Trade War: Thug of War between Two Economic Giants

Submitted to: Sir Arshad Ali

Osama hafeez

S2023353003
Trade War: Thug of War between Two Economic
Giants
Abstract
The ongoing trade war that the Trump administration initiates creates the trade flow in the US
favor. But rather than solving a problem, trade war led to a series of tariffs imposed by both
sides. There is no immediate end to this war because none of them steps back from their stance.
Unfair practices of the Chines government, unemployment, and unequal market access are
causes. The trade war is a US response to China's ambition to overthrow the US as a hegemon
and took its place. Due to globalization, all global economies suffer if trading partners impose
tariffs on each other, affecting everyone because global economies are integrated; for instance,
sanctions on Huawei affect the global telecommunication industry. It causes severe damage to
many firms.
Introduction
This paper explains the trade relation between both US and China. Why the US accuses China that
Chinese unfair trade practices are the reason behind the current US trade deficit. It will also discuss the
reason and causes of trade. This paper also analyzes that Trump's imposing tariffs on China and other
allied countries help the US to overcome the trade deficit. Causes and reasons behind the trade deficit.
Are tariffs are the only solution to trade deficit?. What is the effect of tariffs on consumers and producers?
This paper applies mercantilism to the trade war case and tries to explain the trade war with the help of
mercantilism.
China is declared the manufacturing hub of the world. The trade war resulted from a shift of economic
power from West to Aisa ( South). It is a sign of an emerging new dynamic within the global economy by
new developing economic power like China that threatens the American hegemony. The US is the largest
consumer globally, and China is the largest manufacturer in the world. What are the factors that led both
economic giants into a trade war?

Literature view
Trade war
When states impose tariffs, quotas, and a ban on the transfer of technology with other states, in response,
other states retaliate in a similar way to protect their economy and trade. Most states fought trade wars to
protect their local industry and market. If a trade war escalates, it has severe effects on international trade.
A trade war is like a domino effect. It is started by one country later on other countries start it to protect
their interest and share in global market (Liu & Woo, 2018)
When one country believes that a rival country is engaging in unfair trade practices, trade wars may break
out. Foreign policy may be pushed toward a trade war by domestic trade unions or business lobbyists
exerting pressure on policymakers to reduce the appeal of imported goods to consumers. Additionally,
misunderstandings of the many advantages of free trade frequently lead to trade wars. Most people
believe that trade wars are a result of protectionism. Policies and actions by governments that impede
international trade are referred to as protectionism. Protectionist measures are typically taken by a nation
to shield its industries and jobs from foreign competition. Trade deficits can also be balanced through
protectionism. When a nation's imports surpass its exports, a trade deficit arises. A tariff is a levy or
charge placed on goods that are imported into a country. A trade war can be extremely harmful to the
businesses and consumers of both countries in a global economy, and its effects can spread to many other
areas of both economies. Protectionism can also take the form of capped import quotas, well-defined
product standards, or government subsidies for procedures designed to discourage outsourcing. Tariffs are
just one example of protectionist policies. By blocking markets, stifling economic growth, and impeding
cross-cultural exchange, critics of protectionism contend that it frequently harms the very people it is
meant to shield in the long run. In the marketplace, consumers might start to have fewer options. In the
event that tariffs have affected or eliminated import goods, they might even experience shortages in the
absence of readily available domestic alternatives. A higher cost of raw materials reduces the profit
margins of manufacturers. Trade wars therefore have the potential to raise prices, especially for
manufactured goods, which could cause inflation in the local economy as a whole (Chen, 2022).
The current US-China trade war is changing the dynamic of regional as well as global economic powers. The
rise of China threatens American global hegemonic ambition and liberal global order. In 2018, ties between
the U.S. and China fell apart. President Trump levied harsh tariffs on China as a result of his fixation with
trade deficits. Implications for China's access to U.S. high-tech markets followed the tariffs.Items and
foreign investments that raise security questions, as well as claims of unfair business practices by China.
According to statements made by the Trump administration, these actions could help the US trade
imbalance between China and the United States, and that the Chinese government mandates the transfer
of US technology to China. The Chinese government responded to US trade sanctions by claiming that
the Trump administration was pursuing nationalist protectionism and by taking punitive measures. In
January 2020, the two sides came to a tense phase one agreement following the trade war's escalation in
2019. The trade war was largely seen as an American failure by the time of the Trump administration's
conclusion. Even though the US industry to reduce hostilities, US Through the bolstering of anti-China
alliances and the imposition of further sanctions, President Joe Biden has thus far reinforced the policies
of his predecessor. Now, Biden describes the US. The conflict in China is described as "a struggle
between autocracies and democracies' usefulness in the twenty-first century." That being said, the
reasoning behind the US. Given the detrimental long-term economic effects for both sides, the trade war
was unwise, and the more recent politically motivated restrictions are ineffective (Huang, 2021).

