In 2018, the first ‘shots’ were fired and two of the world’s largest economies embarked on a gruelling trade war. At 12:01 pm on the 5th of July, the Trump administration followed through with its threat to impose tariffs on $34 billion worth of Chinese products, including flat-screen televisions, aircraft parts, and medical devices. The goods marked for tariffs would now face a punishing 25 percent border tax when they’re imported into the US. This was a significant escalation of a fight that could hurt companies and consumers in both the United States and China, and was an indication that things were getting serious.
The motive behind the tariffs was to make Chinese products more expensive for American consumers and businesses to buy. This would lead to Chinese businesses losing money as consumers would look to buy the same products from somewhere else at a cheaper price.
Moments later, China fired back, accusing the United States of violating World Trade Organization rules and setting off “the largest trade war in economic history to date”. They retaliated by imposing 25 percent tariffs on $34 billion worth of US goods, including soybeans, automobiles, and lobsters. “In order to defend the core interests of the country and the interests of the people, we are forced to retaliate,” the Chinese Commerce Ministry said in a statement.
Shortly afterwards, Russia joined China and announced extra duties on US imports in retaliation for earlier U.S. steel tariffs. Import taxes of 25 to 40 percent would be applied to various U.S. industrial goods, including those used in the construction and energy sectors, according to Russian Minister of Economic Development Maxim Oreshkin. The retaliation announced on the 5th provided compensation of almost $88 million, far less than the nearly $538 million that Trump’s tariffs have cost Russian companies.
Russia also joined the European Union, China, India and Canada in complaining to the WTO about the U.S. action. Still, Russia is not a top commercial partner for the United States. The total trade of goods between the countries last year was about $24 billion, roughly what the United States and China exchange every two weeks. The risk of escalation — specifically Trump’s 500 billion dollar threat against China — has analysts worried. “The countdown is on as to what Trump will do next,” said Yanmei Xie, a China policy analyst at Gavekal Dragonomics, an economic research firm in Beijing.
The Trump administration imposed these tariffs after concluding an investigation into some of China’s controversial trade practices. The U.S.’s new trade barriers are designed to penalize China for doing things like forcing foreign businesses to hand over their most prized technology to Chinese companies — many of which are state-owned — in exchange for access to their market.
Both the US and China’s initial round of tariffs against each other were designed to sting deeply. The US is targeting high-tech Chinese goods to put economic pressure on Beijing’s “Made in China 2025” program — a Chinese government initiative to transform China into an advanced manufacturing powerhouse.
China deliberately targeted big US agricultural exports like soybeans that come from states in the heart of Trump country, where neither the president nor his party want to see economic instability or job losses right before the 2018 midterm elections.
16 months later, Beijing and Washington are still locked in a trade feud, although there are hopes that an initial deal offering some relief may be signed this month. If that fails, nearly all Chinese goods imports into the United States – worth more than $500 billion – could be affected. U.S. imports from China subject to tariffs fell to $95 billion between January and June from $130 billion during the same period of 2018, a study released by the U.N. Conference on Trade and Development (UNCTAD) showed. “Overall, the results indicate that the United States tariffs on China are economically hurting both countries,” the report said. “United States losses are largely related to the higher prices for consumers, while China’s losses are related to significant export losses.” Over time, Chinese companies began absorbing some of the extra costs of the tariffs through an 8% dip in export prices in the second quarter of 2019, but that still left 17% “on the shoulders of U.S. consumers,” said the report’s author Alessandro Nicita, an economist at UNCTAD.
Other countries stepped up to fill most of the gap left by China, the study found. It named Taiwan as the largest beneficiary of “trade diversion”, with $4.2 billion in additional exports to the United States in the first half of 2019. They were mostly office and communication equipment. Mexico increased exports to the United States by $3.5 billion, mostly agriculture and transport equipment and electrical machinery. The European Union boosted deliveries by $2.7 billion, mostly via additional machinery exports, it found. “The longer the trade war goes on, the more likely these losses and gains will be permanent,” Nicita said. Not all of Chinese trade losses were picked up by other economies and billions of dollars in trade were lost entirely. Vietnam’s exports to the US swelled by $2.6 billion, driven by trade in communication equipment and furniture. Trade diversion benefits to Korea, Canada and India were smaller but still substantial, ranging from $0.9 billion to $1.5 billion. The remainder of the benefits were largely to the advantage of other Southeast Asian countries.
At this point, more and more American firms are calling for the Trump administration to resolve its trade conflict with China. They argue that elevated tariffs have hurt American businesses and consumers. And it’s not just China that American firms have been squeezed out of as a result of several policies by Trump. The president pulling the U.S. out of the Trans-Pacific Partnership, for example, placed American beef exporters at a disadvantage versus their peers in Japan too, according to Peterson Institute for International Economics, PIIE. “This is just one more good reason why trade wars are not easy to win,” said the researchers.
With more players joining the war, tension continues to rise as new tariffs are imposed and money is lost. How long will it take before one superpower falls, or will the two superpowers reach a consensus
Edited by Jillian Giberson.
The opinions expressed in this article are solely those of the author and they do not reflect the position of the McGill Journal of Political Studies or the Political Science Students’ Association.
Image by via Wikimedia Commons