Trade war between the USA and China: causes, consequences, course of the game

12 min read
Trade war between the USA and China: causes, consequences, course of the game

The Chinese agreed to buy food from the Americans in exchange for Washington promising not to impose additional duties on goods from the Middle Kingdom. The documents, however, have not yet been signed. All agreements are a draft developed during negotiations between United States Treasury Secretary Steve Mnuchin and Chinese Vice Premier Liu He.

What is the essence of the new agreement between the United States and China?

On October 15, 2019, new duties on Chinese goods entering the United States were to come into force. The agreements reached cancel this. The total cost of the increased tariffs was $250 billion. The list of products is quite large, including everything from textiles to electronics.

China’s response includes concessions, including those related to the most sensitive area for Washington – the purchase of American food. Beijing agreed to purchase it for up to 50 billion, twice the current level. The list includes: soybeans and pork, for which China is the largest market.

The leadership of the “celestial Empire” agreed that some approaches to intellectual property could be revised. It also agreed to stabilize the situation on the foreign exchange market. The US regularly accuses China of undervaluing the yuan and misdealing in financial services.

As follows from Steven Mnuchin’s statement, Washington can remove Beijing’s status as a currency manipulator, and China, by conducting currency interventions, will ensure their transparency.

What will change if the agreements are finally signed?

2019 was the time when Americans regularly introduced tariffs on Chinese goods. After the final signing of the treaty, Washington is not going to reduce them. This also applies to those that were introduced in September and affected the consumer sector. Moreover, an import tariff of 15 percent on a number of Chinese goods will be established in mid-December. There is no talk of revising it yet. Nor are restrictions expected to be lifted on China’s largest tech conglomerate, Huawei.

US-China trade war

In turn, Beijing is not going to give in in providing its industrialists with various subsidies amounting to hundreds of billions of dollars. Washington considers such a policy a strategic issue, since it is confident that it is through this policy that Chinese corporations manage to conquer the world. Their American competitors do not have direct government support, and therefore the conditions in which American corporations find themselves are less favorable.

Will the deal be the beginning of a truce?

The reaction in the world to the announcement of the agreements was immediate. Stock indices in America, Europe, and Asia responded with an increase. However, analysts still have doubts. For example, an expert at The Financial Times called it just “cosmetics”.

As for the actions of the Americans, he is convinced that they are saying that there is no talk of any warming of relations. The United States does not set such a goal. As evidence, an example is given of the events of recent days, when several Chinese companies found themselves on a blacklist compiled by Washington due to allegations of human rights violations.

Here we can recall the events that took place in March-April. Then the American side assured that a new trade agreement was almost ready, and in May the United States introduced new restrictions on Chinese goods, more stringent than before.

The point is not in economics, but in politics

This is largely about politics, not economics. Donald Trump had the opportunity to declare his new “victory”, because at first impression, the United States made fewer concessions.

US-China trade war

This modest truce will appeal to Trump voters. After all, there are many farmers among them. Since China will now purchase twice as much food from the States, rural Americans will improve their affairs. And this, at a time when the election race is already beginning, is very important for Trump, because he is already being threatened with impeachment.

Preparations for the American elections are also underway in the Middle Kingdom. The Chinese just need to buy time, counting on the fact that in November 2020 there will be a new owner in the White House who will be more accommodating. This may be just a mistake, since both Republicans and Democrats support a hard line against Beijing, but China may assume that the situation in the future will not be worse than now.

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As for the economy, according to a number of forecasts, there is not much time left before a global recession. Intensifying the situation in a trade dispute before a crisis is not a safe matter. This means that if aggressive protectionism cannot be abandoned, then it should simply be suspended. The agreements reached the other day are reminiscent of just such a suspension.

How Trump’s trade wars will affect the global economy

There is a lot of talk today about the trade war between the US and China. At the same time, everything that happens in the markets (recession in Europe, stock movements) is explained precisely by the events that characterize the trading front. Of course, there are many turns in the confrontation between Washington and Beijing, and therefore the reaction in the world is most easily explained by this.

