What comes to your mind when you think of a war? Is it a plane dropping bombs or missiles flying overhead? If you’ve been listening to the news lately, you have likely heard a lot about a different type of war—a Trade War. Since July 2018, the US and China have been engaged in a trade war, and it is turning out to be just as devastating as a real war, but in obviously different ways.
Before we delve any further into the present situation, what exactly is a trade war?
Unlike most wars, the weapons employed in a trade war are different: it affects the food we eat, the medical devices we use, and even the laptop on which you’re probably reading this. Trade wars are basically economic conflicts in which both the countries involved try to damage each other’s trade. This is often done by imposing tariffs, which are taxes imposed on imported goods.
In a way, tariffs are an essential tax to protect domestic trade and companies. The British, during their rule in India, dumped factory-made goods into the Indian domestic market. This resulted in people buying the finished machine-made clothes, as they were way cheaper, but this caused the domestic market of India to collapse.
In such situations, tariffs are an important tax to protect domestic market from foreign companies. However, when tariffs are used as a tool to punish a country and the other country retaliates by imposing their own tariffs, it may continue on in that way, resulting in what would be called a Trade war.
There have been quite a few trade wars in the past; for example, the opium wars fought between the British and China, Anglo-Irish trade wars, and even the current Japan-South Korea trade dispute.
What causes a Trade war?
There are various factors that can result in a Trade War. They may be the result of unfair trade practices between two countries, intellectual theft, manipulating trade in any way, or even the failure to pay certain costs.
The Anglo-Irish War (1932-1938) was a result of the latter. Before 1932, both Britain and the Irish free state were trade allies. 90% of agricultural exports went to the British, as the Irish were dependent on Britain for coal. The trade war was caused because De Valera, the then Irish president, refused to pay land annuities to Britain. Land annuities was the money that the British gave to the Irish tenant farmers to buy land.
The British punished Ireland by imposing a 20% tariff on all goods from the Irish free state. The Irish responded by imposing duties on goods from Britain and Northern Ireland. De Valera knew there would be financial consequences, but he believed that the war would strengthen the domestic market and encouraged entrepreneurs to set up their own manufacturing companies. He thought that the trade war would result in self-sufficiency, but the trade war instead had disastrous effects on both countries.
Eventually, the deteriorating political situation encouraged the British to end the trade war. Aside from the negative effects the Trade war had on both countries, there were some positive outcomes. The Irish encouraged coal production and Northern Ireland, which had earlier been dependent on the Irish free state for domestic stock, started its own production to satisfy domestic needs. The land annuities were ended and De Valera was seen as a hero for challenging the British. The Anglo-Irish Trade war resulted from the Irish free state not paying back the land annuities to the British. The British punished them by imposing tariffs on goods, but that resulted in a Trade war and the resulting damage took a toll on both nations.
Why is the present trade war a bad idea?
The US and China have been trading partners for a long time, and China is the United States’ largest trading partner. With both being two of the biggest economies in the world, and given the complex relationship they have shared in the past, it may come as no surprise that a trade war could actually slow global economic growth, cause an economic downfall in both countries, and negatively affect other countries that are practicing free trade with the two combatants.
The situation is critical because both countries dominate the global trade market, with China surpassing the United States in 2013 as the largest trading nation in the world. China also plays a vital role in international trade, as it has free trade agreements with a number of other countries. China and the United States are dependent on one another and the Chinese are the largest foreign holder for the US treasuries’s debt. It buys U.S debt to support the value of the dollar.
On the other hand, China is also the largest exporter to the US. The total exports to the US in 2018 was $540 billion, which makes the United States the largest consumer for the Chinese market. Considering these factors, it is obvious that the two countries are dependent on each other and should find a way to work together.
What caused the Trade war?
On July 6, 2018, a trade war became official when the US imposed tariffs on $34 billion of Chinese goods. A series of tariffs were then imposed by both countries, as China retaliated promptly on every tariff imposed by the US. A game of tit-for-tat was played by both countries and it has now reached a point where the US is imposing levies on nearly every product China exports to the United States.
Both countries agreed to halt the tariffs after initial negotiations in Washington, but after a few days in August 2018, the US proposed tariffs on another $200 billion of Chinese goods.
Now, why would the US initiate a Trade war that could have devastating effects on both the countries and even impact the global economy?
Trump has blamed the trade deficit as one of the factors, given that the US has an all-time high trade deficit with China at around $500 billion. Trump says that this is bad for America, and has accused China of illegal trade practices over the years, saying, “That war was lost many years ago by the foolish, or incompetent, people who represented the U.S”, adding that now we have a deficit of $500 billion, along with another $300 billion of intellectual theft.
In reality, the trade deficit is only the tip of the iceberg. The larger picture includes China’s unfair trade practices over many decades, bending W.T.O. rules, intellectual theft, cheating in terms of manufacturing, and the race to dominate global trade. Although imposing tariffs means that American consumers have to pay extra for almost everything, Trump’s advisers strongly believe that in the long term, this will benefit the US economy and encourage manufacturers to set up manufacturing units in America.
