Who Wins? Trade War between US and China

April 24, 2018
Editor(s): Deeksha Kapoor
Writer(s): Thomas Yu, Shirley Tang, Dennis Berner

It all commenced with Donald Trump’s 2016 election campaign when he announced that his administration would be implementing a steep 35%-45% tariff on Chinese imports, in efforts to protect the interest, which will further facilitate levelling the playing field for domestic producers. On 23rd March 2018 Trump followed up by announcing that the current administration would impose 25% tariff on foreign Steel and 10% on foreign Aluminium. The tariffs were predominantly viewed poorly by many industry leaders and economists. Reuters believed that tariffs on Steel and Aluminium would harm the US economy. The Steel and Aluminium tariff is particularly troublesome for China as they are the world leader in steel production, accounting for 50% of total steel supply. China’s steel and metals associations were absolutely opposed to such policies, as such policies urged the government to retaliate against the United States. The wishes of these associates were granted on 1st April when China countered with a 25% tariff on 128 U.S. products, of which majority were agricultural goods. Under immense pressure, the Trump administration counteracted by unveiling a 25% tariff on 1300 Chinese products, namely electronics such as televisions, medical devices, aircraft parts and batteries. The White House claimed that it was a part of its plan to combat China’s dominance in the technology industry, and identified these products as disruptions to the U.S. economy. It has been estimated that these newly imposed tariffs would impact a total of $50 billion worth of Chinese products every year. The Chinese government quickly replied on 4th April by announcing additional tariffs on 106 U.S. products, a tit-for-tat measure. This 25% additional tariff affects U.S. imported products such as soybeans, cars and whiskey

Figure 1 Top Chinese Exports to US

Strategies adopted by each nation

Looking at the focus of each nation, America imposed tariffs on Steel and Aluminium which accounts for approximately 1.7% of China’s exports to the US. This was claimed to be America’s retaliation for China’s theft of America’s intellectual property, which are worth several billion dollars. However, by believing that the Steel and Aluminium industry will be protected from a reduction of foreign competition, Trump unintentionally and deliberately weakens the industry. Tariffs placed on inputs and raw materials increase the price of production for American suppliers and creates a negative chain reaction that seeks to distort and stifle the expansion of multiple industries in unpredictable ways. When America’s domestic businesses are finding it difficult to perform at an optimum level, their foreign rivals are given chance to compete for customers. It would then be easy to observe the futility of heavy imports.

On the other hand, China’s alleged theft of intellectual property and American corporate produces a more obscure and sophisticated retaliation, threatening to change America’s trading behaviour. Echoing America’s move to impose tariffs on steel and Aluminium, China responds by intending to introduce a higher percentage of tariffs in the same industry. Here, it adopts a similar approach as Canada’s response to the American Smoot-Hawley tariff (1930). This refers to the fact that America’s production was in a plunge to exceed Canada’s egg export by more than twice the percentage. In addition, China directed it’s aimed at politically controversial and sensitive industries; such as the aircraft and soybean industries which may swing the votes of a state in upcoming elections and influence the decision of the government to continue with these specific tariffs.

On the surface, America’s tariffs on China’s exports that seeks to protect its producers against foreign competition is inevitably going to cause repercussions for its own economy. China similarly attempts to acquire an “upper hand” in the economic “sovereignty” but will be bound to suffer the detrimental effects of additional costs pertaining to exports.

Political Game

With America threatening to propose an import tariff of 25% on an estimated 1300 Chinese products, China endures responding by producing its own list that covers “106 categories” of American products. To this, the Chinese embassy retorted by asserting that “It is only polite to reciprocate”. In response to this, it becomes easy to question whether the issue of the US-China Trade War is reforming into a political war, consequently creating adverse effects on their respective economies. America anticipates a public consultation for the proposed import tariffs and China responds once more by stating it will “Wait for America to move”. Given the dire consequences on industries; both small and large and the wider global ramifications of imposing severe tariffs on each other’s exports, America and China would be much better off looking at a deal than a lose-lose trade war.

Looking Ahead

Tariffs are often considered to be a double-edged sword, in the sense that when implemented they do limit imports but also tend to stagnate the local economy. It is indisputable that the protectionist policies implemented by the Trump Administration will damage the economy of both countries in the long run, and while the implemented tariffs are mostly symbolic in the measure, the Trump Administration should take care that they do not damage the economy that they are trying so hard to protect.

The CAINZ Digest is published by CAINZ, a student society affiliated with the Faculty of Business at the University of Melbourne. Opinions published are not necessarily those of the publishers, printers or editors. CAINZ and the University of Melbourne do not accept any responsibility for the accuracy of information contained in the publication.

Meet our authors:

Deeksha Kapoor

Deeksha is currently pursuing a Master of Management (Human Resources) at the University of Melbourne. She has a keen interest human resource management, economics and public policies.

Thomas Yu

Thomas is currently studying a Bachelor of Commerce (Finance and Management Major). He is interested in the world of finance and technology.

Shirley Tang
Dennis Berner

Dennis is in his second year of a Bachelor of Commerce at Melbourne University. He is majoring in Finance and Economics and has a passion for both disciplines.