Even before winning the 2016 presidential election, President Donald Trump was vocal about his disappointment in US trade agreements that were in place at the time. According to Trump, a majority of U.S. manufacturing jobs were being outsourced to foreign countries such as China and India. One of his priority political agendas was to bring all these jobs back to the U.S. Soon after he won the election, he initiated a protectionist campaign and even threatened to pull the country out of the WTO (World Trade Organization). Fast forward to today, and we see the president making his threats real by doubling tariffs on $200 billion worth of Chinese products, with China retaliating in kind, affecting everyone from farmers and manufacturers to local businesses and private individuals.
Here we take a closer look at everything that is going on.
What are Tariffs?
In the U.S., tariffs, also known as levies or duties, are collected by Customs and Border Protection agents at several port entries all over the country. Simply put, tariffs are taxes imposed on imports. They are billed as a percentage of the transaction price that a buyer pays a foreign seller for their products. For instance, if an American buys 100 pairs of shoes from China for $10 a pair, the total cost would be $1,000. If the U.S. tariff rate for these shoes is 6.5%, the American buyer would have to pay a $65 tariff on the 100 pairs of shoes. This tariff would raise the total price from $1,000 to $1,065.
The country’s International Trade Commission publishes tariff rates in the Harmonized Tariff Schedule. They are meant to achieve two things: protect domestic industries from foreign competition, and increase government revenue. As illustrated in the brief example above, tariffs raise the prices of imports, thereby discouraging import consumption by making imports costlier. By doing so, a government that imposes tariffs can reduce the pressure from foreign competition in the local market and make it easier for domestic companies to thrive. Today, most countries impose tariffs on imports as a way of punishing foreign countries for unfair trade practices such as dumping goods at unfairly low prices.
What Started the U.S.-China Trade War?
The U.S.-China trade war has been in existence since January 22, 2018, where both countries threatened to impose tariffs on each other’s products. Disputes between the two countries were in existence even long before China joined the WTO. Former presidents George H.W. Bush, Bill Clinton, George W. Bush, and Barack Obama all tried to solve these problems, but they couldn’t. President Donald Trump vowed in his presidential campaign to fix China’s (presumed) unfair trade practices and long-time exploitation of international systems. The Trade Act of 1974 gives the U.S. President the authority to impose tariffs on any trading partner if the partner is found (or, it would seem, even deemed) to be violating international trade agreements or hurting U.S. business interests.
According to Trump, Chinese laws undermine intellectual property rights by forcing international companies to engage in joint ventures with their domestic partners. This, ultimately, gives Chinese companies access to foreign technology which they presumably steal, improve, and resell themselves. Mr. Trump also sees the ‘Made in China 2025’ agenda as a threat to the U.S. economy and national security. However, the Chinese firmly oppose these U.S. trade practices and argue that they have strengthened intellectual property rights protections in the country. They also claim that the U.S. has wholly ignored WTO rules and calls of their industries to reduce tariffs.
What is the Current Status?
To date, the U.S. has imposed three rounds of tariffs on more than $250 billion worth of Chinese products. The tariffs range from 10% to 25% and cover a broad range of consumer and industrial goods. They include items ranging from handbags to railway equipment. China, on the other hand, has targeted U.S. products such as coal, chemicals, and medical equipment. The levies on U.S. goods range from 5% to 25%. China has also targeted products made in individual U.S. districts that have strong support for Republicans along with products that can be bought elsewhere, such as soybeans. So far, U.S. exports to China are down 30% while Chinese exports to the U.S. are down 9%.
President Donald Trump has further threatened tariffs of up to $325 billion on Chinese products. The total value of Chinese goods imported into the U.S. in the year 2018 was $539 billion. China, on the other hand, had imposed $110 billion tariffs on U.S products in 2018. The total value of U.S. goods imported into China in 2018 was $120 billion. Beijing accuses the U.S. of starting the most massive trade war in economic history. In its latest move, China announced that it would levy new tariffs on more than 5,200 U.S. products if the U.S. goes ahead and imposes 25% tariffs on $200 billion worth of Chinese products.
How Does the U.S.-China Trade War Affect the Global Market?
According to the IMF, a potential escalation of the China-U.S. trade war could shave 0.5% off global growth by 2020. It further warned that the trade war between the U.S. and China would put a significant dent in global economic recovery. According to their latest assessment, the IMF states that the China-U.S. trade war risks hurting households, businesses, and the broader economy by making the world a more “unfortunate and dangerous” place. Several recent media reports show that China’s manufacturing sector’s growth has slowed down while one measure of U.S. consumer sentiments have fallen in the wake of the current trade war.
The current China-U.S. trade war has the potential to hurt the financial stability of the global economy and dent global growth if it continues for the long-term. Consumers may be left with little choice in the marketplace as tariffs eliminate or cause a shortage of imported goods. Also, tariffs on raw materials could cause a rise in the price of manufactured goods. This would, in turn, make products more expensive to acquire, which can ultimately lead to inflation in local economies. However, as painful as tariffs and trade wars are, they are thought by some to be the only effective way of dealing with a nation that remains unethical or is unfair in its trading practices. The outcome of the ongoing China-U.S. trade war is yet to be decided, but as things unfold, only time will tell who the real winners and losers are.