The Trade War between China and the United States

Student’s Last Name 1 Student’s Name Professor’s Name Subject DD MM YYYY The Trade War between China and the United States China and the United States are two of the greatest economies on earth. However, since 2018 there has been a trade conflict between the two nations due to the alleged unfair trade practices of China that include theft of intellectual property belonging to U.S. companies and the unlawful use of American technologies in China. Additionally, the trade deficit between the two countries was growing significantly owing to the fact that the U.S. is a net importer while China is a net exporter (Irwin 56). The U.S. President, Donald Trump, imposed higher tariffs and trade barriers to discourage the trade between the two countries.

For many years, even before becoming the president of America, Donald Trump had been advocating for the reduction of the U.S. trade deficit through reliance on its domestic industries as opposed to importing product that it has the capacity to produce. This paper examines the causes and effects of the trade war between China and the United States. It also recommends how the two countries can resolve the issue to avoid further damage to the global economy (Wolfson & Epstein 67)

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(Source: PYMNTS) Beginning of the Trade War The United States and China are the two greatest economies in the world; therefore their conflict is likely to affect several other countries globally (Zeng, & Ka, 78). For several years, Chinese companies have engaged in intellectual property theft, excessive competition and flauting of human rights which inevitably led to America’s decision to protect itself from the unfair terms of trade. In March 2018, Donald Trump’s administration placed heavy restrictions on imports from China siting unfair trade practices (Newman 102). The tariffs were worth at least $50 billion and affected goods such as clothing, shoes, electronics and investments. China retaliated almost immediately by imposing tariffs worth billions of US dollars on America’s exports to the country. In July of the same year, the trade war escalated when the Trump administration imposed a further $34 billion worth of new tariffs on Chinese products, and a 25 percent import tax on over eight hundred goods. China responded to the fresh tariffs by imposing its own tariffs on approximately five hundred prodcuts from the United States, estimated to be worth around $34 billion as well. The administration of Donald

Student’s Last Name 3 Trump acted in such a manner because it believes that China has been taking advantage of its trade relations with the U.S., and that the American firms operating in China were being unfairly targeted. In October of the same year, Mike Pence, the Vice President of the United States, stated that the U.S. would not relent on its stand against China. He also stated that the tariffs were used to combat China’s economic aggression (Klein, & Pettis, 68). According to the current U.S. administration, China interfered with U.S. elections, steals American intellectual property and engages in censorship. While some of the accusations that the United States presents against China may be true, the two countries have built a trade partnership through many years of transacting with each other. As a result, their economies rely on each other, and imposing high tariffs on each other is likely to affect both their economies negatively.

Analysis of the Trade War One of the main reasons the United States restricted its trade with China was to correct its balance of payment deficit. However, this is ineffective because the U.S. trade deficits exists due to the inefficiencies in its capital accounts. Secondly, China is a crucial trade partner to the United States because it has the capacity to help the U.S advance technologically.

Chronology of the Trade War The ongoing conflict between the United States and China has resulted in a drastic decrease in trade between the two countries which were formally great trade allies. The imposition of high tariffs has affected the prices of the countries’ commodities, forcing them to purchase products from other countries. Research shows that the American market, which

Student’s Last Name 4 relies majorly on imports from China, has been significantly affected by the trade war (Krugman 98). The U.S. market is paying for the trade war in the form of higher prices since the importers of Chinese goods have passed down the higher costs to consumers. This increases the risk of inflation.

Prior to the trade war, the trade between China and the United States was beneficial to both markets because it created lower prices and a wider variety of good. In every trade agreement, there are winners and losers. Similarly, there are also winners and losers in trade wars. In the context of the US-China trade war, the United States’ expectation was that restricting trade with China would reduce its trade deficit, and reduce the rate of China’s advancements in technology. However, the sudden imposition of trade tariffs affected the United States negatively, it is the net loser because it is a consumption-driven economy that imports majority of its products from China (LaRocco 34). Additionally, several American companies have production hubs in China, thus the trade tariffs in reality work to their disadvantage.

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(Source: cnbc.com) China’s retaliatory response has had a significant negative impact on employment and production opportunities for Americans who engage in trade directly with China. The government may have started the trade war in an effort to protect the US economy but the consumer market and those who relied on exporting produce to China as a source of income have been left to deal with the impact of the trade war alone.

