The US/China trade war: the threat it poses to the global economy

How it all began

The trade war between China and the United States began on March 1, 2018, when Washington decided to increase the import tariffs on a number of countries, including China. Those tariffs included aluminum (10%) and steel (25%).

A meeting of the presidents of the United States and China at the G20 Summit in Singapore led to an agreement to postpone the imposition of import charges until March 2019. This seemed to be a truce. However, U.S. President Donald Trump later said that he was not pleased with the meeting because Chinese President Xi Jinping did not follow up with any commitment to purchase American agricultural products. And in the summer of 2018, Donald Trump introduced a 25% import duty on Chinese goods worth $50 billion. Retaliatory tariffs from China were imposed on the US. 

On September 18, 2018, Trump announced that by the end of the year, an additional 10% in new tariffs would be imposed on Chinese goods worth $200 billion. But by January 1, 2019, those were increased to 25%. The answer was not long in coming — China introduced duties on US goods worth $60 billion, which were implemented on September 24, 2018, as reported by the Press Office of the Chinese Ministry of Finance.

On February 24, 2019, Donald Trump announced “significant progress” in negotiations with China. But by  March 14, he was already saying that the United States was in no rush to sign a trade agreement with China.

On May 10, the tariff squabble continued with Washington’s preparation for new import charges on almost all imports of goods from China. “The President also ordered us to begin the process of raising tariffs on essentially all remaining imports from China, which are valued at approximately $300 billion” was the statement published by the US trade representative, Robert Lighthizer, on the United States Trade Representative website. 

In June, Donald Trump announced his intention to introduce additional tariffs on Chinese goods worth $325 billion, if an agreement were not reached. “Now we have another $325 billion left and if we don’t make a deal, we’re going to put a tariff on that too. And the United States is making more money than they’ve ever made, ever, ever before from China. I would like to make a deal, but we’ll see what happens” said the US president. Then on July 2, negotiations between the two countries resumed. On July 31, their new round of talks was held in Shanghai, but terminated before reaching an agreement. 

Most recent events 

On August 1, Donald Trump announced that from September 1st, additional tariffs on Chinese goods totalling $300 billion would be introduced. CNN reported that the tax will affect such popular Chinese goods as sneakers, toys (85% of US toys come from China), iPhones and other electronics. China responded by refusing to import agricultural products from the United States.

On the morning of August 8th, the yuan against the dollar fell to the key level of 7.0039 yuan per dollar, officials from the Central Bank of China said. It was the lowest rate in more than 11 years. US Treasury Secretary Steve Mnuchin was directed by Donald Trump to label China’s devaluation of the yuan as “currency manipulation,” done to gain competitive advantage in the trade war. This claim on the part of the US was disputed by economists. It served to further escalate the trade war.

On the same day, representatives of the Trump administration announced a prohibition on the purchase by US government departments of equipment from 5 Chinese firms. Telecommunication equipment companies Huawei and ZTE; Hikvision and Dahua, which provide surveillance cameras; and Hytera, which specializes in wireless equipment, were all blacklisted. In August 2020, the US administration determined that all government agencies would stop working with any global companies using goods produced by the five Chinese firms. 

Impact on the global economy

The trade war has provoked a wave of fear in the investment market. Harvard University economist and senior fellow Megan Greene told the BBC that investors are most concerned that a trade war between the US and China will turn into a currency war. This could lead to inflation, a drag on economic growth, and increased interest rates on loans.

Central Banks in New Zealand, India and Thailand are cutting rates, which reduces a currency’s value. In New Zealand, the dollar already fell more than 2.6 % on Wednesday, August 7.  

Analysts polled by the Washington Post also agreed that the likelihood of a currency war is very high. Professor Eswar Prasad of Cornell University warned of the serious after-effects in the event of the conflict escalating into a currency war. According to him, the United States could completely shut out all imports from China or impose unilateral punitive tariffs.

Klaus-Juergen Gern, expert on global economic development at the Kiel Institute for the World Economy, noted that the uncertainty of the situation negatively affects the global economic perspective, and consequently, the international stock markets. He expects persistent tensions between the countries and a possible deterioration of the situation, as both parties seem unprepared to yield even a little to each other.

“The current devaluation of yuan and the recognition of China as a ’currency manipulator’ by the US government is a dangerous escalation of the US-China trade conflict,” Gern said.  

In turn, Donald Trump pledged that the dollar would not follow in the footsteps of the devaluated yuan. But cutting interest rates by the Federal Reserve “would automatically bring down the dollar a little bit,” relieving pressure on exporters. “We have the safest currency of the world,” Trump said. “We have the standard of the world.”

The trade conflict between the United States and China has affected the price of oil of benchmark crudes. Brent crude oil fell in price to $58.53 per barrel, due to the expectation that OPEC will reduce production. West Texas Intermediate (WTI) was $53. Due to concerns about the situation on the world market, Brent dropped in price by 6% over the week, and WTI by more than 5% (Friday, August 9, 2019).

The trade war has also prompted the International Energy Agency and other international organizations to revise their forecasts of growth in oil demand from 2019 to 2020.

The impact of the conflict has also affected the gold market. The price of gold has skyrocketed to its highest point in six years. According to the Bank of America Merrill Lynch, for the week from August 5 to 9, investments in gold funds amounted to $2.3 billion — the 4th largest inflow in history.

The trade war also made its way to Wall Street. As a result, during the week of August 5th, the Dow Jones Industrial Average fell 95.08 points (a loss of 0.36%), the S&P 500 lost 14.75 points (0.50%), and the Nasdaq fell by 58 points (0.72%).

The escalation of the trade war also led to a significant decrease in European stock indices on Monday, August 5. The composite index of the largest Stoxx Europe 600 fell in tenders by 1.94%. National indicators suffered similar losses. The stocks of the mining and technology companies experienced serious pressure.

The forecasts of American multinational investment bank Goldman Sachs sounded just as pessimistic: “We expect tariffs targeting the remaining $300bn of US imports from China to go into effect.” Multinational investment bank Goldman Sachs came to the conclusion that a trade war between the United States and China increases the risk of recession in the global economy, and that a trade agreement between the countries should not be expected.

For the second quarter of 2019, China’s economic growth was slowed by the trade war to a record low of 6.2%. According to the official Xinhua News Agency, the potential of the country’s domestic demand can cope with “new challenges and risks.” Xinhua also reported that in a Politburo meeting headed by President Xi Jinping on July 30 it was said: “We must be good at turning a crisis into an opportunity by getting our domestic things done.” Also: “We will not use the property market to stimulate short-term growth.”

China’s largest pork producer has been purchasing soybeans from America for animal feed for 36 years. The trade conflict now poses a risk to that 12.7 billion in US exports. In such a case, American farmers will of course suffer the most. 

A trade conflict between countries can be summarized in a report by the credit and analytics firm, Moody’s: “Rising tensions between global trading partners, including US and China tariffs, set the stage for broader challenges to the global trade regime, financial market uncertainty, disruptions to manufacturing supply chains, and dampened economic growth.” 

So, what is the result of a trade war for the two countries? Regarding predictions as to who will win, economist forecaster A. Gary Shilling for Forbes: “While China suffers from the departure of high margin production, the U.S. will still enjoy low-cost imports from other Asian countries. In a world of surplus goods and services, the buyer has the upper hand. Therefore, the U.S. should win the trade war with China. But the long-term gain that follows the short-term pain may be limited by China’s determined challenge for world domination.”

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