is actually the result of free trade. It allows capital and production to flow and ship from one country to another in the interest of earning more profit. Washington has long been a proponent of free trade across the globe. However, the US does not seem to be encouraging free market economics when it does not benefit directly from it.

Protectionist measures taken by Trump are a reaction to what he sees as ‘globalism’. The term seems to encompass all the pitfalls of globalization and none of the benefits. Globalization is the phenomenon of increasing integration of economies around the world, particularly through the movement of goods, services, and capital across borders.

New York Times columnist and author Tom Friedman in his 2006 book The World is Flat discusses three eras of globalization. The first era began in 1492, with the discovery of the Americas by Christopher Columbus and lasted till the beginning of the 19th century. The second era began in 1800 and lasted till 2000.

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The third era began in 2000 and we are still living in it. There seem to be larger historical trends behind the increasing interconnectedness across the globe between nations, peoples and businesses. The measures taken by Trump can only go so far in inhibiting these trends. He may even have to reverse his policies once the American consumer begins to complain of high prices of consumer goods imported from China.