The tariff retaliation by China has exposed agricultural commodities to price fluctuations. The economies of the United States and China are crucial to the wellbeing of the global economy. By the mid-1980s, China received a significant amount of its revenue from its trade with the U.S. while the United States was China’s fourteenth largest trading partner (Lau 78). This parity in their importance to each other was the subject of congress debates, because China was exporting more commodities than it was importing from the United States.

Student’s Last Name 6 Some American industries such as the textile industry felt threatened by China, and therefore lobbied for tariffs to be imposed on China to control its export capacity.

Between the late 1980s and early 1990s, the Chinese economy was growing at a fast rate, and this posed a threat to America, since it was duplicating some of its product and selling them at cheaper prices. Additionally, China was using unethical methods of production, where the political elite benefitted from trade while the lower classes of the population were oppressed (Xing 27). For these reasons, the administration of President George Bush I minimized its trade interactions with China, such that by 1991, Chinese imports only accounted for 1% of the commodities that America imported. In 2000, the governments of China and the United States entered into an agreement known as the United States-China Relations Act which led to more trade between the two countries (Ksah 105).

The then president, Bill Clinton, was of the opinion that by trading with China, the U.S. would be able to advance its economic interests. The Act also allowed China to join the World Trade Organization (WTO). However, even in the initial years of the agreement, the United States had several grievances about China’s trade practices. America was losing revenue worth billions of dollars annually as a result of China’s rampant intellectual property theft. The software, music, fashion and movie industry were severely affected by piracy and theft (Salsman 84). Despite the U.S.’s complaints about this, China was not willing to create laws and policies that could address the problem.

In the trade agreement of 2000, to form a trade coalition with the United States, China was required to lower its trade barriers and open its markets for free trade. Under this agreement, the United States had a larger market to sell its products, and it could access the

Student’s Last Name 7 Chinese market without having to move its production to China, as was required before.

These were also the terms of China’s entry into WTO. China agreed to lower its tariffs and open up its markets for trade but continued to engage in the theft of United States’ intellectual property, and forced American companies to transfer their technologies to the Chinese market. In 2008, the WTO issued a formal warning against China for coercing foreign automakers to purchase materials from its local suppliers or pay a higher percentage as tariffs. In response to the warning, China lowered its import tariffs to 10% from 40%. However, the United States’ trade deficit continued to grow because its imports from China were growing continually, while China’s imports from the United States stagnated, and were significantly lower. In 2010, Obama’s administration accused China of attempting to control the growth of America’s fast growing industries by subsidizing companies that provide alternative energy (Rodrik 14). Additionally, U.S. firms seeking to enter into joint ventures with Chinese companies were forced to transfer their technologies and designs to them. China’s efforts to undermine free trade showed that it was acting contrary to the terms of WTO. During Obama’s tenure, the U.S.’s complaints against China was that it was creating difficulties that hindered foreign direct investment, stealing intellectual property, and treating foreign firms in a discriminatory manner. China was also accused of manipulating its currency a strategy that enabled it to underprice its products and therefore attain a competitive edge in the international market.

President Trump’s discontent with China’s trading practices began in the 1980s when he would frequently advocate for the United States to control the extent of its trade with China in order to grow its domestic industries. According to Trump, the U.S.’ economy has been severely adversely affected by China’s unfair trade practices, hence its growing trade

Student’s Last Name 8 deficit. When Trump took over as the president of the U.S. , the trade deficit with China was approximately $335 billion, which was more than half of its total trade deficit of $565 billion (Kolb 45). Trump also alleges that intellectual property theft by China costs the U.S. $300 billion annually.

To a large extent, the economy of the United States is steered by its ability to spearhead the innovation of new technologies. For several years, there has been a rise in cases of China forcefully acquiring U.S. technologies through cybercrimes, and acquiring U.S. companies that are based in China. From early 2018, during the same period that the U.S. began to impose the trade tariffs, Trump’s administration also began to implement measures to prevent Chinese companies from acquiring American technology companies or forming joint ventures with them. This would help to control the loss of technologies to Chinese companies. Researchers of the trade between China and the United States have termed the U.S.’ loss of intellectual property to China as the largest loss of wealth in the history of the world.

