A US-China Trade War And Its Economic Implications

A US-China Trade War And Its Economic Implications

Investors around the world can no longer shrug off the prospect of a US-China trade war. On 3 April 2018, Trump surprised the market with a proposed 25 per cent tariffs on US$50 billion worth of imports from China, covering some 1,300 Chinese products. Beijing retaliated the next day, with a plan to impose import duties on US$50 billion products imported from the US. Trump fired back the day after, with a fresh round of tariffs on an additional US$100 billion worth of Chinese products.

Stock markets around the world crumbled, at the prospect of a trade war between the world’s two largest economies. Although it is merely an exchange of words before any real actions take place, such a possibility with even the slightest chance is enough to shake the investors’ confidence on the global economic growth. If you have signed up for economics tuition with an economics tutor, your economics tutor may have shared a few such cases in the past. Based on what you have learned in economics tuition from your economics tutor, what do you think are the economic implications of a US-China Trade War?

No Winners In A Trade War

Despite different circumstances and different countries involved in a trade war, the result is always the same. That is, both parties will end up as losers. With the help of your economics tutor in economics tuition, revisit the adverse effects of protective economic policy.

The US government initiated a trade war with its Chinese counterpart with the intent to protect its domestic industries, and reduce the US China trade deficit which is at US$375 billion. However, the protective measure, in the long run, will lead to reduced efficiency of its domestic firms and their competitiveness. Consumers in the US are on the losing end too. Not only will the tariffs push up prices of goods imported from China, they will also lead to higher prices charged by domestic firms given there is less competition. This means, the real consumption of the US consumers will be effectively lower, with other conditions being the same.

If the Chinese firms are penalised by the US government’s move to impose higher tariffs, the American firms too, will suffer. This is because the Chinese government too will come up with higher taxes and more restrictions on imports from the US, further hindering the American products’ competitiveness in the Chinese market.

Therefore, both consumers and some firms in the US will lose out in the event of a trade war with China. Although some firms benefit from the protectionism in the short run, it is not beneficial to their long term survival.

Similarly, Chinese consumers will feel the pain by paying higher prices too. The negative impact on the Chinese firms selling products to the US market is self-evident. Although Trump claims that China has more to lose, it is never a matter of who loses more. In discussion with your economics tutor in economics tuition, devise a win-win situation to avoid a trade war.

Still Time For Settlement

Officials from both countries have left room for negotiations before implementing the tariffs. With a US$375 billion trade deficit, some analysts argue that Trump have more cards to play. However, with its huge holding of the US treasury, the Chinese government has a powerful weapon in its arsenal too. Applying what you have learned in economics tuition from your economics tutor, discuss whether selling the US treasury will be a good option for the Chinese government.

With Trump’s irrational behavior, it is difficult to predict the outcome. This tug of war between the two of the world’s most powerful leaders is interesting to watch. We are hopeful that they will settle their long-time difference over trade soon. At the same time, the world awaits with anticipation, to see who will ultimately be able to gain an upper hand in this standoff.

Linda Geng

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