Over the past several months, there has been an increasing amount of buzz over the possibility of a trade war between the United States and China. Such a conflict has been referred to in apocalyptic terms, with many observers stressing the possibility that it could lead to the ruin of the global economy at large. The developing economic and political situation, as well as the concept of a “trade war” itself, is complicated and deserves a thorough explanation. These are some important terms, defined in relation to the current circumstances.
Trade deficit is the amount by which the cost of a country’s imports exceeds the value of its exports. The US trade deficit with China was $347 billion in 2016. The trade deficit exists because US exports to China were only $116 billion, while imports from China were $463 billion. President Donald Trump ran on a platform of bringing industries back to the US to create jobs and reduce reliance on Chinese products.
A tariff is simply a tax on foreign goods. Several examples are taxes on all goods from a specific country and taxes on a specific good from all other countries. The goal of a tariff is to collect money and raise the price of goods originating from outside the country. This makes domestic producers more competitive. For example, the US could put a tariff on Chinese steel, raising its price to equal or more than domestic producers. However, doing so, as President Trump has stated he may, would probably create a…
While you can have wars over trade, a trade war is typically defined as a situation in which one state raises tariffs on another, prompting the second state to raise tariffs on the first. With high enough tariffs on either side, trade between the countries becomes infeasible.
Although there is ongoing debate about the precise impact of a trade war between the world’s two preeminent powers, the general consensus amongst economists is that the result would be disastrous.
In both countries, but especially China (due to its trade surplus with the US), industries would be hit hard. The increasing difficulty of competition would make exporting to the other country costly.
Consumers would likely feel the burden of increased price levels. In both countries, but especially the US (due to its trade deficit with China), consumers would have to pay expensive domestic companies for items previously sourced in the other country. This would result in strained budgets for both Chinese and American consumers.
There is a possibility that other economic sanctions could come into play.
The United States has accused Chinese entities of cyber-attacks on American government and corporate assets, so President Trump could expand an Obama administration executive order that froze the assets of specific persons and organisations in China.
The political dynamics surrounding this situation are unique. President Trump ran on the promise that he would take China to task for what he identified as currency manipulation and unfair business practices.
As such, there is more political pressure on him to act tough on China than there was for his predecessor, who pursued a more conciliatory approach. China, on the other hand, seeks to avoid economic turmoil without compromising its international prestige and capitulating to American demands.
While details are still shadowy, it appears that talks between President Trump and Chinese President Xi Jinping have had positive results. NPR reports that China will no longer vote against UN resolutions regarding Syria –– in exchange for US assurances that it will not militarily intervene in North Korea.
While these are not economic agreements, they show willingness to compromise that many observers feared would be absent from US-China dealings under the Trump administration.
Additionally, a 100-day negotiating period, during which no action on trade will be taken by either side, was set up to give both sides more time to prevent a trade war.
However, this does not mean that a trade war is off the table; if the 100 days pass and there is no agreement, a trade war and all its varied consequences could still occur.