At several of his rallies, Trump has mentioned that Apple should start manufacturing its products in the US, but it’s not that simple. Normally, people imagine that making an iPhone consists of the raw materials going in from one side of a factory and an iPhone being produced on the other end. However, it doesn’t work that way. The battery is made in China, the camera is made by Sony, which is a Japanese company, the back panel is made in China, the antenna is manufactured by a Massachusetts company called Skyworks, the A10 processor (designed by Apple) is manufactured by a Taiwanese company called TSMC, and Apple’s design team is located in Israel. Yes! It’s really really hard to make an iPhone. The 50 elements needed to make an iPhone are sourced from all around the world. China essentially assembles the iPhone in the various Apple plants, which utilize cheap labor, and then the finished products are shipped to the US. Acting as though tariffs are the magical tools that can bring the entire production ecosystem to the US is foolish and essentially impossible.
However, imposing tariffs to force China into making deals is a risky gambit and Trump is relying heavily on Section 301 of the Trade Act of 1974. This is a unique law, as it does not involve any interference from the government and allows the United States Trade Representative (USTR) to take action against unfair trade. It is a crude tool that allows the US to investigate and unilaterally impose tariffs on a foreign country’s exports or restrict its access to the US market with the president’s authorization. However, the policy has rarely been used in the decades since the formation of the World Trade Organization in 1974. The US had effectively agreed to stop using it, as the WTO became responsible for the practice of free and fair trade between members. Even so, Trump is willing to risk it in the hopes of making a deal with the Chinese.
In some ways, Trump has solid ground in his reasoning. Since becoming a member of the WTO, China has been playing the market. It has been accused of cheating, unfair trade practices, industrial espionage, currency manipulation, massive governmental interventions and the theft of intellectual property. When China joined the WTO in 2001, it was allowed in as a “developing nation”, subject to very low tariffs on its exports (like its 25% tax on car imports, as compared with the 2.5% tariff imposed by the US) to the US, but still permitted to impose high tariffs to protect its own industries from US and European competition.
It was assumed that, as China gradually grew, it would cut its tariffs and practice free and fair trade. However, it has refused to voluntarily lower its tariffs and the WTO has not yet completed a new trade round.
China developed an industrial policy that often bends WTO rules. The government gives away cheap land and cheap loans for new domestic industries, but foreign companies that want access to the Chinese market are forced to form a venture with a Chinese company and transfer their advanced technology to them. This puts tech companies in a bind, as they are forced to share their prized innovations and are therefore denied a chance at fair competition. The Chinese gain access to their technology, which puts US companies at a disadvantage.
This is not where it ends, as most companies are government-owned and the “Made in China 2015” campaign could give China an edge in technology, consequently assisting China in a race to dominate the global market. The US evidently does not want this.
Even with all that, Trump is taking a risk that could backfire badly. The global trade war would inevitably hurt American consumers, incoming goods from abroad would become more expensive, and American exports would see a plunge in demand.
This war needs to stop
There are no winners in a trade war, as both countries will suffer significant damage. China, for example, has seen its slowest economic growth in nearly 30 years. However, this is not primarily because of the tariff, as Trump claims; the main cause has been domestic drivers. Still, a staggering 1.8-1.9 million jobs have been lost in China due to the trade war.
The war has been particularly harsh on Americans, even if some aluminum and other factories have opened up since the tariffs began. Many factories have also been shut down in a matter of days. Most of the manufacturing units have come to a standstill, with more uncertainties ahead, as the tariffs are only a temporary tool. Walton Farms in Wilton, Iowa—who export the majority of their soybean crop to China—will have to look for other markets, as China normally imports 13 billion of soybeans from the US.
Experts say that Trump makes it look like the trade deficit is what makes the relationship unfair, but it doesn’t work like that. At the end of the day, trade is mutually beneficial. We need them, and they need us. The US relies on China’s cheap labor and the Chinese rely on US goods. American companies benefit from outsourcing manufacturing to China. Apple, for example, has 27 plants in China.
Mid-Continent Nail is one of the largest manufacturers of nails in the US. Located in Poplar Bluff, Missouri, the company has doubled in size in the last five years. However, since the tariffs have come into effect, it has lost about 70% of its business. “This is a three-alarm fire for jobs in our state,” said former senator Claire McCaskill.
There is a new consensus among economists that this prosperity is under grave threat and that President Trump, with the stroke of a pen, could cripple the American economy, resulting in an imbalance in global trade with massive ripple effects. More importantly, this war is a test of patience and the Chinese are known to be very patient. The question is, how long will they hold out with Trump leveraging as hard as possible. In a race to dominate the global economy, the two biggest economies are at war and the casualties are heavy on both sides.
Even if Trump is playing the leverage game, it may only be a matter of time before this way ceases. With elections coming up and the increasing political pressure at home, this war needs to end soon. The Chinese, on the other hand, are taking everything the US is throwing at them, and we don’t know how long this can continue.
At the recently concluded G-20 summit, the US decided to halt further tariffs in a bid to de-escalate the ongoing trade war. Trump concluded by saying, “This doesn’t mean there will be a deal. They would like to make a deal. I can tell you that. If we make a deal, it would be historic.”