Author: Jagrit Chawla | FIMT School of Law
What is Trade war?
The trade war can be understood as an economic conflict between countries when countries retaliate to levying hefty tariffs on imports and trade barriers imposed by others. Trade leads up to trade war when a country imposes tariffs on the imported products and creates a barrier to the entry of foreign products in the domestic market to protect its own economy or hurt the economy of an adversary. The consequences of levying taxes on foreign products are numerous, including a rise in the price of imported goods in domestic markets, thereby depriving its citizens access to those expensive goods.
Many factors contribute to the emergence of a trade war. Protectionism is one of the significant factors whereby countries protect domestic industries, strives to increase economic capital and create more job opportunities in the country with lesser imports and more exports. It also aims to influence customer choice for domestic products over imported goods. The global demand for the geographical product unleashes the zeal to produce more related products and increase tariffs. This increases the economic competition, creating a space for a trade war between the countries. The recent US-China trade war serves as a reference to understand the economic turmoil.
Significant Developments in US-China Economic Relations.
The friction in the economic relationship between the US and China has tremendously impacted global trade, traces of which can be traced to July 2018. Hefty tariffs and trade barriers were imposed on Chinese goods by the United States. It also extended to an accusation of Chinese involvement in unfair trade practices, including inducement of forced technology transfer, theft of intellectual property rights, lack of market access in China for those companies that are incorporated in America and creating a limited pricing range of products through state subsidies of Chinese companies. Meanwhile, China believes that the United States is trying to restrict China’s rise being the global economic power.
The US-China trade war has impacted the global economy, which could risk a recession. The Trump administration has advocated tariffs to reduce US trade deficits and promote domestic manufacturing. Both countries have put hefty tariffs against each other’s products. Trump’s policy aims to encourage consumers to buy more American products by making imported goods much more expensive. The USA has levied tariffs on more than $ 360 billion worth of Chinese goods; meanwhile, China has retaliated with tariffs on more than $110 billion worth of US products. As per the Bank of Finland’s calculations, until November 2019, there was a 1% difference in China’s GDP growth rate due to this trade war and a difference of 0.9% on the USA’s GDP growth.
US-China Phase 1 trade deal
With the trade war effect in place, a shift in China being labelled as currency manipulator can be seen. China has undertaken steps to provide more robust legal protection to intellectual property, copyrights, trademarks, and patents, and help end the ongoing tensions concerning IP regulations. The winding down of opinions led to the US and China, signing the first phase of a new trade agreement with China. The deal includes the $200 billion purchase of American machinery, goods and services by China, including special tariff charges for China. It has reshaped China-US relations for the first time towards a future of fair and reciprocal trade.
The impact of phase 1 trade deal has forced several US companies to relocate China’s production facilities to other countries. Consequently, several companies shifted their business from China, depicting the US dependency on China began to shrink.
The economic impact of the US-China Trade War on Southeast Asian Countries
The emerging economies of Asia have been the biggest winners from the US-China trade war. The US-based companies have started shifting their manufacturing hub from China to other Asian countries such as Vietnam, Bangladesh, India and South Korea.
According to the Manila-based Asian Development Bank, exports from developing countries to the United States has seen a significant surge of 10%. Due to China’s exports falling by 12 %, the exports from other countries to the US has seen a considerable shift. For instance, exports from Bangladesh to the US increased by 13% and from Vietnam by 33%.
Source: Statista chart
The U.S. Census Bureau data shows the percentage change in the U.S. goods imports from its top import partners of 2018 and 2019. There is a significant drop in imports from China [minus 13.4 per cent change in imports]. But the biggest gain in Asia was to Vietnam, Taiwan, South Korea and India.
The proliferation of the ongoing trade war between US-China has impacted the world economy. Although both the countries reached a consensus in January 2020, it is not yet successfully implemented. China has started imposing tariffs on importing goods above $60 billion from the US. In contrast, the US has ended ties with China. The US also blamed the World Trade Organization (WTO) role in supporting China warning the WTO with a fund cut. While the USA has been on one of the largest economies, the Chinese market’s continuous and rapid growth does not go unnoticed. This dispute seems to be never-ending because of the position these two countries hold on the global economic hub. The imposition of tariffs and rift in the economic relationship between the US and China has propelled interest in a trade war; it also serves as an essential concern to the economies worldwide and its regulation.