Rise of China as an economic power in 21st century

Contemporary China creates its political, economic, and social version for the state in which the economy
is led and controlled by the government. In recent decades both China and the USA are economic and
military powers. For instance, Japan and the EU are economic powers, but they are not considered
military power. Russia is regarded as a military power but not economic power. Both the USA and EU
are not prepared for the rise of new economic power in the last four years. After the sudden surge of new
economic power (China), the USA gives the first reaction. Towards a new rising economy. Later on, the
EU join the USA (Hosain & Hossain, 2019).
In recent years, China's economy has transformed from one of an emerging consumer market to one of
great economic influence. It has modernized its economy and society through strategic long-term goals,
transforming its economy into a high-tech industry and elevating its status as a nation with global sway.
China has successfully modernized its domestic market and emerged as a global leader, driven primarily
by rising middle class consumption. China's sheer size and growth rate have made it a huge economic
market for Western companies for a long time. However, with the help of government initiatives like the
"Made in China 2025" plan, Chinese businesses have grown over time and assumed leadership roles in a
number of industries. China's "Dual Circulation" strategy, which emphasizes home consumption, is
bolstered by social media campaigns and educational initiatives aimed at ingraining Chinese superiority.
Through its own inventions, China has strengthened its position as a global leader in high-tech industries
and decreased its dependency on imports of foreign technology, enabling it to directly compete on added
value. Catch-up procedures, however, are unclear in some places. The largest banking assets worldwide
are found in China. In the entire globe, it is the biggest producer. the pioneer of e-commerce, green
technology, and digital innovation worldwide. Network infrastructures, such as telephony, electric and
driverless cars, surveillance technologies, and drones, are largely responsible for China's technological
domination.
During his election campaign in 2016, Trump raised the slogan of America first. He promised the nation
that he made policies for fair trade with China and claimed that China stole US technology, jobs of its
people, and US firms have no access to the Chinese market. It is the Chinese strategy to push the US back
and create a new global system.
Economies of the US and China
Both US and China gain no advantage in the trade war. To understand this concept, we must realize both
sides economies and trade volume between them. China is one of the world's largest growing economy in
the world. It became an economic power from the developing country and became the largest bilateral
partner in US trade. China is an important market for the US. US transfer technology and source of
foreign investment for China.
Meanwhile, China provides cheap consumer products to the US. It does 8.40 % of export and 21.45 %
import with China and 16% of its total trade. In 2018, the trade volume between both countries was $737
billion, according to the State Department of commerce. According to different reports, the dependence of
China on the US is decreased for trade. However, the US has become more dependent on China in
business. In 2017, trade between the US and China generated 2.6 million jobs, estimated by oxford
economics (Kalsie & Arora, 2019).
America's exports to China are still suffering after collapsing amid President Donald Trump's 2018–19
trade war. Chinese purchases of goods from overseas are currently being made less frequently in the US.
They both fear that the other side will suddenly turn trade flows into a weapon and stop allowing imports
or exports in the name of security. All of them are now trying to diversify in an effort to get ahead of that.
In 2018, as a reaction to Trump's trade spat, China started to distance itself from US exports and impose
tariffs. Once a truce was declared in January 2020 between Presidents Trump and Xi Jinping, China
promised to boost US imports by $200 billion over the next two years. China fell far short of reaching its
promised goal for a variety of reasons. Not even by 2021 had US exports to China returned to their pre-
trade war levels. American exports are lagging behind international competitors who are also selling to
China, according to recently released data from 2022. Once important American manufactured goods,
such as cars and Boeing aircraft, have virtually vanished from export markets. Because of the new US
export control policy, the semiconductor sector's sales fell off in 2022 and might not rebound. Since the
pandemic, US services exports have not increased. Though US farm sales to China in 2022 hit record
highs, there are worrying signs even in the areas where US exports seem to be doing okay. Increased
shipments did not account for a large portion of the agricultural gains, rather sim.
The trade conflict has already cost the U.S. s. with an estimated 0.3 percent of real GDP and close to
300,000 jobs. According to additional studies, the U.S. s. roughly 0.7 percent of GDP. The trade war was
predicted to cost the U.S. in a 2019 Bloomberg Economics analysis. s. 316 billion by the end of 2020,
according to more recent research from Columbia University and the Federal Reserve Bank of New York.
s. Due to U.S. policy, companies' stock prices dropped by at least $1 point seven trillion. s. tariffs put on
Chinese imports. As a result of numerous studies, U. s. enterprises mainly covered the cost of U. s. tariffs,
the projected expense coming in close to $46 billion. American companies were forced by the tariffs to
accept reduced profit margins, which resulted in wage and job losses for U.S. s. employees, put off future
pay increases or expansions, and raise costs for US businesses or consumers.
Chinese retaliation has caused "farmers to lose the vast majority of what was once a $24 billion market in
China," according to an American Farm Bureau spokesman. In the meantime, the US The deficit in goods
traded with China grew further, hitting a record $419.2 billion in 2018. Because of lower trade flows, the
trade deficit decreased to $345 billion by 2019, which is about the same amount as in 2016. It is
noteworthy that, even though the U. S. trade deficit did not decrease overall; only the deficit with China
did. Trade flows from China were redirected by Trump's unilateral tariffs, leading to the US trade deficit
to rise as a result with Europe, Mexico, Japan, South Korea, and Taiwan. The trade war hurt China's
economy as well, albeit reportedly not enough to make it give in to the Trump administration's main
demands for significant structural change. In fact, as the trade war continued, Beijing lessened its reliance
on US goods and lowered its tariffs for its other trading partners marketplaces. The final agreement,
which was announced by both parties on January 15, 2020, was essentially the same as what Beijing had
initially proposed: higher purchases of goods along with pledges for better protection of intellectual
property, currency, and forced technology transfer (Hass and Denmark, 2020)

