An update on the US-China trade war

image: PAS CHINA

THE US-SINO TRADE war is at the forefront of the international stage. China’s $60 billion tariff in retaliation to Trump’s much larger $200 billion tariff has already caused severe impacts for American firms both domestic and abroad.

The American Chamber of Commerce survey reveals 50.8 per cent of US firms based in China have recorded a reduction of profits. This is due both to increased production costs and a fall in demand for products (47.1 per cent of firms experienced a rise in manufacturing costs, while 41.8 per cent face a decrease in demand). The decline in profits of these American firms will not only lead to a decrease in tax revenue paid to the US Government, but could also lead to an increase in competition in these markets, which could lead to a fall in US international competitiveness. Economies such as Germany and Japan are already starting to beneficial due to trade uncertainty, at the expense of the US.

The worsening trade tensions will also affect domestic US firms. Boeing, the biggest global aircraft manufacturer, is the largest exporter in the US by dollar value. Amid rising animosity, many fear a Chinese retaliation could massively threaten Boeing’s sales. Over the next 20 years, Boeing expects Chinese demand for airliners to top 7200 aircrafts with a value of $1.1 trillion. A cancellation of orders would not only yield a sizeable loss for Boeing, but would also negatively impact smaller scale parts manufacturers, resulting in major job losses across the US.

Trump’s assumption that tariffs on Chinese imports will reduce the American trade deficit proves to be misguided, as there has already been an eight per cent rise in American imports from China since the introduction of the original tariffs. Due to this, America’s deficit in traded goods with China increase by 4.3 per cent, creating a record high deficit of $37.4 billion.

The Chinese economy has already felt the chilling effects of the ongoing trade war. China posted a current account deficit of $13 billion through the fist nine months of this year; if this trend continues, the country is on track for its fist full year deficit since 1993. This will solidify the slowdown of Chinese growth rates and contribute to the “spillover” effect that is currently damaging key Asian economies. In attempts to combat this, the Chinese Government has spent roughly $32billion in foreign exchange reserves to strengthen the Renminbi. The two leaders plan to resume trade talks at the upcoming G20 summit, however, if no deal is reached, it is likely the tariff rate on Chinese exports to the US will rise to 25 per cent. It is feared that, if this is the case, the Chinese will use currency devaluation as a form of retaliation. A devaluation of the Renminbi will improve China’s trade balance. Essentially, the price of Chinese exports will decrease as it takes less of another currency to purchase Chinese goods. Steven Mnuchin, the US Treasury Secretary stated: “no question that a weakening of the currency creates an unfair advantage for China”. The effects of a competitive devaluation are not always favourable, other economies may view China’s tactics as a form of trade protectionism, which will invite retaliation actions from other nations, not just the US. The possibility of widening the trade war will have disastrous effects for the world economy, thereby showing there are no situations where China can become the real winner of this trade war. The World Trade Organisation is currently attempting to diffuse tensions between the two nations before a full-scale global trade war erupts.

While at this point one would agree the Chinese have faced far less damages to their economy than the US, due to import tariffs, one can clearly see that a prolonged trade war will ultimately produce two losers. Each leader risks indirectly harming their own country’s economy by attempting to establish their dominance on the international stage.