(US-China trade war 2018-2019)
The wars that are fought between two or more countries on the basis of their industrial and economic productions is termed as trade war.
In such wars the two sides and their allies or dependents follow such policies that protect or safeguard their domestic industries from the foreign strong competitors who may otherwise seriously halter their domestic industries development. Such safeguarding or protectionism is considered the prime cause of initiating the trade war.
Any standard language-dictionary gives a very short and apt definition of the trade war…
‘’Raising of taxes and quotas between or among countries for protecting and developing their domestic industry from the foreign competitors (i.e. countries) is called a trade war’’…
A Small trade stand-off between countries could lead to a full scale trade war between them, if they continuously retaliate to each other trade impositions.
Protectionism… main cause of a Trade War.
A trade war usually ensues when one country or countries turns to protectionist policy in trade for the boosting and development of their domestic producers both in services and in goods. Thus limiting imports to their marketplaces.
Such protectionism of a country comes into different forms. It usually includes,
The country A imposes duties or taxes to the imports of a country or a countries. Which ultimately results into to price-hike of imports in the country A market, reducing the country B exports to the country A.
The price-increase reduces the country B goods demands in in the country A markets.
There is an inverse relation between a country tariff imposition and its’ imports from the other countries. With low or minimum tariff country markets would be flooded with foreign goods (imports).While with raising the tariff, its markets become empty from the imports. Which, however, negatively affect the other countries. Other countries, when they respond in the same manner, a trade war is started.
Tariff: product demand & product price (hike) have an inverse relation. Raising the one reduces the other portion.
When a time related restriction is imposed by a country on another country upon their goods or services, such restrictions/banning is called quota.
The imposing country fixes a volumetric quota on the imports of other country or countries beyond which it does not allow their imports in its market. The quotas are ‘ the non-tariff trade barriers’ as in them the imposing country does not fix or impose a duty or tax on imports. Instead of this it fixes or allocates a Volume for these imports. When this Volume fills out, the imports are automatically closed.
Imposing quotas or volumetric-boxing of products of other country.
This boxing-in or volumetric restrictions or fixings of imports increases their price of in the local market by increasing their demand.
The domestic producers are facilitated by their governments through negative taxes or tax credits (relief-given) to compete with their foreign competitors. This create a gap between the consumers’ price and the producer production cost. This gap or void is filled by the government via their subsidies to these industries.
Sometimes a country demands that all imports to its local market must fulfil certain basic requirements. The standardization or calibrating process usually results in the price hike of imports after their demand goes up in that country market. For example European Union has strictly standardized the apparel imports to its Union by the Product safety, REACH & RSLs implementations.
The Standardization or calibrating of products of a country.
Pros & cons of Protectionism.
The aim for protectionism is always the protection and development of the domestic nascent industries from the foreign competitors, but it has its own pros and cons, too.
1. The protected industries have an opportunity to develop and grow till they are matured enough to compete in the open market.
2. Imports reduction via protectionism help into the growth of GDP of the country that’s result into more employment for the people.
However, protectionism has some negative effects, too.
1. Protectionism develops a sense of security and protection in the local producers who become incautious about the use of modern technology & investing in them. Such protectionism surely help them but only for a short time. Such economic & cultural separation further aggravate their position.
2. An uncompetitive local market does not give much variety to the consumer. The producers produce mediocre goods in the local market while their prices are too high for their quality.
Some famous Trade wars in history.
Right with the age of Discovery (1400s to 1600s) different nations of the world are involved in one trade war or another. These economic rivalries & competitions were not sometimes limited to the economic and industrial sphere only. Wars and armed conflicts between & among the nations were fought for these trade disputes settlement. Some famous trade wars of 19th & 20th century are:
1. Jefferson vs. Europe: Embargo Act of 1807.
The Third President of USA, Jefferson was enraged at the impressment of US sailors by the British Navy who were lacking qualified and seasoned sailors at that time of Napoleonic wars (1803-1815). They would capture the US merchant ships & impress or forcibly recruit its sailors to their battleships. While the French Naval fleet were plundering the US merchant vessels.