Reason and Causes

Trade Deficit
The tariff war started back in 2018 when the US adopted aggressive trade policies. The US also imposes
tariffs on its allies such as Canada, the EU, and Mexico, but China is the main target (Dollar, 2018). 10%
tariffs and 25% tariffs on aluminum and steel, respectively by the Trump administration on export from
China like old typical mercantilist fashion. In retaliation, China imposes 25% tariffs on 128 US products
estimated value of 3 billion (Appiah-Marfo & Osei-Hwedie, 2019). In response, threaten china to impose
more tariffs, restriction on student visa and investments. Trump claim that tariffs are the only solution to
the trade imbalance
The United States and China have long been at odds over trade, and since Donald Trump took office, the
issue has heated up even more. Trump made a promise to apply harsh tariffs of up to 45% on goods made
in China during his campaign. Trump declared on August 1st that his administration would use section
301 of the US Trade Act to start extensive investigations against China and to levy steep tariffs on a
number of Chinese goods. A trade war looks likely to break out soon.
First, exports from Hong Kong to the US are included in the US figures. However, this is irrational since
not all exports that go through the world's biggest free port—Hong Kong—come from the Chinese
mainland. Second, despite having a goods trade deficit with China, the US has a trade surplus in services.
Of course, the value of trade in services is relatively small when compared to trade in goods. Yet, its
percentage is expected to rise. China will expand its services sector's accessibility to American businesses
as one of the first fruits of the two countries' 100-day trade action plan. China is still at the bottom of the
global value chain despite having a large trade surplus. For instance, the Chinese side only gets $9 for
producing an iPod that is exported to and sold for $209 in the US. Nevertheless, the iPod is recorded as a
$209 export from China when the US totals its trade with China. Thus, the global value chain's division of
labor, the disparities in the industrial structures of the various nations, and market competition are the
causes of the trade deficit. In terms of product design, research, and development, the US leads the world
and occupies the top spot in the value chain. There is no comparative advantage for the US in
manufacturing because of its high labor costs. Or, to put it another way, the two countries' disparate
economic structures are the obvious cause of the US's goods trade deficit (and services surplus) with
China Should be the fundamental reason (Miaojie, 2017)
The US imposed new tariffs on China by invoking its trade act of 1974. To protect national security and
stop the industrial espionage by China, the US stop Chinese business and business mergers (Boudoukh et
al., 2018)There is both political and economic reason behind the imposition of tariffs (Zhang, 2018)
What are the reasons and causes behind the trade deficit
According to microeconomic theory, the imbalance between investment rates and national saving caused
a trade deficit (McBride et al., 2020); if a state does not have enough national savings to support its
federal investment, then a domestic interest rate increases. Since 1970 US faces a gradual rise in public
and private debt due to the imbalance between investment and savings rates. (Reinbold & Wen, 2018a)
The recent gap between investment and saving is 11 trillion dollars which equal to the foreign assets of
US bonds and currency. The dollar increase increases due to demand pressure, and the cost of exports
rises (Reinbold & Wen, 2018b). The dollar is the dominant currency globally, and The US has more
consumers and high interest rates. Therefore it attracts foreign investors, which increases the gap between
national savings and investments.