Progress of the two-year game between the USA and China

The start of the US-China trade war began in the summer of 2017. Initially, in May, Washington and Beijing agreed that the United States would gain expanded access to the Chinese market, and China could sell its own chicken products in America.

But August came, and the US Trade Representative USTR initiated an “investigation into China’s activities” in the transfer of technology and intellectual property. In other words, it was stated that the “celestial kingdom” was engaged in industrial espionage.

“Thaw” in relations between the USA and China

Then November came, and Donald Trump visited China, following which the American president announced a “thaw in relations.” Another three months passed, and in February 2018, the States introduced duties on the import of solar panels and washing machines into the country. The total amount of duties amounted to $10 billion. The main exporter is China.

U.S. President Donald Trump and Chinese President Xi Jinping in 2017
U.S. President Donald Trump and Chinese President Xi Jinping in 2017. Picture:

The following month, the United States filed a WTO complaint against China. At the same time, Washington introduced increased tariffs on imports of goods such as steel and aluminum. Australia and South Korea were excluded from the list of countries to which this applied. In addition, high value-added products imported into the United States from China were subject to tariffs. Finally, a ban has been introduced for Chinese investors to invest in knowledge-intensive sectors of the American economy.

Resuming strikes

April 2018 came, and China began to respond to the States. Washington imposed additional tariffs on Chinese products ($3 billion) and published a list of future tariffs ($50 billion). Beijing responded by publishing its own list with the same amount.

Immediately after this there was a new blow from the United States. The Chinese telecommunications giant ZTE was caught violating the sanctions regime. Washington has banned US companies from cooperating with ZTE. Then, in May, after negotiations between the warring parties, Trump tweeted about his intention to help the Chinese company and the Chinese announcement about the suspension of tariffs.

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June came, ZTE began working with the States again. At the same time, the United States reduced the list of Chinese goods by almost half. But in the “heavenly Empire” they did not treat this as a reciprocal step. On the contrary, they imposed 25 percent tariffs on American goods ($34 billion), assuring that they could add tariffs for 16 billion. During July-August, duties were exchanged between the parties.

America announced its readiness to introduce $200 billion worth of them, and China filed a counterclaim in the WTO in August. Trump’s new attack followed in September. We were talking about duties in the amount of 267 billion dollars. The Chinese side immediately responded with a blow of 60 billion.

New negotiations between the US and China

Last October, the parties sat down at the negotiating table and came to an agreement to suspend the war and even reduce some duties. Mutual consultations and negotiations continued until May of this year. China agreed to some not particularly significant concessions. Beijing and Washington decided not to introduce new tariffs.

US-China trade war

Trump’s announcement that tariffs on Chinese goods in the United States would be increased by $200 billion (from 10% to 25%) occurred on May 5th. China responded with tariffs on American goods ($60 billion). Washington has banned American companies from collaborating with the Chinese giant Huawei. China’s response was to create its own list of such companies, albeit without US companies, and then launch an investigation into FedEx.

In the second half of June, the American list was replenished. Now, Sugon, Jiangnan Wuxi University of Computer Technology, Higon, Chengdu Haiguang Integrated Circuit and Chengdu Haiguang Microelectronics Technology have been added to Huawei. This happened on June 21, and on the 26th Trump announced a truce, and in the middle of the next month Huawei resumed work.

A little earlier, the Americans removed 115 Chinese goods from the list. Now the new tariffs did not apply to them, but on the 16th, Trump’s proposal to introduce duties on goods from China ($325 billion) followed. Washington’s next move is to accuse China of currency manipulation on August 6th. The response was to stop Chinese companies purchasing agricultural products from the United States.

Amount of duties

The beginning of September was marked by the entry into force of all the promised duties. All month, the United States and China were engaged in making minor additions to the “exclusion lists” and conducting negotiations (medium level). October arrived and the US slapped tariffs on Chinese imports ($550 billion a year). Exports to China are taxed at 185 billion per year.

Trade wars in US history

The trade war between the United States and China is not the first and will not be the last such way of putting pressure on each other.