The Chinese government has denied allegations that it forces U.S. companies to surrender their technologies and intellectual property as a market entry requirement. China claims to be open to free trade between itself and the United States; its failure to admit its role in the U.S.’ loss of intellectual property has led to the failure of talks between the two countries. The Chinese government, on the other hand, claims that the real reason behind the trade war is to restrict China’s growth.

Effects of the Trade War Following the implementation of the first trade tariffs in March 2018, China repealed the law that forced multinational automobile companies to collaborate with Chinese

Student’s Last Name 9 companies in order to enter the market. Trump’s administration did not withdraw the trade tariffs despite China’s attempts to cooperate with the United States. China retaliated by imposing stiff tariffs of its own on imports from the United States. Since China imports vast quantities of food products from the U.S., the American agricultural industry was severely affected by China’s tariffs. Between the period of Obama’s administration and Trump’s, exports to China reduced by more than 50%. This has greatly reduced the income earned by farmers, leading to lower standards of living and increased bankruptcies. As a result, other industries have been affected; for instance, agricultural equipment companies’ revenues dipped significantly from 2018 when the trade war began.

As a result of the government’s imposition of trade tariffs, farmers have incurred severe losses, this has forced the government to allocate relief funds of about $28 billion to alleviate the crisis caused by losing the Chinese market. This further reduces the government’s income. As the United States’ wheat exports continued to reduce, Canadian exports increased drastically by almost double.

China’s economy has continued to thrive despite the tariffs imposed on its exports to the United States. In 2018, its trade surplus was approximately $320 billion, which is the highest it has ever been. The United States’ trade deficit, on the other hand, continued to increase. As at the end of 2018, it had a trade deficit of over $600 billion; the largest deficit is has ever experienced.

China has been relatively open to trade; this is illustrated by the fact that before the trade war between itself and the U.S. began in 2018, it imposed a uniform tariff of 8% on all its trade partners. When the trade war began, China reduced its tariffs to 6.7% for its trade

Student’s Last Name 10 partners, and hiked the U.S’ to 20%. Similarly, American tariffs on Chinese goods increased eightfold from 3% to 24% (Cox, & Tanous, 112) The United States and China are the two greatest economies in the world, and several countries are involved in their supply chain. As a result, the global economic growth slowed down due to the trade war between the two nations. While China’s economy is still performing well despite the trade war, its economic growth slowed down in 2018. The economic growth of the United States slowed by a greater margin than China. The trade war has also caused uncertainty among businesses and consumers in the warring nations, and a majority have had to seek alternative sources of the products.

Compared to China, America has been the greatest loser of the trade war. Since March 2019 when the war began, the U.S. has lost approximately 300,000 jobs in retail, distribution, warehousing and manufacturing (Tandon 55). American manufacturers have had to reduce their investments in China due to fears that the trade war might lead to massive losses.

The United States – China trade war has led to a reduction in foreign direct investments globally due to uncertainties about the future state of the economy. Majority of the industrialized countries have had to reduce their manufacturing capacity, due to the economic damage arising from the trade war (The New York Times Editorial Staff 18). While major economies have shrunk, some countries have benefitted from the gaps left by the severance of trade ties between the United States and China. These countries include Malaysia, Vietnam and Chile.

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(Source: quartz.com) Conclusion Throughout history, some trade wars have enabled countries to achieve the desired results while some have led to severe negative effects. The United States – China trade war is an example of a trade war that has affected the economies of the two counties. The move from free trade to a protectionist stance towards international trade should be approached cautiously to ensure that the country does not disrupt its economy in the process. The trade war between China and the United States puts their economies and that of many countries around the world at risk.

Student’s Last Name 12 Works Cited Cox, J., & Tanous. Debt, deficits, and the demise of the American economy. Hoboken, N.J.: Wiley. 2013.

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Available at: https://www.pymnts.com/news/international/2019/port-of-los-angelesvolumes-show-trade-war-impact/. 2019 Zhou, Youyou. "The US-China Trade War Is Creating Winners Out Of Brazil, Australia, Mexico, And Canada". Quartz, 2019, https://qz.com/1684207/mexico-canada-and-australia-are-winningthe-us-china-trade-war/.

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