Shealah Craighead

There Is No Winner in a China-U.S. Trade War

In 2017, a well-known scholar, Graham Allison, proposed the possibility that one day China and the U.S. will be at war with each other. That argument seems to be true today, especially if we look at the economic battle between the U.S. and China which has lasted a year.

On the one hand, the U.S. has increased tariffs for Chinese imported goods worth $267 billion. Beijing immediately responded by raising tariffs on U.S. goods worth $110 billion.

President Trump replied that the trade deficit of the U.S. with China reached $500 billion a year, and intellectual property theft another $300 billion.

Trump argued that the trade war is the simplest way to win big against China because the policy inhibits imported goods from China. It is expected to certainly improve the trade balance which continues to deteriorate from year to year and to protect American domestic companies. But unfortunately, the trade war seems to be a nightmare not only for the U.S. and China but also for the world.

Impact on the world

The notion of global trade is inspired by a theory of comparative advantage by David Ricardo. A country that specialises in their products is able to produce cheap goods that advantage trading partner countries.

Chinese factories, for instance, can create cheap cell phones and affordable household goods. As a consequence, as reported by the World Economic Forum, the total export of these goods to the U.S. reached $70.4 billion, equivalent to about 14 percent of the total value of Chinese exports in 2017.

At the same time, the U.S., the biggest soybean producer in the world with more than 120 million tons a year, exports the agricultural commodity to China. These conditions make such collaboration a benefit for both countries since people can buy cheap stuff and they have the rest of the money to spend on other products. The local factories also get inexpensive resources.

A trade war, nonetheless, could ruin the international trade system by both the U.S. and China increasing the tariffs on imports which makes the price of foreign goods more expensive. Suppose that the cost of an electronic fan from China is increased. As a consequence, Americans have less money to buy a pair of jeans, and the future of the American jean industries will be bleak in the long run.

Moreover, the rise of tariffs burdens the operational cost of factories. For example, if Bumble Bee Seafoods cancels its plan to expand the canning plant in California it might look for new production options in Southeast Asia because of the 25 percent tariff increase on tuna loins from China. Consequently, trade barriers make Trump’s tax cut decision no longer effective to attract new investments in 2019.

In 2018, the data from the U.S. Census Bureau reveals that a trade war does not stop the deficit of trade between the U.S. and China. The deficit escalated by approximately 11 percent, from $375 million in 2017 to $419 million in 2018. In fact, the rise of the 2018 trade deficit was worse than in 2017 (8 percent).

Entering 2019, the atmosphere of a trade war begins to be warmer. The value of Chinese exports between January and February to the U.S. dropped to $74 million in total, from $90.5 million in the same months in the previous year. Besides, the total amount of American goods exported to China declined to $15.5 million, from $17.7 million.

China’s trading partner countries are also affected because in the network of trade integration the global production system is connected between one country to another. The contagion impacts of a trade war also spreads to other countries. Indonesia and Malaysia are such examples.

According to data from the Trade Ministry of Indonesia, exports from Indonesia to China only grew 17.5 percent in 2018 while they reached almost 40 percent in 2017. Besides, Malaysia’s export growth in February 2019 reached the lowest level since August 2016, a decline of 5.3 percent year-on-year. The decrease is caused by the lower demand from Hong Kong, Indonesia, the U.S., and Vietnam.

Furthermore, Malaysia’s electronic products are affected by trade tensions. Total exports in 2019 are predicted to decline due to the reliance on electronic markets in China and Hong Kong. In fact, both countries are the largest markets for Malaysian electronics firms during the last five years.

These demonstrate how a China/U.S. trade war has no winners but is also, more importantly, how it affects many other parts of the world.

As two big powers, Beijing and Washington need to realise that other countries are not merely audiences but, rather, are also impacted.