The world’s two largest economies – US and CHINA are locked in a ferocious and implacable trade war. A trade war is exactly what it sounds like: Countries attacking each other’s trade by imposing tariffs, quotas, and other kinds of restrictions, causing other countries to respond in a tit-for-tat escalation. This can hurt both economies and lead to rising political tensions. 

The dispute between the two countries has been enraged for nearly 19 months, imposing tariffs on hundreds of millions of dollars worth of one another’s goods causing tensions to jump up a notch. After the US, China has the largest economy in the world, growing by 6% annually. In October 2019, the trade surplus of China had amounted to around 42.8 billion U.S. dollars. If the economy were represented in purchasing power parity (PPP), China edges out the U.S. as the largest economy. However, with a population of over 1.3 billion people, the Chinese gross domestic product (GDP) per capita is far behind that of the United States.

China-vs-US-GDP-comparison
China-vs-US-GDP-PPP-comparison

HOW DID THIS TRADE WAR START?

‘Make America great again’ it’s been Donald Trump’s aim since he ran for the presidency and he wants to do it by targeting the enormous trade deficit between his country and China. In 2018, china sold almost 540 billion dollars worth of consumer products to the United States. It’s mostly mobile phones, computers, clothes, and toys. The US, meanwhile, exported 120 billion dollars worth of goods to China, including planes, cars, and soybeans. The result – the U.S. reached a trade deficit of 420 billion dollars with China in 2018. Donald Trump thinks the US is the victim of unfair competition by China. He wants to put pressure on them to negotiate a trade deal and lay out his own conditions. Trump wants China to stop giving a helping hand to state-owned companies, and to stop undervaluing its currency to boost exports. He also accuses China of stealing American intellectual property. Part of the campaign aims to redress what Trump sees as unfair trade deals the US has agreed to in the past. Donald Trump wants to bring more production back into the country to protect US jobs, as he believes such past agreements have been a “rip-off” for the US. Chinese Premier Xi Jinping has also said that he does not want to be seen backing down, with both the leaders seeing the honor of their nation at stake.

TRADE DEFICIT OF U.S. 2016

The words turned into action and the Trump administration announced tariffs of 25% on steel imports and 10% on aluminum imports. China, the world’s biggest steel exporter, called the tariffs a serious attack on international trade. In response, the Chinese government announced tariffs on about $3 billion worth of U.S. imports, including a 15% tax on 120 American products (including fruit, nuts, wine, and steel) and a 25% tax on eight other goods from the U.S., including pork. The U.S. proposed additional tariffs of 25% on 1,300 Chinese goods. China volleyed back with another set of tariffs-25% on 106 goods including aircraft, automobiles, and soybeans. With every increase from America, came an increase from China. Since the start of the trade war, China has more than doubled its average tariff rate. America has tripled. The fight has become overtly political because china’s tariff is hitting President Trump’s voter base. Many counties where Trump won in the election were in the Great Plains and these counties were most affected by china’s tariffs. One of the things that China has done in its tariffs is it has imposed really high tariffs on American exports of soybeans. This is a huge product across the greater plains where they grow only to sell to China. 

US-CHINA TRADE WAR TIMELINE

WHAT’S NEXT?

The so-called ‘phase one’ deal will defuse the 19-month-long trade war and constitute one of President Trump’s biggest economic victories to date. Officials from both sides had worked tirelessly to agree upon a deal earlier this month. An agreement was made in principle, with Trump signing off on the details later in the day, on December 13. That gave Wall Street a boost, as renewed trade optimism helped send the stock market to new record highs going into the end of 2019. 

According to Forbes, phase one deal would see the U.S. remove some of the tariffs it placed on $360 billion worth of Chinese goods “phase by phase.” In an announcement, Trump described the “amazing deal” in a series of tweets: The U.S. will slash the tariff rate in half, to 7.5% from 15%, on roughly $120 billion of goods. Tariffs on nearly $250 billion of goods, including machinery, electronics, and furniture, will remain at 25%. The next round of scheduled U.S. tariffs, which were planned to take effect on another $156 billion of Chinese goods—including smartphones, toys, and consumer electronics—on December 15, was canceled as part of the trade deal, both sides confirmed. China will also agree to increase its purchases of American farm products to a total of $40 billion a year, to raise it to $50 billion, U.S. Trade Representative Robert Lighthizer confirmed.

IMPACT OF THIS TRADE WAR TO THE REST OF THE WORLD:

Economic growth has slowed worldwide amid the trade war. The International Monetary Fund’s World Economic Outlook report released in April 2019 lowered the global economic growth forecast for 2019 from 3.6% expected in 2018 to 3.3% and said that economic and trade frictions may further curb global economic growth and continue to weaken the investment. According to Capital Economics, China’s economic growth has slowed as a result of the trade war, though overall the Chinese economy “has held up well” and China’s share of global exports has increased. U.S. economic growth has also slowed. Globally, foreign direct investment has slowed. The trade war has hurt the European economy. Some countries have benefited economically from the trade war, at least in some sectors, due to increasing exports to the United States and China to fill the gaps left by decreasing trade between these two economies.

WILL A PHASE 2 DEAL LIKELY TO HAPPEN?

An ambitious “phase two” trade deal between the United States and China is looking less likely as the two countries struggle to strike a preliminary “phase one” agreement, according to U.S. and Beijing officials, lawmakers, and trade experts. The second phase would focus on a key U.S. complaint that China effectively steals U.S. intellectual property by forcing U.S. companies to transfer their technology to Chinese rivals.

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