As the two warring nations, Britain & France, had imposed an embargo upon each other to weaken & destroy each other economy. As this plundering & looting also affected the US trade with Europe & French colonies.
Thus President Jefferson imposed the Embargo Act (1807) on All French & British Products in the US mainland. The Jefferson administration bungled on this embargo. The smuggling of British goods in Americas, both North America & South America, were accelerated which seriously damaged interests of US merchants & its’ already fragile territorial integrity.
2. The first Opium war, the British Hong Kong.
The Chinese silk, tea & procelain were the goods that were in great demand in Europe. This resulted in a looming trade deficit to the British Empire. To balance this deficit, the British East India started the cultivation of opium in British Bengal. Their poppies were plied to China circa 1780.
The Egyptian & US cotton further gave the British a stunning blow as their export of Indian cotton dwindled. The Chinese market were flooded were British & American opium (then imported by Americans) from Turkey.
Upon the decree of the Emperor Daogaung, an operation against this Opium in the whole Quing China was started in 1839. The British merchant carrying the Opiated good were stopped in the Pearl River, leading to Canton (Guangzhou). The British gave their reaction by attacking with their full might of Royal Navy on Imperial China.
Which resulted in many treaties greatly favouring the British Empire. Chinese were forced to secede the Hong Kong port to the British and also the opening of five trading ports to their merchandise. Thus a century long period of humiliation & degradation of China began that ended with the Mao Revolution of 1949.
2. The Second Opium War, European in the Chinese Mainland.
The first opium war partially opened the Chinese territory to the British Empire. But they were limited only to the Hong Kong port while the opium were banned & illegal in whole China. Their a
The British would furnish the Chinese merchant vessels in Hong Kong with their insignia who were usually stopped by the Chinese authorities on the suspicion of piracy. Once three such crewmen were not released by the Chinese officials after such a search. This provoked the British who shelled the Canton for this arrestation.
American & French also jumped into battlefield on the British side. After Canton fall in 1857, the Chinese approached for a peace agreement which were accomplished on the conditions that they to open up ten more port cities to the European. They have to maintain diplomatic missions of theirs (of Europeans) in Beijing, then a closed city.
Also with the right of travel for the foreigners in the interior China which then strictly prohibited to them. In 1860, the British & French troops attacked the Beijing & burned down the Imperial palace of the Emperor.
Chinese Empire had no other option but to permit the sale of Opium, a huge indemnity payment, religious freedom & carrying of the indentured Chinese to the both Americas, that is North & South.
3. Smoot- Haleway Act.
In June 1930, President Herbert Hoover signed into the Smoot- Haleway Act. The Lawmakers from the GOP (‘Grand Old Party’ or the US Republican Party as is now called) were its initiators. The Tariff rate for more than 900 import products into US were raised by an average of 45 percent.
It automatically increase the prices of daily-used-products. The main exporters to USA, Canada & Europe, turned back by imposing a heavy tariff on the American exports to them. The global economy was shrunk by 25 percent in volume by this tug-of-war between USA, Europe & Canada.
While The GDP of USA dwindled by 40 percent due to the Great Depression. Also European nations started imposing tariffs on each other. US-Europe bilateral relations stranded by these Tariff war.
The only country that benefited from this Worldwide economic tussle was the Soviet Union which did not partake in these tariff haggling.
4. The Great Chicken war.
In mid-1962 France Italy Netherlands Belgium West-Germany and Luxembourg, six members of the European Economic Community s’ Common Market, imposed 13.43 percent tariff on the American poultry imports to their market with a view to up their domestic industry in this field.
The American reduction of poultry products to this market had serious repercussions for some members. West-Germany for example, where it was merely 4.7 percent before the Tariff imposition was tripled to nearly 14 percent in value which aggravated the situation further for them.
The US government retorted by the imposition of counter-Tariff on the imports of France, West-Germany & Netherlands to USA. This Chicken war tariff had three major effects on the economy of USA & Europe.
