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1 United States/China Trade War Columbia Southern University Principles of Macroeconomics Dr. Craig Hovey August 31, 2021

2 United States/China Trade War The ability for consumers to purchase a wide variety of goods at cheaper prices is due to international trade. The basis of international trade is comparative advantage. However, when one country has the idea that a competitor nation has unfair trading practices, a trade war can be the result. The trade war between the United States and China is an example. This paper will look at major issues of the trade war, the tactics and measures that were taken by the United States and China during the trade war, and the impacts of the trade war. Issues The United States and China are major trade partners. According to Pencea (2019), the United States and China have become very dependent on each other in recent decades in an attempt to capitalize on their complementary capabilities. However, things have changed. In recent decades, China became the leader in commodity exports, a dominant player in international trade, the world’s low-cost manufacturing center, and is becoming an export- oriented global technology hub (Kapustina et al., 2020). This has led the United States and China to shift from co-dependency to uncoupling causing strategic rivalry and trade war because of a deficit in the trade balance. This trade deficit caused friction between the countries. Attempts at resolution through official channels have not been successful. During his campaign and after he was elected, Donald Trump often spoke about this issue. He talked about the trade deficit with China that he thought was huge and unjust while alluding that China was raping the country and getting away with the biggest theft in the history of the world (Pencea, 2019). China had a different point of view. According to Cai (2020), the reason for the trade deficit of the United States is its economic structure, not by unequal trade or other external reasons; and the trade deficit does not mean that the United States is in a

3 disadvantageous position. This disagreement led to the trade war between the United States and China. Measures The main measure taken by both sides was tariffs. In this case, the tariff is a tax on imports and can be specific, such as a dollar amount per unit or ad valorem, a percentage of the import price (McEachern, 2019). In this war, the tariffs were based on a percentage of the import price. “Between July 2018 and August 2019, the United States announced plans to impose tariffs on more than $550 billion of Chinese products, and China retaliated with tariffs on more than $185 billion of U.S. goods” (Hass & Denmark, 2020, para. 5). Each side tried to target industries and markets that affected the other the most. Impacts Many American companies depend on Chinese resources for supplies. To cut costs, US companies may try to replace their Chinese suppliers. However, there could be a low chance of finding replacements and it could be very costly and take a lot of time to find them and integrating them efficiently (Pencea, 2019). This could cause an increase in production costs. Therefore, this could have a profound impact on the transportation industry in the form of higher prices. Employment was also affected by the trade war. According to Kapustina et al. (2020), one of the sectors most affected in the US is transport equipment with 10,000 lost jobs in each aspect of machinery and equipment along with automotive and auto parts. Therefore, unemployment will increase because of the loss of these jobs. The trade war can also have an impact on inflation. Inflation is a sustained increase in the economy’s price level resulting in an increase in aggregate demand, a decrease in aggregate supply, or both (McEachern, 2019). A tariff increase acts as a negative supply shock, raising prices of inputs to

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4 production and increasing output prices, leading to lower output. This means a decrease in aggregate supply. Therefore, the higher tariffs that President Trump has put in place on Chinese imports could have the effect of an increase in inflation. A trade war that substantially impairs the trade between two countries can have the adverse consequence of reduced output and a significant decline in social welfare (Guo et al., 2018). Unemployment is a major factor in this slump in output. This will result in a recessionary gap because the economy is not performing up to expectations. This will lead to an expansionary fiscal policy in which the government will increase spending to stimulate the economy and decrease unemployment. Foreign exchange rates show how much a nation’s currency is worth compared to another nation’s currency (McEachern, 2019). The exchange rate of currencies is dependent on the supply and demand of those currencies. The US-China trade war has had a significant influence on the US dollar and the Chinese yuan. One result of the trade war is that the US dollar is relatively strong versus the Chinese yuan, which sits at multi-year lows (Reineke, 2019). This means that fewer yuan are exchanged for dollars. The trade war has resulted in international trade between the United States and nations other than China. United States companies are looking to trade with countries that produce similar products as those obtained from China. Vietnam, whose exports to the United States rose by 35 percent or $17.5 billion, was a clear winner in Asia while Taiwan also benefited because of its ability to manufacture hardware components better than other countries (Huang & Smith, 2020). The trade war between the United States and China has had a deep impact on the transportation industry. Many jobs were lost which had caused the transportation industry to be

