Origins of the Trade War
Bilateral conflicts over trade between the U.S. and China have long existed. Their history comprises numerous disputes over politics, human rights, and cybersecurity. These key sectors dictate the relationship between these two superpowers. The common feature of the US-China relationship and meetings between their administrations is open disagreement. The political positions of these two nations differ significantly on a wide range of issues. Significant disputes include the South China Sea, state trading companies, and international espionage (spyware). Various senior government officials from both nations have been found speaking negatively about the trade relationship the two countries endure. The US-China Tensions index is a tool used by political analysts to summarize the level of bilateral relations. In 2021, this index showed significantly higher levels than in previous years. This indicates a dangerous level of bilateral friction and rhetoric. In the past, this has been common in both countries’ approaches to political issues.
The Trump-era U.S. import tariffs and Chinese retaliatory measures have direct connotations for businesses in the U.S. It has meant that they must look for suppliers in countries aside from China. The U.S. has seen its economy spread due to relaxed steel tariffs for the E.U. and Japan. Businesses are searching for viable alternatives with no encouraging signs of a trade policy thaw.
The trade war has come at a significant expense to businesses in the U.S. Within the 2018-19 financial year; the U.S. reduced the total cost of imports from China by 16.3%. This statistic indicates that businesses in the U.S. have been forced to find new international suppliers or buy locally. Conversely, exports to China also fell by 11.5%. This data shows that the markets available to U.S. businesses decreased significantly.
Despite the blatant decrease in trade between these two nations, it is not yet confirmed that the world’s largest and fastest-growing bilateral trade and investment partnership is in danger of collapse.
U.S. Trade War and President Donald Trump
Donald Trump made numerous campaign promises to restore employment by manipulating the U.S. trade deal with China to their benefit. The President described this deal as “the greatest theft in the history of the world.” the President argued China was one of the primary causes of the loss of U.S. manufacturing jobs. The data for Trump’s election year showed that the U.S. trade deficit with China was around $346 billion. Donald Trump believed cutting into this deficit was key to helping American businesses and workers compete.
U.S. businesses were set to benefit from improved control of intellectual property, forced technology transfer, reduced export subsidies, and lax labor laws and environmental standards. American companies would also become more competitive due to reduced corporate tax rates.
When Donald Trump was elected, he managed to get the Chinese administration to open its economy marginally to U.S. firms and services. The President achieved this objective in exchange for greater Chinese access to bilateral trade. When China stopped providing the U.S. with these concessions, President Trump moved to launch the trade war.
The war was initiated by imposing unilateral tariffs on China to reduce the U.S. trade deficit between the countries. The mantra was to bring manufacturing jobs back to the United States. During the financial years of July 2018 and August 2019, the U.S. administration enacted policy plans that added import tariffs on over $550 billion of Chinese products. The administration in Beijing responded by adding taxes and duties on over $185 billion worth of U.S. products.
Economic Costs of the Trade War
U.S. businesses are reeling from the economic pain of the Trade War between their country and China. This war has resulted in a diversion of trade flows away from both countries and their businesses. U.S. economic growth has slowed as a result of reduced business investment. Less business investment has directly translated to higher levels of unemployment as companies aren’t able to hire as many people as before. Expansion is complex when specific markets are wiped off your radar as a business. Traditional agricultural businesses also suffered a severe economic impact. Numerous farmers went bankrupt as some of their major clients were from China. These markets lost viability when the manufacturing and freight transportation sectors were hit with tariffs. These critical pillars of the U.S. economy cannot operate in isolation. When they increase their prices, businesses have to follow suit.
Data from September 2019 has shown that the U.S. economy conceded nearly 300,000 jobs due to the trade war. This information translates to over 0.3% – 0.7% of real GDP. The U.S. GDP was predicted to eventually lose close to $316 billion by the end of 2020. China is a massive part of the U.S. economy. These losses are expected to hit a minimum of $1.7 trillion in stocks, as predicted by the Federal Reserve Bank of New York and Columbia University.
This data shows analysts that U.S. companies have suffered the most significant blow from these trading wars. Lower profit margins alone have cost these businesses $46 billion in revenue. The combination of lower profit margins, cut wages, and jobs for U.S. workers has led to recessionary effects. Companies seeking survival have had to refer to potential wage hikes or expansions and raise prices for American consumers.
The intended purpose of this war was to reduce the trade deficit; however, the deficit with China has continued to grow, reaching a record $419.2 billion in 2018. Reduced trade flows have meant that the U.S. trade deficit with Europe, Mexico, Japan, South Korea, and Taiwan has risen due to the war.