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US China Trade War and Its Impacts on Traders

china trade us Oct 31, 2019

2019 has not been a great year for geopolitics as we can see emerging risks and conflicts everywhere.

With the returning great power rivalry, the threats to global political and economic systems are increasing.

Ever since the presidential elections of 2016 with Trump coming into power, the US. has adopted increasingly protectionist economic policies.  

Due to this protectionism and ‘self-fulfillment’, the US has given up on an important role as a global helper.

The flagbearer of liberalization is itself moving towards restricted trade, rising tariffs, and other economic policies that are not beneficial for the world economy.

 

The Chinese Economy

China's economy has seen rapid expansion since 2000.

Within a decade, it surpassed Japan to become the 2nd largest world economy by 2011.

  • According to analysts, China is going to overtake the US and become the world’s largest economy in 2025.

Now maybe that’s what is threatening Trump the most. With a vacuum in geopolitics, the US economy is suffering greatly.

Cameron Munter, a former US envoy, said, “It is now not possible to contain China.

With China’s One Belt One Road initiative, it is imprinting a strong foothold in Asia, the Middle East, and all over Europe.

With its Strings of Pearls strategy in the South China Sea, it is connecting China to the rest of the world quite quickly and effectively.

So in this scenario, what suited US interests best was to initiate a trade war with China. Or, that’s what the US government thought. The US initially increased the tariffs on Chinese imports to which China reacted in the same way.

 

Start of the US. China Trade War

In March 2018, the US applied tariffs of $50-60 billion on Chinese goods to which China reacted in April 2018 by imposing a tariff on 128 US imported products.

Since then, tariffs and counteractions are continuous.

This trade war does not seem to be settling down anytime soon.

 

Escalation of the US. China Trade War

Recently, in May 2019, the US threatened to increase tariff on Chinese imports by 25%.

China reacted by announcing that the tariffs on $60 billion worth of US goods will be raised.

  • These tariffs are moving both of the giant world economies towards other trade partners.

There has been a significant drop of 31% in the import of US goods in China.

Due to the trade designs of the US, China is being encouraged to buy from other countries and not the US.

The same is the case with the United States since its imports are declining as well.

This trade war escalated by America is doing equal harm to both countries. A great economy is known for its imports.

  • The stronger the economy, the more the number of imports will be. If the economy of China is weakening, then so is Americas.

Due to trade restrictions and contradictions, Chinese exports to the US declined by 8% whereas overall China’s trade surplus grew by 3% and accounted for roughly $39 billion.  

 

Who is at the losing position?

The scenario is clear: China’s economy is hurting, but the US is hurting more.

  • As per the experts, fulfilling import needs from other countries is not going to help in US-China trade war negotiations. And so, the conflict is increasing every new day.

Mark Williams, chief Asian economist had to say, “President Trump will realize, sooner or later, that he is not going to get any of the things he thought the trade war will give.”

The analysts think the very first thing was the weakening of China’s economy so it cannot become the global hegemony.

  • With its years of experience and world-wide expanded economic policies, strategies, plans, and actions, it is not possible now to take down China.

President Trump is not doing any good for either his own country nor for the world economy. US firms, as well as international organizations, have stated that the trade war is harming them at a great rate.

 

 

Impacts of escalating Trade War on Global Traders

The WTO chief has warned that due to the non-escalation of the US-China trade war, the global free trade is experiencing the worst economic crisis now since 1947.

And if it continues, the world trade is going to collapse really soon.

  • The current wave of protectionist trade is a great threat to free trade.

The trade war between the US and China is not only impacting these two states but the whole multilateral trading system. Now how is this happening?

  • The principles of cooperation and non-discrimination have been endangered. This is a really serious issue for traders around the world.
  • They are hoping for a settlement soon but these hopes were once again crushed at the G-20 Summit that recently happened.
  • If the same scenario keeps going on in the international arena, there is a big chance that economic alliances will be formed that will induce unspoken rules such as no foreign investment from the opposite alliance, restricted trade, increased tariffs, and whatnot.

The most affected group from such activities will be global traders.

The drop in China’s export to the US has fallen on Taiwan, South Korea, and Malaysia.

  • 1.6% of Taiwan’s output depends on Chinese exports to the US.
  • In the case of South Korea and Malaysia, the percentage is 0.8 and 0.7, respectively.

The other two big countries dependent on US exports to China include Canada and Mexico.

This escalating trade war has a strong impact on foreign exchange markets. Due to shifting trade flows and poor impacts on the world’s GDP and monetary policies, world traders are suffering a great blow.

 

Poor impacts on currencies

 

 

The currency valuations are also a victim of poor foreign trade and stock exchange.

As per IMF records by the end of 2018, China’s currency is overvaluing with the US currency at the 2nd position while the currencies of other dependent global traders such as South Korea, Japan, South Africa, Mexico, and Taiwan are under-valuing.

 

New trade wars

All the countries under the influence of the US-China trade war are showing signs of initiating similar trade wars over petty disputes.

  • Recently, Japan and South Korea have shown signs of trade wars as Tokyo and Seoul are intending to take over each other’s tech industries.

Again, both are close allies of the US and their trade war is going to damage the US and other world economies, while the Chinese can sit back and relax.

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