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.