1. The US light automobile industry seriously suffered from it. It gone on the back foot in comparison to other Asian countries.
2. The out-sourcing method was utilized by the American automobile industry to get away with tariff restrictions.
3. Europe Union was compelled to implement the Protectionism for the agriculture for avoiding any such like consequences in future.
The Present China-US Trade off.
The present trade war between USA and China flamed into July 2018. The then US President Donald Trump and Chinese President XI Jing ping led their countries in this war. The background to this trade is the rapid growth of Chinese imports after accession into WTO in 2001.
However, USA was a great loser in the balance of trade which China. This trade deficit with China was the major political issue in the presidential election of United States in 2016. In 2002 USA has to take the brunt of 272.5 USSD billion loss in bilateral trade with China.
In 2018 it further rose to 378 USSD billion while in 2019 with the trade war on-set, it slightly fall to 345.6 USSD billion in USA favour.
In his presidential election campaign (2016) Donald Trump promised to reduce the trade deficit between USA and China. In his electioneering Donald Trump blamed China for practices in trade like intellectual property theft, No-open access to the American companies in Chinese market & other unfriendly business-posture by Beijing for America.
On 6th July 2018, US imposed a Tariff of 25 percent amounting to 34 USSD billion on the Chinese Imports. In a counter move China also raised the import duties & tariffs on many US products on China. They were doing up on the ladder of escalation till December 2019 when a Phase One Deal was signed between the two.
In this Phase One Deal China pledged to buy the additional American goods worth of 200 USSD billion in next two years. These additional buying of American goods were categorized into following categories…
1. Manufacturing 77 USSD billion
2. Energy 52 USSD billion
3. Agriculture 32 billion
4. Services industry 38 USSD billion
Chinese government avowed to further ease the American imports to its market. While Trump administration revoked a further increase of 15 percent of Tariff (162 USSD billion) on the Chinese goods (previous imposed Tariff 25 percent + 15 percent new proposed Tariff, if imposed = 40 percent the total US imposed Tariff on Chinese goods).
US government also slashed down by half the already 15 percent import duty on Chinese products. Beijing reciprocated by positive moves to the US government.
The Phase One Deal….. To be or not to be!!!
The Coronavirus outbreak in December 2019 & following the countrywide lockdowns in different countries of World greatly stagnated the World economy. Economists also question the Beijing capability in such economic scenario to follow its pledge of buying 200 USSD billion goods additionally from USA in The Phase One Deal signed in December 2019.
The Chinese officials affirm that Beijing would honour this Deal. However some economists & experts say that China may invoke to the force majeure clause (a Natural Calamity beyond human control) to relief itself in the coronavirus spate.
While China is mainly focusing on the purchase of US agricultural products as agreed in the Phase One Deal. However, it does not fully achieved it task for the year 2020. No doubt it relaxed the US trade deficit to some level but US administration still feels that such bilateral trade is seriously bruising the US economy tilting in the Beijing favour even after this Deal.
What is coming new in the US-China trade war?
Immediately with signing of Phase One Deal, President Trump demanded for the Second Phase Deal which would address the Chinese government subsidies to its different industries that US government think undermines its business interests. But with pandemic of coronavirus & following the accusations as well as the controversial virus-birth-and-spread further deteriorated the situation between the two superpowers.
The two Powers still uses the tactics of Tariffs on each other for damaging the other side.
President Joe Biden in Beijing is seen as a rational & logical man who could be convinced to re-negotiate & re-define some part of this Phase One Deal which China considers very unbalanced & tilted in US favour.
It would be a hard mile to travel!!!
As Biden administration will never soften or secede the Phase One Deal to China at cost of American trade deficit.
Despite his affirmation to join again Paris Climate Agreement (left by Trump administration for undermining & disadvantages to the US economy) & World Health Organization (blamed by Trump government for favouring & pressurized by China in the pandemic of coronavirus) that Trump administration has withdrawn from.