U.S. vs China Trade War: The road until now

Ever since he was a candidate, U.S. President Donald Trump has classified trading relations with China as the primary cause for the loss of manufacturing jobs and intellectual property, commonly referring the substantial trade deficit of $346 billion in 2016. As such, he presented a four-part plan to reform the trade relationship in favor of the U.S.

After the first meeting with the President of China, Xí Jìnpíng, the two agreed on a 100-day action plan to settle trade differences. However, further negotiation and increased pressure from Washington for concessions lead to a lack of an agreement between the two countries. This was followed by a general increase of tariffs on goods imported from China starting in 2018, and the expected retaliation by the country on goods imported from the U.S.

Despite President Trump’s statement that China would be paying for the tariffs, a 2019 Reuters Study has concluded that most of the burden was put on U.S. consumers. By increasing the average tariffs from 2.7% to 17.5%, resulting in the collection of over $300 billion, a large number of national firms that relied on Chinese products forcefully had their costs increased, leading to lower profit margins, higher prices across the board for customers, and cut of costs, particularly in wages and jobs of U.S. workers, as over 300 000 jobs were lost due to this dispute. Additionally, a study from the Federal Reserve Bank of New York has found that the trade war “reduced U.S. investment growth by 0.3 percentage points by the end of 2019, and is expected to shave another 1.6 percentage points off of investment growth by the end of 2020”, and has already lowered the market capitalization of U.S. listed firms $1.7 trillion.

Logically, this trade war also impacted Chinese firms, as they were forced to provide discounts to account for some of the tariffs’ burden (significantly less than U.S. firms’, but still existent), and also saw import prices increase for U.S. products. However, they were less exposed to that single market, and the country reduced tariffs for other countries in response.

For instance, U.S. soy farmers lost billions of dollars for their product was now more expensive than their Brazilian counterpart. The result for the United States was a trade deficit with China in 2019 similar to the one in 2016, but a higher trade deficit overall with other trade partners, with an overall impact much higher than the one initially predicted, or rather announced by President Trump.

Even though most politicians support the intention of battling China’s “unfair trade policies”, they disagree on the method used for the negative economic impact.In January of this year, the two countries signed an agreement to ease the trade war, as China would increase imports by $200 billion above 2017’s levels and strengthen intellectual property rules and the U.S. would halve some of the new tariffs imposed, indicating a possible future understanding between the two parties on economic terms, but their relation has still much to develop and demonstrate.

Published in our August Newsletter

David Tita, BSc in Management

Published by lisboninvestmentsociety


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