The story behind the US-China trade dispute

13

April, 2018

  • The US are concerned at China’s economic activity and trade practices, especially in the field of intellectual property
  • Both countries have imposed tariffs on each other’s goods, leading many to fear a trade war could be on the horizon
  • The tariffs won’t be in effect until the US meet with businesses and make the final decision to proceed, showing there is still room to maneuver
  • China has made efforts to ease tensions by responding to US concerns over doing business in the country

“China ran a $375 billion goods trade surplus with the United States in 2017. Trump has demanded that China cut the trade gap by $100 billion”

Fears are rising as the US and China have engaged in a trade dispute in the last month, raising concerns of an incoming trade war between the two superpowers. Import tariffs – a tax that increases the price of imported goods –  have been been imposed by both sides on the other countries goods. Trump has claimed “trade wars are good and easy to win”, but as both sides become embroiled in this trade dispute, the effects will be consequential.

The US are concerned at China’s economic activity, mostly in relation to what Washington has termed “unfair trade practices”. China ran a $375 billion goods trade surplus with the United States in 2017. Trump has demanded that China cut the trade gap by $100 billion. The move to impose tariffs from Washington was aimed primarily at the issue of intellectual property rights in China. Beijing stipulates that foreign investors will have to transfer technology over to their Chinese counterparts when entering into joint-ventures with Chinese companies – it is a condition of entry and a major component of the Made in China 2020 policy. Also, one of China’s main aims, and consequently grievance from not only the US but others, is that the foreign technology for products will then be replaced with domestically made components. The threat of tariffs could hamper the development of this key industrial policy, at least that is the hope from the US.

The two sides exchanged blows after Washington made the first move and imposed $50bn worth of tariffs on Chinese imports. China’s response was stern with Beijing announcing plans to match the $50bn worth of tariffs on US imports, the most prominent being aeronautical equipment, cars, and soybeans – the latter of which has already caused realignment of trade patterns with the US soybean price fall accompanied by increased prices on Brazilian soybeans.

The American Soybean Association warned that China’s proposed 25% tariff on soybeans would be “devastating” to American farmers, considering China is the biggest market for US soybean. The likelihood is that we will see US soybean being exported to unexpected destinations in large volumes (analysts have already suggested EU soybean processors including Netherlands and Germany have ordered soybean in large volumes), especially in the short-term as prices are cheap in comparison to other soy-based export nations such as Brazil.

Although the trade dispute is designed to counter the economic consequences of each side’s actions, the upcoming midterm elections in the US have been influential. China’s tariffs directly targeted commodities produced in states such as Iowa and Texas, who happened to vote for Trump in the 2016 presidential election. Republican U.S. Senate Majority Leader Mitch McConnell expressed his concern at the “growing trend in the administration to levy tariffs”. By targeting battleground states which will be pivotal in deciding the midterms, China’s move aims to inflict political damage.

Despite the escalating tensions, there appears to be room to maneuver and avoid the dispute spiraling out of control. Complaints from the US and foreign businesses over China’s business environment has been constant in the last few years. A business survey by the American Chamber of Commerce in China this year showed that 75 percent of member companies felt they were less welcome in China. For example, Timothy Stratford, a former deputy trade representative for the US, has said the lack of detailed regulation on how to obtain a business license in China is hindering foreign companies from entering the market. However, in good news for US investors and companies it appears as if calls for greater market access and reduced protectionist measures have been acted upon somewhat. The People’s Bank of China announced moves to treat foreign companies equally to their domestic rivals in the financial services sector by the end of the year. Concessions will need to be made to end this protracted stand-off between the two countries and this move suggests progress is being made to come to a beneficial understanding for both sides.

Importantly, the trade actions will not be carried out straight away. A period of public comment and consultation is expected to follow, with Washington then having 180 days to decide whether to continue. White House spokeswoman Sarah Sanders was firm in her view of the situation, suggesting China’s behaviour will dictate what happens next. “It’s going to be a couple months before tariffs on either side would go into effect and be implemented and we’re hopeful that China will do the right thing.” On the other side, Beijing has said it will be waiting for the US to announce whether they will go through with the tariffs on Chinese goods before announcing their decision.

A full-blown trade war is a real risk if further escalation isn’t tempered with negotiation. Gaurav Saroliya, director of Global Macro Strategy for Oxford Economics, said there could be “a considerable loss of growth across the board if the ongoing trade skirmishes spiral out of control.” The potential failure to avoid a clash would trigger a “pronounced” slowdown for the world economy by knocking 0.5% off worldwide growth

China and the US are not only playing a dangerous game amongst themselves, but also the world economy.

 

Written by Abdi Buwe. Edited by Keval Dattani.

 

Warwick Congress Blog

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