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Economy

Who Will Be the Bigger Loser in the Trade War?

Aug 09 , 2018
  • Fan Gaoyue

    Guest Professor at Sichuan University, Former Chief Specialist at PLA Academy of Military Science

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Picture Credit: Gage Skidmore

The US has always waged trade wars. It has conducted dozens of trade wars with Japan, the Soviet Union, China, and European countries. In some cases, such as the Plaza Accord, the US has achieved enormous economic gains through these endeavors. However, in most cases all parties involved were losers. During the Great Depression between 1929 and 1933, the US launched a trade war with Japan and European countries. In the end both exports and imports from the US dropped from $5.16 billion and $4.4 billion in 1929 to $1.65 billion and $1.45 billion respectively, in 1933; and world trade shrank by 66%. Today the US employs the same strategy again by imposing a 25% tariff on steel imports and a 10% tariff on aluminum imports from all countries, as well as a 25% tariff on $250 billion worth of imports from China. To retaliate, China announced that it was imposing a 25%-5% tariff on $110 billion worth of imports from the US. Canada, Russia, India, Japan, and European countries also announced the imposition of retaliatory tariffs on US exports, making the impact of this trade war global. Judging from the interdependent global economy, it seems that no country will come out on top in this trade war, and all countries concerned will suffer heavy economic losses.

  • As a result of retaliatory Chinese tariffs on US soybeans, beef, and fruit, the Trump administration announced that it would give farmers _______ worth of subsides to offset the adverse effects of the trade war.

    • 1. 12 billion

      On July 24, President Donald Trump claimed China was targeting American farmers to extract concessions from the United States in the trade war. As a result, his administration implemented a new program to give farmers $12 billion to offset the effects of Chinese tariffs on agricultural products.

    • 2. 15 billion

    • 3. 30 billion

 

America’s Gains and Loses

In 2016 the US’ exports occupy about 13% of its GDP while China’s exports occupy 20.2% of its GDP. The US is China’s largest export country while China is the US’ third largest export country. If both sides impose the same rate of tariffs on each other’s exports, it would seem that the US would be gaining economic resources. However, upon careful analysis, the US would not benefit as much as it seems. 73% of the Chinese products subjected to tariffs are intermediate goods used by American enterprises and 70% of the products are produced by foreign enterprises, which include American enterprises in China. The tariffs will reduce the competitiveness and profits of these American enterprises. Furthermore, if the US can’t import cheap goods from China, American people’s living standards may drop 5%-10%, which will arouse dissatisfaction and discontent.

It doesn’t stop there: the US still has more to lose. Firstly, the trade war has undermined solidarity between the US and its allies, as well as the confidence of its partners by making them realize that the “America First” strategy only takes care of US interests. Secondly, the trade war has hurt China’s national dignity and its people’s interests, which will harm China-US relations and make future cooperation between China and the US difficult. Thirdly, the trade war has violated WTO regulations and has been rejected by the rest of the 164 WTO member states, whose retaliatory tariffs will have a huge economic impact on the US, as seen in the 7.2% increase in the trade deficit it’s experienced in the last four months. Finally, the trade war has severely impaired US credibility, which will hasten the decline of US world leadership. Currently, the US seems to have gained a lot from the trade war. A recent poll by The Wall Street Journal and National Broadcasting Company shows that support for Trump increased from 40% in April to 44% in June; capital returns have accelerated; US GDP growth in the second quarter of 2018 reached 4.1% and unemployment dropped below 4%. But in the long run these temporary gains will not be able to make up for what it is sacrificing in the process - its credibility and world leadership, which has been built over decades of effort.

China’s Gains and Loses

In 2017 China’s total exports to the US were $505.6 billion, with a trade surplus of $375 billion (US figures). From 2007-17, trade with China made up 46.5% of the US trade deficit. Now the US has announced the imposition of a 25% tariff on $250 billion worth of Chinese exports and China has announced a 25%-5% tariff on $110 billion worth of US exports. If the tariffs are executed, China’s trade surplus will be greatly decreased. As a result, China’s export-oriented enterprises will struggle to continue growing. However, China has the opportunity to mitigate the consequences, and will benefit if it adopts wise policies. Firstly, China protects economic globalization, free trade, and a multilateral trade system. It also opposes trade protectionism and trade war, insisting on solving trade disputes through talks mediated by the WTO. These views are widely appreciated and supported by the global community. Secondly, the trade war helped China understand the US’ strategic intention to contain its national rejuvenation, and has pushed it to develop advanced technology itself instead of relying on the Western world. Thirdly, the trade war stimulates China to expand imports and reform its economy more comprehensively. Fourthly, China has a large domestic market that can buffer the trade war impact and help it upgrade its industrial structure. Fifthly, foreign enterprises still have confidence in China’s economy. In the first half of 2018, foreign investments from countries such as the US, Singapore, South Korea, and the UK increased 29.1%, 19.7%, 43.8%, and 82.5% respectively from the previous year. Sixthly, China has stood firm in resisting the US trade war instead of yielding to its aggression, which has won respect from other countries and enhanced China’s international image. Finally, the Chinese government is highly efficient in its decision making and execution, and can deal with the trade war quickly. Therefore, although in the short term China may suffer some loses, in the long run China will benefit.

From the analysis we can see that both the US and China are negatively affected by the trade war, but in the long run the US will lose more than China will. Therefore the US has more to lose, and China should be confident and brave in resisting the US trade war.

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