Trade War Escalates Between U.S. and China

Source: Asia Financial Publishing

By Alexander Dieker

The first week of April saw a rise in trade tension between the United States and China. The two economic powerhouses have exchanged blows in the form of tariffs, with presidents Donald Trump and Xi Jinping proposing escalating commercial restrictions between the two countries. The events over the past couple months – dubbed a “trade war” by many news outlets – began in late January when President Trump imposed tariffs on goods heavily exported by China, according to the New York Times. What has ensued since then is a back-and-forth spat in which both nations have compounded restrictions on billions of dollars of exports.

The Trump Administration announced plans to put in place restrictions on $50 billion worth of goods from China, in addition to imposing tariffs on steel and aluminum. In response, China levied tariffs on 128 goods from the United States. Last week, after the US officially proposed the restrictions, Jinping countered with a $50b tariff proposal himself. Trump escalated the situation on April 5th by “considering additional tariffs on $100 billion worth of goods in response to China’s retaliation” (New York Times).

Trump’s focus on restricting imports from China fits in nicely with his campaign mantra, “America First”. In economic terms, this means putting American industry before that of free-flowing global trade. Adding more expenses to foreign-made goods may force companies to raise prices when shipping to the United States, or even convince them to stop shipping here in the first place. Besides steel and aluminum, Trump’s proposed tariffs could cover products such as televisions, batteries and medical devices, according to the New York Times.

The innate problem that comes with protecting US companies from foreign competition is the potential for retaliation. CBS stated that China’s proposed tariffs covering $50 billion worth of US goods specifically target America’s agricultural industry, such as pork, beef, and soybeans. This would severely hurt American farmers’ ability to sell goods to China at a fair price, meaning that companies in the United States could be directly harmed by Trump’s seemingly good-willed tariff applications on Chinese exports.

According to the Office of the United States Trade Representative, the United States exported over $115 billion worth of goods to the People’s Republic of China in 2016. If Xi Jinping decides to escalate his proposed tariffs even further, over half of America’s exports to China could be heavily restricted. China’s exports won’t be affected as much under Trump’s current plan, since the US currently imports four times as many goods from China as we export.

We are operating at a massive trade deficit with China. In a tweet last month, Donald Trump referenced our “Trade Deficit of almost 800 Billion Dollars” as “Bad Policies & Leadership.” Entering into a commercial battle with America’s biggest trade partner done little to ease worries over the very deficit Trump claims he wants to reduce.

China’s massive trade surplus isn’t the only advantage the most populated nation has over the US. Last month, according to NPR, Chinese lawmakers reframed their constitution to obliterate presidential term limits. Because of this, Xi Jinping is set to serve as the country’s leader indefinitely, which means that he is under no pressure to succeed in the short-term during this trade face-off. Trump, on the other hand, must show voters that his policies are getting results to stand a chance of re-election in 2020.

Many of the states that voted for Trump in 2016 – Iowa, Indiana, Kansas, and Nebraska to name a few – are heavily dependent on their agricultural production. If the trade war reduces their means of selling to China, we could see a revolt in the form of votes during the 2018 midterms and 2020 election. Adversely, if China rolls back proposed tariffs to American goods, the US economy could flourish without as much foreign competition. However, as of now it seems neither leader is willing to pull any trade punches.

When Donald Trump tweeted that “trade wars are good, and easy to win,” he made his intentions clear to everyone around the world. China has not backed down to the administration’s threats, and the stock market has taken a major hit after the tariff escalations, according to CNN Money. Trade wars often take years, if not decades, to expose their true ramifications. Much of America’s success in the automobile industry is a product of a trade war between the US and Europe over chickens in the 1960’s. Will this quickly-escalating war of commerce between the two most powerful nations take time to play out, or will we begin to see massive changes to the market in the coming years?