5 stagnant and lose money. However, the future is looking brighter. New deals have been implemented to improve job opportunities. More money is being put into the economy to help the transportation industry improve its infrastructure and dig out from its backlog of projects. There is also increased importance on new improvements in the industry such as the electric car. All of this will help the transportation industry to flourish in the next five years. The trade war between the United States and China was started based on the trade deficit between the United States and China. The trade war caused tariffs to be imposed by both sides. As a result, American companies were forced to seek supplies from other countries. There was a rise in unemployment and the inflation rate. The transportation industry was hard-hit by the war. However, a change in fiscal policy has started to improve unemployment and put more money into the economy. The future seems to be looking brighter. Nobody wins in a trade war. Both countries have already experienced the increasingly negative effects of the trade war. Since a trade war is not conducive to the economic development of the two countries and harms the global economy as a whole, the United States and China should return to complementary advantages and win-win cooperation (Cai, W. (2020). Trade talks with China should be restarted and the tariffs initiated by President Trump should be reduced.

6 References Cai, W. (2020). Financialization, Economic Structure Change, and the USA–China Trade War. World Review of Political Economy , 11 (2), 256–269. https://doi- org.libraryresources.columbiasouthern.edu/10.13169/worlrevipoliecon.11.2.0256 Hass, R. & Denmark, A. (2020). More pain than gain: How the US-China trade war hurt America . https://www.brookings.edu/blog/order-from-chaos/2020/08/07/more-pain-than- gain-how-the-us-china-trade-war-hurt-america/ Guo, M., Lu, L., Sheng, L., & Yu, M. (2018). The day after tomorrow: Evaluating the burden of Trump’s trade war. Asian Economic Papers , 17 (1), 101–120. https://doi- org.libraryresources.columbiasouthern.edu/10.1162/asep_a_00592 Huang, Y. & Smith, J. (2020). In the U.S.-China trade war, new supply chains rattle markets. https://carnegieendowment.org/2020/06/24/in-u.s.-china-trade-war-new-supply-chains- rattle-markets-pub-82145 Kapustina, L., Lipková, Ľ., Silin, Y., & Drevalev, A. (2020). US-China trade war: Causes and outcomes . SHS Web of Conferences 73(1). https://www.researchgate.net/publication/338550900_US- China_Trade_War_Causes_and_Outcomes McEachern, W. A. (2019). Macro ECON6: Principles of macroeconomics (6th ed.). Cengage Learning. https://online.vitalsource.com/#/books/9781337671804 Nguyen, T. (2018). The reaction of currencies to a trade war. Undergraduate Research 37 . https://digitalcommons.lasalle.edu/cgi/viewcontent.cgi? article=1038&context=undergraduateresearch Pencea, S. (2019). The looming USA-China trade war and Its consequences. Global Economic Observer , 7 (1), 283–298. https://eds-b-ebscohost-

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7 com.libraryresources.columbiasouthern.edu/eds/pdfviewer/pdfviewer? vid=2&sid=1ee8e23c-d779-4a02-aea9-6dadf24cce45%40sessionmgr103 Reineke, C. (2019). Trump's trade war has led to a historically weak Chinese currency — and a new study shows that impact could spread globally . https://markets.businessinsider.com/news/stocks/trade-war-currency-impact-weak-china- yuan-em-impact-2019-8 Žemaitytė, S., & Urbšienė, L. (2020). Macroeconomic effects of trade tariffs: A case study of the U.S.-China trade war effects on the economy of the United States. Organizations & Markets in Emerging Economies , 11 (2), 305–326. https://doi- org.libraryresources.columbiasouthern.edu/10.15388/10.15388/omee.2020.11.35

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