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US-China Trade War: Its impact on World Trade

The past following years have witnessed major economies changes and crisis around the world, from Brexit to the Greek Crisis. But one major economic crisis that may have a significant impact on world economy; is the US-China trade war.

How it all Started

It all started with the US imposing a tariff on steel and aluminum, to protect its domestic industry. Resulting in China issuing a proposition to impose duties on agricultural goods worth $3 billion imported from the US. This was just the beginning of a cold trade war between US and China.
The months following, both countries entered into a cold war like situation. If the US imposed a tariff on goods, China responded by imposing a tariff on the export of the US’s goods. Thus, if after due process, all these tariffs are imposed, it would increase about 15% of bilateral good traded.
Such steps have had a significant implication on global trade. The US is the largest importer of goods at $2.2 trillion and exporter of goods at $1.4 trillion. China stands at number one with exports of $2.1 trillion and second for imports of $1.5 trillion on 2016.

Glocal Market Impact

The recent volatility on the implementation of tariffs has adversely hit Global Markets. If this war is persistent, the existing tension between US and China could go beyond trade wars into Supply Chains. Predicting the worst-case scenarios, companies might have to relocate factories and distribution centers. It would further affect employment and taxes. This escalation of tariff war could affect the global economy, especially the UK eyeing for free trade Brexit.
Britain is a relatively open economy have put its faith in global trade. Any shake on the global trade system can significantly threaten Britain’s prosperity.

Even if full-fledged trade war is a prediction of the near future, a fragmented and protectionist world would only increase the challenges for the UK, since its exit from EU.
With the US being the leading service exporter in the world, any trade negotiations between US-UK would put the US an advantage. Especially when Britain is concentrated on the trade of goods rather than services. A medium sized country like the UK will find it increasingly difficult to have favorable trade negotiations with countries beyond EU.

Now taking India into perspective, the dwindling trade agreement between US and China could bear positive results for countries like Brazil and India in the short run. With China imposing large tariffs on agricultural products like soybean, could prove to be of advantage for India. But, taking into consideration, the long-term impact, traders are in for some bad news. The trade war could lead to higher inflationary and low growth scenario.

Indirect Impact

Considering the indirect impact of the trade war on the scenario, an increase in interest rates in the US could have implications for the equity and debt market. Even a trickle or drop change in US trade could have a ripple effect on the Indian trading system. Economists have warned India to brace itself of a volatility and stress resulting from both foreign and domestic markets.

With the tit-for-tat conflict happening between US and China, there will be a mix of countries get hurt and others emerge as winners. Only time can actually show the reality.

US-China Trade War

A trade war is a side effect of protectionism that occurs when one country(Country X) raises the tariff on another country(Country Y) in retaliation for Country Y’s imposition of a tariff on Country X. Trade War’s often initiated when one country perceives the other country’s trading practices to be unfair.

How it all began

One can trace the steps of this definition to understand the recent happenings of trade conflict between US and China. It all began on 1st March when US President Donald Trump announced steep tariff. Of about 25% tariff on steel and 10% tariff on aluminum, coming to the US from abroad.  This action dramatically raised the possibility of a trade slowdown with China, EU and other trading partners like India.

On March 22, Trump signed tariffs on up to $60 billion of Chinese imports that included components used in aeronautics, technology and energy industries. The real battle though, is against the Chinese, over the theft of intellectual property. Estimated to be around $225 billion and $600 billion every year. This caused China to respond to the US tariffs by announcing new taxes on American imported meat, wine, fruits, nuts etc.

Trump administration responded by releasing a list of 1300 product categories that cover almost 25% China tariffs. This list includes a variety of household products from flat-screen television to dishwashers, snowblowers to even vaccines. China retaliated with 25% tariff and an even longer list of American goods like Whiskey, Cars, and Soybeans, cotton, and other products.  Trump has also indicated at a reduction of existing trade deficit of $376 billion of American goods with China. Trump has already threatened to put an additional $100 billion on Chinese goods in addition to the existing ones. Known for his ferocity in negotiations, economists and politicians are exploring various scenarios of this US-China trade situations.

Why Trade War is bad for both countries

China for years has had a state-driven investment and export-driven growth; though recently President Xi Jinping is motivated to gradual shift towards consumer spending. A trade war could set China back several steps from their desired economic goal. With a lag, China has exhibited underperformance in the first quarter of 2018.

On the other hand, with China retaliating to Trump’s imposition of the tariff, has increased its tariffs on a large number of agricultural products. Which, will have a severe impact on American rural states, who had backed Trump extensively in the 2016 presidential election. This may soften the tariff blow by America, owing to Trump losing his voters.

With a slim possibility of US-China trade war being solved in the near future, Trump is in a lot of political pressure as well as China’s position as being global leaders in technology being in doubt; both sides, as well as other trading partners, have a lot to lose with the persisting trade war.