Ex US President Donald Trump has long accused China of unfair trading practices and intellectual property theft.
In China, there is a perception that America is trying to curb its rise as a global economic power.
During the 2016 presidential campaign, a consistent refrain from then-candidate Trump was to point to U.S. trade with China, and the agreements that enabled it, as a primary cause of the loss of U.S. manufacturing jobs and intellectual property
By far, the largest U.S. trade deficit by country is with China. In 2018, the U.S. trade deficit with China was $419 billion. The United States imported $540 billion, primarily in computers, cell phones, and apparel. Much of this is manufactured in China by U.S. companies but is still considered imports. The U.S. companies exported $120 billion to China. Most of this was commercial aircraft, machinery, optical and medical instruments, and vehicles and soybeans.
In addition to reducing the trade deficit, Trump wanted to limit U.S. technology transfers to Chinese companies. China requires foreign companies who want to sell products in China to share their trade secrets.
The Trump administration has imposed three tariffs on a total of $250 billion in Chinese imports. The Federal Reserve estimated these tariffs cost the average household $414 per year.
On May 10, 2019, Trump imposed a fourth tariff. He raised tariffs to 25% on $200 billion worth of goods.32 The Fed estimated that this tariff combined with the
previous 2018 tariffs would cost the average household $831 a year. Trump is increasing the pressure on trade talks that are underway.31
What tariffs have been imposed?
Mr Trump’s tariffs policy aims to encourage consumers to buy American products by making imported goods more expensive.
The US has imposed tariffs on more than $360bn (£268bn) of Chinese goods, and China has retaliated with tariffs on more than $110bn of US products.
Washington delivered three rounds of tariffs in 2018, and a fourth one in September last
year. The most recent round targeted Chinese imports, from meat to musical instruments, with a 15% duty.
Beijing hit back with tariffs ranging from 5% to 25% on US goods.
ECONOMIC COSTS OF THE TRADE WAR
The trade war caused economic pain on both sides and led to diversion of trade flows
away from both China and the United States. As described by Heather Long at the
Washington Post, “U.S. economic growth slowed, business investment froze, and
companies didn’t hire as many people. Across the nation, a lot of farmers went
bankrupt, and the manufacturing and freight transportation sectors have hit lows not
seen since the last recession. Trump’s actions amounted to one of the largest tax
increases in years.”
A September 2019 study by Moody’s Analytics found that the trade war had already
cost the U.S. economy nearly 300,000 jobs and an estimated 0.3% of real GDP. Other
studies put the cost to U.S. GDP at about 0.7%. A 2019 report from Bloomberg
Economics estimated that the trade war would cost the U.S. economy $316 billion by
the end of 2020, while more recent research from the Federal Reserve Bank of New
York and Columbia University found that U.S. companies lost at least $1.7 trillion in
the price of their stocks as a result of U.S. tariffs imposed on imports from China.
Numerous studies have found that U.S. companies primarily paid for U.S. tariffs, with
the cost estimated at nearly $46 billion. The tariffs forced American companies to
accept lower profit margins, cut wages and jobs for U.S. workers, defer potential
wage hikes or expansions, and raise prices for American consumers or companies. A
spokesperson for the American Farm Bureau stated that “farmers have lost the vast
majority of what was once a $24 billion market in China” as a result of Chinese
Meanwhile, the U.S. goods trade deficit with China continued to grow, reaching a
record $419.2 billion in 2018. By 2019, the trade deficit had shrunk to $345 billion,
roughly the same level as 2016, largely as a result of reduced trade flows. It should be noted that, while the U.S. deficit with China decreased, its overall trade deficit did not. Trump’s unilateral tariffs on China diverted trade flows from China, causing the
U.S. trade deficit with Europe, Mexico, Japan, South Korea, and Taiwan to increase
as a result.
China also felt economic pain as a result of the trade war, though apparently not enough to capitulate to the Trump administration’s core demands for major structural
reform. Indeed, as the trade war dragged on, Beijing lowered its tariffs for its other
trading partners as it reduced its reliance on U.S. markets. The final deal that both
sides announced on January 15, 2020, largely resembled the offer Beijing had put on
the table from the start — increased goods purchases plus commitments on improved
intellectual property protection, currency, and forced technology transfer.
Missing from the deal was any forward movement on subsidies, state-owned enterprises, and China’s uses of industrial policy to advantage its own firms over foreign competitors. Progress on market access also proved underwhelming outside of the financial sector. These and other challenges were put off for a phase two negotiation, which Trump recently said is not under consideration.
2020: A trade truce and a pandemic
In January 2020, the US and China signed the Phase I deal, aimed at deescalating trade tensions. It called on China to buy billions more in US products in order to shrink the trade surplus that it enjoyed with the US. The condition was deemed unrealistic even before the deal went into effect. The pandemic has only made it more daunting.
“The requirements for additional imports of US products appear very, very challenging,
given the growth of the Chinese economy will be much slower than forecast in January,”
says Yasuyuki Sawada. In addition, the deal kept existing tariffs in place, effectively stalling the conflict instead of resolving it.
The pandemic that followed effectively disrupted global supply chains. But China’s economy has been able to bounce back since the second quarter of 2020. As one of the first major economies to come out of lockdown, it has been able to provide countries like the US with the products they need.
“Part of this was due to increasing exports of health supplies and equipment,” says Sawada. Imports of face masks from China to the US, for example, have increased more than 10-fold. This has been helped by the many tariff exceptions granted by the US in the past months concerning products like not only surgical gloves and face masks, but also many electronic items, car parts and others. All this has boosted trade between the US and China almost back to pre-dispute levels.
But the effects of the trade war are still playing out. While prices for Chinese imports rose during the dispute, US demand in cell phones, computers, lamps or printers didn’t cease. As a result, US consumers and manufacturers are shifting to other countries to get the products they need.
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