Employment
A decrease in the employment rate is one of the significant factors in the implications of tariffs. A trade
deficit is identified as the leading proponent for the loss of jobs. According to Trump's theory, an increase
in trade deficit means an increase in the unemployment rate, and a decrease in the trade deficit means a
decrease in the unemployment rate. (Juraboeva, 2019)
Yes, in few decades, the unemployment rate indeed increases in the US, but it is due to automation, not
because of the trade deficit. In US services, the latest manufacturing and advanced technology developed
due to the contribution of international trade. The US has a comparative advantage in the high-tech
industry instead of the labor manufacturing sector, therefore to protect such industry-led US backward.
(Bi, 2017)
Unfair trade practices of China
Forced transfer of technology, currency manipulation, support to local export, and protection to the new
industry are unfair trade practices of the Chines government. Global trade is facing a threat by Chines
mercantilism. Many economists think that after joining WTO, China would adopt an open market
economy. After 18 years of joining the WTO, Chinese economic policies are the same now. More than
500 companies are own, operated, and funded by China's state council (Gerwin, 2018)
Today US IP industry consists of 39% of total GDP; therefore, the US is concerned about the danger of
Chines high-tech mercantilism. More concern arose when 2015 China took the initiative of "Made in
China 2025". The purpose behind this initiative was that to make China a global powerhouse of high-tech
industries. (Morrison, 2019)
China forces foreign investors to make partnerships with local businesses. To approve a permit work in
China, a foreign firm must share its technology with a local firm. Companies are forced to disclose their
classified pieces of information. Foreign investors are also forced to allow the local companies to used
their technology after ten years freely (Kim, 2019).
Thoertical frame work
Merchantlist describes a global economy as competition between states to acquire natural resources, and
the state increases its power and wealth through trade for survival. Merchantlist argues that through
international trade, wealth is generated by the state with the help of trade policies. In global trade gain of
one state is the loss of another state, which is a zero-sum game (Magnusson, 2015). When one state gains
wealth at the expense of other states, it led to a trade war. There is also an element of national security in
trade; if the state made one lousy trade deal, it might bring military disadvantage and instability.
Merchantlist considers self-sufficiency as a solution to economic growth.
The above paragraph explains the reason behind Trump's action: high tariffs and trade war with China.
However, nations' wealth will come from an increase in productivity rather than wealth (money). If
country is best in producing one good, specialized in its production. Then trade with other nations which
are best in production of other goods (positive-sum game). Trump's action is also mismatched with 18 th-
century mercantilism. They argued that tariffs should not be imposed on raw material; instead, tariffs are
imposed on finished products to protect the local industry. Industries used raw materials to produce high-
quality products for export. For instance, car automobile industries are affected by tariffs imposed on steel
and aluminum. (Nelson, 2019)
Mercantilism provides the best explanation for an ongoing trade war between the US and China compared
to other international political economy theories. Because it justifies the tariffs and describes both
international and domestic factors. According to mercantilism, economic nationalism is a state-centric
approach(Drezner, 2010)
Conclusion
Trump argued that US trade relations with other countries, primarily China led to the trade deficit, rise in
unemployment, and economic slowdown. These issues have only one solution, and that is the imposition
of tariffs. A trade deficit is not nearly due to the wrong economic policies. Mostly is due to the imbalance
between savings and investment. The public saves less and invests more, which causes a deficit in the
national account.
Unemployment in the US is not increased due to trade relations between the US and China. A rise in
unemployment is due to the automation process. In contemporary global trade create jobs in the US. In a
trade war, both consumers and producers are a loser. Lower tariffs mean lower rates of daily usage items;
people got different varieties of things. When tariffs are imposed, consumers and importers pay the extra
cost. That cycle led to an increase in the price of the product. Therefore, consumer demand is low.
Now, look at producers. They have both loser and winner. Producers who have a direct rivalry with
Chines products are winners. Producers those source products from China are a loser. If the US doesn't
trade with China, it must trade with another country to meet consumer demand other than China.
Therefore the trade deficit remains the same.
In the near future, the US will not lessen its reliance on China for financial support as long as the latter
maintains its current account deficit and fosters the expansion of vital domestic industries. Nevertheless,
the US will start to make an effort to move its supply chains abroad, possibly to Mexico, where labor
costs are sometimes less expensive than in China. There are currently reports suggesting that the Biden
administration is moving toward a more "sophisticated" strategy with China. Yet the likelihood that the
US will allow for greater trade with developing East Asian nations appear unlikely given the persistence
of isolationist political forces in the US such as those that prevented the Trans-Pacific Partnership from
being adopted in 2017. As time went on, the US If it does not address the causes of political dysfunction
at home, such as growing income inequality and the exorbitant expense of higher education, it may find it
more difficult to project leadership abroad. Therefore, in terms of trade and foreign investment, there is a
chance that the global economy will soon break up into distinct groups. One bloc could be formed by
Western economic powers, such as South Korea and Japan, and other allied democracies; another bloc
could be formed by China, its main East Asian trading partner, and other allied pariah states. However,
China's financial system won't be strong or autonomous enough to avoid being dependent on Western
systems. China will also want to keep its close ties with the US for as long as trade and investment.

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