International Political Economy

Week 3

Syed Mustafa Hasan

Q.1. Examine the ongoing trade war between China and the US. Who benefits and who loses in a

trade war? What would be the alternatives to a trade war? Please explain your answer in detail and

apply the concepts from your readings to shape your answer.

Ans 1. In order to understand trade war, it is very important to first understand what international trade

exactly is. International trade is the exchange of capital, goods and services across borders and regions

because of the need and desire for goods and services.

There are three perspectives on trade. According to Economic Liberals, Free trade is more efficient and,

as a result, all countries engaged in free trade benefit. It does not limit the countries that limit what is

produced and how products are produced. The main idea is to be able to sell freely in the open market

and to sell freely without restrictions. Free trade is more efficient and, as a result, all countries engaged

in free trade benefit. It does not limit the countries that limit what is produced and how goods are

produced. The main idea is to be free to sell in the open market, without any restrictions.

According to Mercantilists, the main idea is to protect the public from the negative consequences of

trade. They believe in zero-sum games and the exploitation of power. They have limited power, states
compete with each other for power, and the international political economy seeks to cultivate

developing countries.

According to Structuralists, the idea of power distributed according to wealth. Wealthy nations can

manipulate weak nations to benefit.

Trade wars occur when one country retaliates against another country by raising import tariffs or

imposing other restrictions on the imports of the other country. Tariffs are the taxes or duties levied on

goods imported into the country. In the global economy, trade wars can be extremely damaging to

consumers and businesses in both countries, and infections can grow to affect many aspects of both

economies[ CITATION Jam19 \l 1033 ].

Trade wars are a side effect of protectionism, the actions and policies of governments that limit

international trade. Countries will generally take protectionist actions to protect domestic companies

and jobs from foreign competition. Protectionism is also a method used to balance the trade deficit. A

trade deficit occurs when a country's imports exceed its exports[ CITATION Jam19 \l 1033 ].

What are the consequences of these trade wars? Time factor plays an important role here. In short

term, protectionist policies can help domestic industries grow by giving them a competitive advantage

as this will increase profits and create jobs. But in the long run, trade wars can slow down economic

growth to the countries involved and can lead to unemployment. Higher import prices could also trigger

inflation.

The history of trade wars teaches that most trade wars begin when there is a breach of a trade

agreement between two countries, which is a common reason. There may be other diplomatic or

political reasons for countries to participate in trade wars depending on the current situation. In the

17th century, colonial powers fought over foreign colonies for the exclusive right to trade. In 1930, the

United States enacted the Smoot-Hawley Tariff Act, which raises tariffs to protect American farmers
from European produced products. This law raised large import duties to almost 40%. In response, some

countries retaliated against the United States, imposing their own high tariffs and reducing world trade

globally. When the United States entered the Great Depression, President Roosevelt began to pass

several legislation to reduce trade barriers, including the North American Free Trade Agreement

(NAFTA).

The US-China trade war is an ongoing economic dispute that began in 2018 when President Donald

Trump imposed trade restrictions on Chinese products. From January 2018, President Donald Trump has

begun a series of tariffs on everything from steel and aluminum to solar panels and washing machines.

These obligations have affected products from the European Union (EU) and Canada, as well as China

and Mexico. Canada has imposed a series of temporary obligations on American steel and other

products. The EU also imposed tariffs on imports of American agricultural products and other products,

including Harley-Davidson motorcycles.

Earlier in 2018, President Trump said he would step up his efforts specifically against China and impose

significant fines on intellectual property (IP) theft and significant tariffs on $ 500 billion worth of Chinese

products such as steel and soy products. Chinese retaliated with a 25% tax on over 100 US products. By

May 2019, tariffs on imports from China affected nearly 200 billion US dollars. Like all trade wars, China

retaliated and imposed severe tariffs on American imports[ CITATION Jam19 \l 1033 ].

The United States and China are the two largest economies in the world. The United States has a large

nominal GDP, while China has a large GDP when measured by PPP. China is the world's largest exporter

and the United States is the world's largest importer.

By 1984, the United States had become China's third largest trading partner and China became part of

the United States' Most Favored Country (MFN). This situation was challenged by anti-China pressure

groups as Chinese imports doubled from $ 51.5 billion to $ 102 billion in five years (1996-2001).
China was allowed to join the World Trade Organization in 2001 and was given MFN status. As a new

member, China agreed to rapidly reduce import tariffs and open the market. Although China reduced

tariffs after joining the WTO, it continued to steal US intellectual property (IP), forcing American

companies to transfer technology to the Chinese market which violated WTO rules. In 2008, WTO issued

a formal ruling against China due to the fact that China was charging 25% tariff on auto parts instead of

the usual 10%. 

China's exports to the United States increased 31% in 2005, while imports from the United States

increased only 16% whereas the US-China trade deficit was $ 90 billion in 2001, which nearly doubled by

2005. China was slow to enforce intellectual property rights and add transparency to industry rules and

regulations, making it difficult for US companies to access the market. By 2019, the estimated cost to the

US economy of China's IP theft was between $ 225 billion and $ 600 billion annually.

