There Is No Winner in a China-U.S. Trade War
In 2017, American political scientist Graham Allison suggested that one day China and the U.S. will be at war with one another. That argument seems to have become a reality with the ongoing economic battle between the U.S. and China.
On one side of the spectrum, the U.S. has increased tariffs on Chinese imported goods worth $267 billion. On the other side, Beijing has raised tariffs on U.S. goods worth $110 billion.
President Donald Trump has defended his decision by arguing that the U.S. trade deficit with China reached $500 billion a year, with intellectual property theft accounting for another $300 billion. Trump argues that the trade war is the simplest way to win against China because the policy inhibits imported goods from China. While it is expected to certainly improve the trade balance which continues to deteriorate and to protect American companies, the trade war appears to threaten a nightmare scenario not only for the U.S. and China but also for the rest of the world.
The notion of global trade is inspired by the theory of comparative advantage, which assumes that a country that specializes in its products is able to produce cheap goods that benefit trading partner countries.
Chinese factories, for instance, produce cheap mobile phones and household goods. As a consequence, the total export of these goods to the U.S. reached $70.4 billion, equivalent to roughly 14% of the total value of Chinese exports in 2017.
Simultaneously, the U.S., the biggest soybean producer in the world, exports soybeans to China. These conditions benefit both countries since consumers can buy cheap goods and have the rest of the money to spend on other products. At the same time, local factories also obtain inexpensive resources.
A trade war, nonetheless, ruins the international trade system as both the U.S. and China increase the tariffs on imports which makes the price of foreign goods more expensive. Imagine that the cost of an electronic fan from China increased. As a result, Americans would have less money to buy a pair of jeans and the future of the American jean industry will be bleak in the long run.
Moreover, the increase in tariffs burdens the operational cost of factories. For example, if Bumble Bee Seafoods cancels its plan to expand its canning plant in California, it may well look for new production options in Southeast Asia because of the 25% tariff increase on tuna loins from China. Consequently, trade barriers make Trump’s tax cuts ineffective in attracting new investments in 2019.
In 2018, data from the U.S. Census Bureau reveals that the trade war did not dent the trade deficit between the U.S. and China. The deficit rocketed by approximately 11%, from $375 million in 2017 to $419 million in 2018. In fact, the increase in the 2018 trade deficit was worse than in 2017 (8%).
Going into 2019, the trade war began to heat up. 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.
It is important to note that China’s trading partners are also affected by the trade war because the global production system connects one country to another. The significant impact of the trade war has also spread to other countries, with Indonesia and Malaysia being examples.
According to data from the Trade Ministry of Indonesia, exports from Indonesia to China only grew 17.5% in 2018 while they reached almost 40% in 2017. Likewise, Malaysia’s export growth in February 2019 dropped to its lowest level since August 2016, a decline of 5.3% year-on-year. The reduction is caused by the lower demand from Hong Kong, Indonesia, the U.S., and Vietnam.
Malaysia’s electronic products are also affected. Total exports in 2019 were predicted to decline due to the reliance on electronic markets in China and Hong Kong. In fact, both 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 more importantly, affects many other parts of the world. As two enormous powers, Beijing and Washington need to realize that other countries are not merely audiences but, are also impacted.