With Europe

For example, the same Americans declared themselves as an independent country precisely because of the trade war (Great Britain was at war with its American colonies).

We can also recall the events that began in 1930, when President Herbert Hoover approved the introduction of customs tariffs on European goods. Europe’s response was symmetrical. As a result, there was a 61% drop in US exports, and Hoover was not elected to a second term. The new president, Franklin Roosevelt, abolished tariffs and even reduced them.

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One can also recall the “banana war” that began in the 1990s. Then the States became concerned that European countries were levying high duties on bananas not supplied from former colonies. The exchange of duties continued until 2009.

Another trade war began in 2002. To support US metallurgists, George W. Bush introduced duties on imported steel. European countries fell under them and immediately increased duties on imports of fruits and cars from the United States. These mutual attacks continued for a year and a half. The result was zero. The only thing is that steel prices have risen.

With Germany, France

Another trade war occurred in the 1960s. Cheap American chicken has flooded European markets. West Germany and France imposed tariffs on it. The United States responded by imposing tariffs on light trucks, spirits and some other goods.

With Japan

Such actions initially had a negative impact on Japan, but the Japanese quickly managed to open the assembly of their cars in the United States. This became a real breakthrough in the automotive industry for the land of the “rising sun”.

An unsuccessful attempt at a trade war with Japan in 1987 was the actions of President Ronald Reagan. By introducing 50 percent tariffs on Japanese televisions, computers and a number of other electronic equipment, he made a miscalculation. The Japanese did not answer. Their supplies to the United States decreased by only 3%, and Americans began to pay much more for Japanese goods.

With Canada

At the same time, there were attempts by Americans to influence Canada because of the cheapness of lumber coming from it. However, even in this case, ordinary Americans had to pay for the imposed duties.

In all cases, the trade war began with a desire to provide protection to its producers. The attacked side usually responded in a similar way. In the end, everything was paid for by ordinary citizens; in most cases, the goals were not achieved.

It happened that a trade war was won by a third country that was not involved in the conflict, but captured the niche created by the “exchange of pleasantries” in the world market. True, such an outcome is a rare occurrence.

Causes and consequences of trade wars

The reasons why the United States starts a trade war from time to time are simple. America’s export to GDP level is very low. For the third decade now it has reached 10-11% (of GDP). In Japan it is 16%, in Germany it is 45%.
How the US-China trade war has escalated
How the US-China trade war has escalated. Picture:

In terms of foreign trade turnover, the United States is in sixth place in the world, if counted from the bottom (26%). The United States also has a large trade account deficit, approaching $800 billion. In some countries it is almost zero, or even positive.

In such conditions, it is beneficial for Americans to exchange with the whole world. Due to the small volume of imports, the tariffs do not hit American consumers particularly hard. Due to the large trade account deficit, the balance from tariffs becomes a plus for the United States, and a minus for the other side.

Causes of the war between the USA and China

The biggest discrepancy for the United States is in trade with China. American exports to China are stagnating at about $120 billion a year. For the States this is not much.

At the same time, import volumes from China are increasing. Now it’s 700 billion dollars per year. The increase is 150 billion over the last five years. Although the “celestial kingdom” supplies goods “on credit,” the Americans pay with dollars deposited in Chinese reserves. Hence the desire of the States, even if it fails to correct the situation, then at least make money from it.

Expert opinion

Many analysts and media overestimate the impact of the trade war on the global economy. Of course, due to such conflict, international trade decreases in value. But this is just a local phenomenon.

In 2008, international trade turnover accounted for 30.6% of global GDP. In 2017 – 29.4%. In 1969 – 13%. That is, when assessing a longer period, it becomes clear that there is no decline. It should be clarified that 1% of world GDP is currently $840 billion. This almost coincides with the drop in oil prices from $120 per barrel to $60, that is, the entire “stagnation” of international trade comes down to the price of a barrel.

In conclusion, it only remains to add that during the trade war in 2018, trade turnover between the United States and China increased by 28%. True, in the first half of this year it was adjusted by 14%, but this does not particularly affect the turnover over a longer period of time.

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