The current US administration believes that although China manipulates the currency, it does not

protect intellectual property rights and restricts imports from the United States. As a result, the United

States faces a $ 500 billion deficit and an additional $ 300 billion loss from intellectual property

infringement. The US economy is thriving with technology and innovation that has also been imitated by

China to boost productivity. The current government follows China's long-standing mercantilist

approach to moving the economy forward. China has an unfair advantage, all of which are unfair

practices against the United States, and there is a strong belief that China should stop to reach mutual

agreement. The final blow was the 5G technology race, which is ahead of China's growing concern over

the United States. China denied the allegations of technology theft and believes that technological

advances are the result of investment in research and development. China is also planning to lower the

restrictions on investment in China's economic sector along with lowering tariffs on the automotive

sector to reduce conflicts between the two major economies.

States imports more from China than the other way around. US tariffs caused a 25% export loss, hitting $

35 billion in China's exports of tariffed products to the US market in the first half of 2019. Of China's $ 35

billion export loss in the US market, approximately $ 21 billion (or 63%) was diverted to other countries,

while the remaining $ 14 billion was lost or Captured by US producers.

The fastest growing markets for the best Chinese-made items such as laptop computers and mobile

phones are in developing regions such as India, Latin America and Africa. In contrast, China itself is a

market that the United States cannot ignore. By the end of 2015, Chinese consumers had purchased 131

million iPhones. Total sales to US customers during the same period were only 110 million. Also, the

iPhone is just a part of the US exports. Boeing, which employs 150,000 people in the United States,

predicts that China has purchased about 6,810 planes over the next 20 years, worth more than $ 1

trillion in that market alone[ CITATION Win17 \l 1033 ].

Companies like Walmart are importing billions of dollars of cheap merchandise, mostly bought by

people who voted for Trump. The prices of almost all of these items would increase, not because of

manufacturing costs, but because of tariffs. The result will be an attrition economic war that China is in a

much better position to win.

Currently, China's foreign exchange reserves exceed $ 3 trillion. In contrast, the United States has over $

120 billion in foreign exchange reserves. Trump tariffs can also automatically cause penalties against the

United States in the World Trade Organization (WTO) and lead to the collapse of the WTO, which can

result in higher tariffs on US exports. It may take some time for that to happen, but the turmoil is

catastrophic to American business and employment. On the other hand, China will emerge relatively

unharmed.
This shows that China, though relatively small, faces some losses as a result of this trade war. More

importantly, this trade war is considered a defeat for both the country and the world economy. The

consequences of this trade war would not have been dramatic if both countries were the largest

economies in the world. The problem with trade wars is that there is no winner. Both countries are

defeated due to limited and reduced feasible consumption options. Exporters in both countries will be

hit by the decline in exports and importers in both countries will see their business decline. And

consumers and producers using imported goods in both countries will have to pay higher

prices[ CITATION Uni19 \l 1033 ].

There are many alternatives to the trade wars feasible in the current environment to protect against

further deterioration of the world economy. The first alternative is for US to increase its exports of

goods to China. In addition, there are two ways to increase US exports. The first is to transfer existing

exports from other countries to China instead, and the second is new output for export to China,

especially using resources that are currently underutilized[ CITATION Law18 \l 1033 ].

The second alternative option is that instead of engaging in a trade war, the United States can produce

the product itself, which is a major import such as machinery, sports, furniture, and bedding, which

make up the bulk of US imports from China. The only advantage that China has over the United States is

a cheap labor force. The United States can lower the minimum wage (although controversial) to achieve

its economic goals.

Another alternative to the trade war is mutual agreement on the problems that are stated above. The

current US administration sees no other alternative resolve the issue other than the trade war which is

problematic.

Finally, I recommend that instead of setting up a trade war, the United States should implement a policy

for its companies regarding the protection of national information. The reason to do so is that it will help
governments safeguard their security that they are concerned about and be at peace with the rest of

the world.

References

Retrieved from https://en.wikipedia.org/wiki/International_trade

Retrieved from https://www.investopedia.com/terms/t/trade-war.asp

Retrieved from https://en.wikipedia.org/wiki/China%E2%80%93United_States_trade_war

Retrieved from https://en.wikipedia.org/wiki/China%E2%80%93United_States_trade_war

Retrieved from https://www.fraserinstitute.org/article/everyone-loses-trade-war

Chen, J. (2019). Trade War.

Lau, L. (2018).

Nie, W. (2017). Why America would lose a trade war with China.

United Nations Conference on Trade and Development. (2019, November 06). Retrieved from United

Nations Conference on Trade and Development:

https://unctad.org/en/pages/newsdetails.aspx?OriginalVersionID=2226

Critical Questions
1. What are the political factors that influence globalization? How can you reduce them?

2. How foreign investment effects international trade?