TRADE WAR

[TOPIC: TRADE WAR] Consequences and future outlook of the trade war

Consequences

In general, a country that attempts to use trade policies in order to boost national income at the expense of other countries will probably provoke retaliation. Retaliation can possibly result in economic, political harm as well as damage the trade relationship between involved countries. Despite what the leaders claim, domestic audiences, including businesses, manufacturers, farmers, and consumers bear the burden of uncertain economic prospects. In many cases, the resulting trade war between two or more interventionist governments will leave all countries involved worse off than if they had adopted a hands-off approach in the first place.  

Amid the trade war with the US, China’s economic growth decline from 6.8% in 2017 to 6.6% in 2018, the lowest figure in almost 30 years. China is clearly being hurt, particularly on the technology front. China’s slowdown has also put some of the U.S.’s most important industries in economic limbo, namely automobiles export and soybeans. Even the tech giant Apple is not confident in their revenue forecasts, saying that the iPhone is significantly more expensive than those of domestic competitors like Huawei. Most analysts argue that Trump ‘s expansionary fiscal policies will create jobs for the American people in the short-run but ultimately render the US fewer jobs and higher prices over the long term.

The World Economic Forum estimates that a full-blown US-China tariff war could reduce global GDP growth by 0.7 percentage points (pp) to 2.8% in 2019. The impact would be more significant on China’s growth (-0.9 pp), due to direct trade effects, and on Europe (-0.8 pp), due to indirect trade effects and financial links whereas US GDP would decelerate by a lesser margin (-0.4 pp). Other regions also are also generally witnessing a deceleration in momentum.

Future Outlook

The two countries are in a truce and have set March 1st as the deadline to reach a new deal. Without one, the US will impose higher tariffs on $200 billion in Chinese goods, which Trump had originally planned to implement in January. Meeting deadline would ameliorate the situation that has contributed to increasing unease across the globe, whereas failed negotiations could cause an adverse reaction from business leaders and send markets tumbling.

Like a game of chicken, if Trump or Jin Xiping backed down from what they stand firm, they would appear in a weaker position and face domestic backlash coming from their support bases. There is high hope that countries heavily dependent on the two powers can facilitate talks among leaders from both sides to reach a settlement (this is why we came up with the concept of “multilateral approach” in the WTO committee of MUN@TIU 2019). Yet, geopolitical implications still constrain countries from pressuring the US and China to make greater concessions.

Which country can withstand the fallout from the trade conflict longer, which country will defect first? Will the two be able to resolve their fundamental differences and end the escalating tensions before a global catastrophe occurs? We don’t know for certain but the consequences are unobscured: soured relations, delaying investment, slow growth, and millions of lives across the world being affected.   

References

Justin Worland, "The China Trade War Affects United States Industries Too," Time, January 10, 2019,

http://time.com/5498915/china-trade-war-affect/.

Lily Kuo, "China's Economic Growth Slowest since 1990 amid Trade War with US," The Guardian, January 21, 2019, https://www.theguardian.com/world/2019/jan/21/chinas-economic-growth-slowest-since-1990

Mario Mesquita and Itaú Unibanco, "How a Trade War Would Impact Global Growth," World Economic Forum, https://www.weforum.org/agenda/2019/01/how-trade-war-would-impact-global-growth-tariff/.

[TOPIC: TRADE WAR] Introduction to Trade War

Context

Accusing China of reaping financial benefits from unfair economic policies such as intellectual property theft and the excessive government subsidies, the Trump administration has taken a hard line against Beijing. Last April, President Donald Trump started a trade war against China, saying that such a policy would solve trade deficits with China and generate more jobs for the American people. So far, the US has imposed three rounds of tariffs on Chinese goods, totaling more than $250 billion while China has responded with tariffs on $110 billion worth of American goods. In a meeting took place in December 2018, China and the United States have agreed to a 90-day tariff truce to reach an agreement but the conflict seems far from over. Just a few days ago, the US filed charges against Huawei, China’s largest technology company, alleging it stole trade secrets from an American firm and committed bank fraud by violating sanctions against doing business with Iran. As more events related to the trade war will continue to unfold in the near future, we encourage prospective delegates to the WTO committee to take notes of the latest updates on the issue.  

Key terms

Tariff

Tariff is a tax on a product made abroad. In theory, the price of taxing items coming into the country means people are less likely to buy them as they become more expensive. The intention is that they buy cheaper local products instead - boosting your country's economy, thereby protecting certain national industries and jobs. Tariffs can also be used as an extension of foreign policy: imposing tariffs on a trading partner's main exports is a way to exert economic leverage. Besides tariff, countries can restrict trade using non-tariff barriers, such as but not limited to quotas, embargoes, sanctions, levies.

Tariffs can have unintended side-effects, such as making domestic industries less efficient by reducing competition, hurting domestic consumers with high prices since a lack of competition tends to push up prices, and creating tensions by favoring certain industries over others. Finally, the act of pressuring a rival country by raising imported taxes can descend into an unproductive cycle of tariff retaliation, known as a trade war.

Trade War

A trade war is a side effect of protectionism that occurs when one country (Country A) raises tariffs on another country’s (Country B) imports in retaliation for Country B raising tariffs on Country A's imports. Trade wars can commence if one country perceives another country's trading practices to be unfair or when domestic trade unions pressure politicians to make imported goods less attractive to consumers.

Free Trade and Protectionism

Free trade is a policy to eliminate discrimination against imports and exports. Buyers and sellers from different economies may voluntarily trade without a government applying tariffs, quotas, and subsidies or prohibitions on goods and services. Free trade is the opposite of trade protectionism, which is shielding a country's domestic industries by raising tariffs on imports from foreign countries. As mentioned above, such an act can sour relations among countries and potentially leads to a trade conflict.