Donald Trump’s trade war with China is exacerbating the economic slowdown. Global economic growth is already flagging, and the US-China trade war is making it even worse. Should we expect a further escalation of tensions, or is the end of the trade war in sight? At least, trade talks will be continued.
Donald Trump’s trade policy: US tariffs on China
A harsh trade battle between the world’s 2 largest economies, the US and China, will not fall off the radar. Prolonged trade tensions between the two giants threaten to impede global economic growth.
China has accused Presindent Trump of “naked economic terrorism” and according to Zhang Hanhui, the deputy foreign minister of China, is against the trade war, but is not afraid of it.
The US government, in its turn, describes its actions as “purely defensive” and justifies them by the unfair competition, trade practice and theft of intellectual property it says China has been conducting over a period of years. According to Peter Navarro, Director of White House Office of Trade and Manufacturing Policy, it cost Americans trillions of dollars.
With no sign of a peaceful resolution in the near future, let’s trace back the major trade war milestones.
US-China trade war timeline
March 2018. President Trump applied tariffs on $50-60 billion worth of goods from China, claiming these actions to be a response to unfair Chinese trade practices and theft of US intellectual property. More than 1,300 imported Chinese goods were exposed to tariffs, including batteries, aircraft parts, satellites, weapons and medical devices.
April 2018. Chinese government responded by imposing tariffs on 128 products, imported from the USA, including soybeans, pork, cars, aluminium, steel piping and airplanes.
May 2018. Despite some positive negotiations and the promise to put a trade war on hold, the White House announced another 25% tariff on $50 billion of Chineese goods, related to “industrially significant technology”.
June 2018. Chinese officials accused the US of launching a trade war and retaliated with their own tariffs on $50 billion worth of US goods. The international community became worried that US-China tariff war would disrupt supply chains.
July 2018. The US released a list of additional $200 billion worth of Chinese goods subject to a 10% tariff. A couple of days later, China responded with additional tariffs on American products worth $60 billion annually.
August 2018. The US and China exchanged another round of 25% tariffs on imported goods. Furthermore, China filed a complaint with the WTO (World Trade Organisation), claiming that US tariffs on solar panels are against the WTO ruling and destabilise the international solar market.
September 2018. A new round of tariff ping-pong hit the stage.
December 2018. The planned increases in tariffs were postponed in order to start negotiations about the Chinese structural changes regarding the forced technology transfer, cyber intrusions and intellectual property protection.
May 2019. US restricted the export of US information and communication technology to foreign competitors. Pursuing the national security grounds, this regulation is meant to protect the United States from espionage by the Chinese telecommunications firms.
By now, US tariffs on China and vice versa looks as follows:
Source: US Census Bureau, BBC
US China trade tensions and tariffs
Why tariffs? Theoretically, President Trump imposes tariffs on China to make American home-made products cheaper than those imported from abroad, especially from China, and encourage American consumers to buy American. During the ongoing trade war, tariffs are seen as a primary weapon and negotiation tactic. However, for now both the US and the international businesses confirm they are being harmed. Fears about further escalation of the US-China trade tensions also hit the stock markets and unsettled investors.
Effects of tariffs on international trade
According to Ayhan Kose, the director of the World Bank’s Prospects Group, “with these trade tensions, the global economy, in a sense, is getting close to a crossroads”. The economic weakness of China, driven by the effects of the trade war, has been spreading to Australia, Germany and other countries.
Mario Draghi, the president of the European Central bank, mentioned that they are ready to add more stimulus into the economy of the Eurozone to overcome the economic slowdown.
President Trump has been steadily using tariffs to “punish” the US trade partners, including China, Canada, Mexico and Europe. He says that they have destroyed American jobs by supplying cheap products to the US market. President Trump considers Chinese economic slowdown as a proof that his trade policy is working.
However, the decline in the world’s 2nd largest economy, deeply involved in global trade networks, has significantly impacted the economies of other countries. In response to President Trump’s tariffs on China, its goods and metals, numerous international companies are shifting supply chains and delaying capital spending.
A flash of light has emerged after the most recent telephone call of the President Trump and Chinese President Xi Jinping. The two leaders have agreed to have an extended meeting during the Group 20 summit in Japan. Though it’s a positive sign, no agreement is guaranteed.
According to the World Bank’s report this month, global trade growth has declined to its lowest rate since the financial crisis of 2008. Especially vulnerable to international trade, the manufacturing industry across advanced economies is also slowing down.
The winners and losers of the trade war
In 2018, China showed the weakest economic growth in 28 years. Amid continued trade uncertainty, the decline is expected to continue in 2019.
European countries will also suffer from the US-China trade war, as 70% of exports are linked to global supply chains. The German automobile industry is a cornerstone of the country’s economy and is highly dependent on China for growth. As the Chinese economy continues to fade, car manufacturers in Germany pay a tough price.
The world’s largest carmaker, Volkswagen, announced last week that the company’s global sales fell 5% from January to May. The experts note the unprecedented decline in the world’s car market in 20 years which may lead to global auto crisis.
As China produces 95% of the world’s rare earth elements, any restrictions could significantly impact US technology sector, hurting firms like Apple.
However, Christian Keller, head of economic research at Barclays, suggests that trade substitution, resulting from the imposed tariffs, opens new opportunities for core Eurozone countries to gain export market share. For example, Germany, France and the UK may serve as the closest US proxies, regarding exports to China.
Meanwhile, the US-China trade war is dragging on and on with no sign of any resolution, and the fears of global economic slowdown are mounting.