What's Next For the US-China Trade War?
by Emile Oliver
AUGUST 17, 2019
“Made In China” is certainly a familiar phrase for Americans. As one of the world’s largest economies and the world’s top exporter, China’s economic dominance is felt globally. China’s economy was built on manufacturing and exports, and given its economic success, which is rivaled only by the US, this approach appears to be working. However, this US-Chinese rivalry has grown too bitter since President Trump took office and tried to stop China’s exploitation of their relationship with the US. This began the Sino-American Trade War in 2017.
We have watched as this relationship has become increasingly fraught, as tariffs have increased, causing global markets to fluctuate. We have heard several times that this war is not far from over, but still see no resolution. How has this trade-war affected countries, markets, and consumers around the world? Is the trade war truly winding down following agreements during the G20 Summit? How will postwar markets and global politics be reshaped by an agreement in the coming months, should one be reached?
Game consoles, smartphones, computers, and almost all technology is manufactured in China. However, take a step back, and you may realize that China is just as dependent on the US to develop this technology as we are on China to manufacture it. As market analyst Kenneth Ropza puts it, most smartphones in the world run on either Apple or Google, two companies both based in the United States.
Despite the manufacturing of these phones being outsourced to China, the US is extremely critical to the development of these products. This holds true for many technological products and manufactured goods, and it is the key reason that a US-Chinese relationship is so critical.
In the short term, the US has benefitted in some aspects. Obviously, Trump’s decision to start a trade war is not unfounded. Simply put, a trade war is a time of reciprocating tariffs between competing nations vying for economic dominance. In the context of the Sino-American Trade War, the United States is able to create an economic incentive for American companies to return to domestic manufacturing, and penalize those who outsource labor to China. The Trump economy has consequently grown significantly. In theory, if the US can outlast China in avoiding a recession, causing China’s economy to begin suffering, a US victory can be declared. However, it’s not so simple, and there will be other consequences both now and in the future.
In the coming months, if a deal is not reached, higher prices on affected goods should be expected. The last major move made in the trade war was the US’ decision to increase tariffs from 10% to 25%. We are currently at a limbo point, where US retailers and manufacturers are relying on imports stockpiled before the tariff hike took effect.
However, when these companies begin to import more goods and pay the 25% tariffs, consumers may have to begin shouldering these additional costs. If a deal could be made in the coming months, much of this could be circumvented. While a deal has seemed unlikely for much of the trade war, a resolution may be on the horizon following agreements made between President Trump and Chinese Premier Xi Jinping at the G20 Summit.
At the June G20 Summit in Osaka, Japan, Trump, and Jinping reached an agreement to avoid further increasing trade war tariffs. This is not a resolution to the conflict, but it could be a beacon of hope. In June, Trump threatened to extend the 25% tariffs to more Chinese goods (worth about $300 billion) if Premier Jinping refused to meet with him at the summit. Clearly, President Trump is searching for a deal, being that he wanted to meet with Jinping enough to threaten him with more tariffs. An ideal resolution to the conflict would have to involve both countries scaling down on their tariffs, meaning the agreement reached at the Osaka Summit is certainly a step in the right direction. With a mutual agreement to a ceasefire, while negotiations can continue, it appears that both countries may be ready to begin scaling back on tariffs. In fact, Trump even tweeted after the meeting with Jinping that talks for an agreement are “right back on track”.
Although no meetings or comprehensive discussions have been scheduled, Trump appears to be right that negotiations are in the works. White House trade adviser Peter Navarro has indeed confirmed that he and Treasury Secretary Steven Mnuchin have resumed informal talks with top Chinese officials in Beijing such as Chinese Vice Premier Liu He and Minister of Commerce Zhong Shan. Navarro warns that a concrete resolution is a long way off. His outlook for concerned US consumers is simple: complicated negotiations take time, but the objective is to make a good deal, not a fast one.
In the short term, China has made some concessions. One of the Washington’s requests for China is that they open their markets to more US goods. While the US continuously imports significant amounts of Chinese goods, about $540 billion in 2018, China continues to linger at about $120 billion in US imports per year. One contentious issue is China’s low importation of US agricultural products, hurting US farmers. However, at meetings during the G20 Summit, China has agreed to buy more agricultural products from US farmers, a move Navarro describes as “immediate” and “significant”. Though a resolution to the trade war has been promised many times by the Trump administration with no outcome, it seems that progress is being made this time around. But how will global markets be shaped by a deal?
Postwar markets could likely go in several directions, depending on the strength of the deal made between Jinping and Trump and international cooperation and alliances following the war. Ideally, if the Trump and Jinping administrations are able to come up with a mutually beneficial deal, international trade can return to a largely uninterrupted state. If the relationship can be restored with both sides making needed changes, global markets will be the least disrupted.
However, given Trump’s major demands and both sides’ drive to come out on top, it is unlikely that everyone will go home satisfied. A possible scenario, should the US lose the trade war, is a global market that is less reliant on the United States and the US dollar. Market Analyst Kenneth Rapoza furthers that reckless US trade policy with China could prompt many other nations to decrease reliance on the US in the economic sector. Currently, many countries, firms, and governments rely on the US, especially for developing core technology. However, if the US undermines its own economic accountability, its trustworthiness and global image could wean too. Nations could instead begin to search for a new global superpower, and China would be likely to try to fill that gap. China is still significantly behind the US when it comes to technology. However, it is not inconceivable that in a future with less US hegemony, China could become number one when it comes to global dominance, soft power, and technology.
However, what would happen if China loses the trade war? Many predict that this is actually a more likely outcome because China’s economy is much smaller and relies on exports. As a result, it is predicted that US tariffs will begin to place a strain on China much before Chinese tariffs hurt the US. Chinese exports to the US account for 19% of its total exports, while the US only exports 9% of its goods to China. The US has many other beneficial and healthy relationships with other nations, especially its fellow North and South American nations, meaning that the US is likely to outlast China. With this outcome being very possible, the Chinese economy would certainly take a major hit. Additionally, global trade patterns would definitely be altered.
China’s manufacturing prices would increase, and global firms would most likely have to shift production into other countries such as Vietnam and Cambodia to maintain cheap manufacturing. Investment in China would also likely decrease, as its economic future would be a highly uncertain and unstable one. This would hinder the technological empowerment and control that China could have gained from winning the trade war.
Regardless of how the trade war ends, one thing is certain: global markets, politics, and hegemony will be changed. Currently, the trade war is nearing a point wherein Chinese and American consumers will begin having to shoulder the costs. However, since the June G20 Summit in Osaka, Trump and Jinping have reopened dialogue for a resolution, though whether one will be reached is still uncertain. When a resolution is reached, it is uncertain how global markets will be changed. If there is a clear victory to the trade war, the country who declares it will have a major advantage in geopolitical influence for years to come. “Made In China” will either be heard around the globe or become a flashback of times of old.