The impacts of the trade war between the US and China
ECON proseminar in economics
Introduction
One of the tenants of growth and development globally has been trade. This has been in the form of the exchange of goods and ideas as a tool for perpetuating growth ad expansion. One of the driving forces of global trade is free and fair trade. These are the two forms of trade that have been advocated for and promoted by global entities such as the world trade organisation (WTO). As a part of the United Nations (UN) agencies, the WTO is charged with the mandate of advocating for and supporting free and fair-trade practice globally. This was the case across nations until early 2016, after the 2016 USA presidential elections (Liu & Woo, 2018). Upon his election, President Donald Trump initiated radical reforms to re-evaluate the USA trading and commerce positioning with China. This led to the emergence of the USA China trade war. The war, although with efforts to calm it down, has escalated over the last four years. This has been mainly on tariffs and taxes rise on products from both nations. Although each of the governments has argued that their actions and their stands on the trade war is in the best interest of their countries and economies. This analysis demonstrates that the trade war continues and will, in the future, have negative impacts on both nations. This essay analysis develops a critical evaluation of the theoretical basis of the war implications and then examines its effects on each of the nation’s economies and growth patterns.
Trade wars Theoretical Analysis
In understanding the potential implications of a trade war, this analysis applies to core economic theories. They are the comparative advantage theory and the opportunity cost theories, respectively. On the one hand, Vernon (2015) described the comparative advantage theory as a critical and base tool for international trade. In this regard, the model states and takes note of the economic fact that resources are unevenly distributed globally. As such, it means that the resources composition and wealth differ significantly across countries and regions. Therefore, this implies that entities have got differing capabilities and ease in producing and availing different products into the market. Thus, it is these differences in capabilities and potential in production that necessitates the need for international trade. Under the global trade rules, countries focus on production and economic activities that they have end edge. These are the activities for which they require resources that are readily available for a country. Once they produce and exercise such as production activities, the states engage in international trade with other nations. This allows them to export the products that they have a comparative advantage in their production and development (Burstein & Vogel, 2017). Don't use plagiarised sources.Get your custom essay just from $11/page
On the other hand, the Chinese market has a large pool of human capital and a wide range of manufacturing and production inputs and raw materials such as in the electronics and the car manufacturing industries. The above is a demonstration that in terms of international trade, both nations are bound to gain from each other. The analysis focuses on examining the level and extent to which the current trade war has blocked off and led to a loss of the potential comparative advantage gains between both nations (Levchenko & Zhang, 2016).
The second applicable economic model is the opportunity cost. This is the cost of foregone activity. The opportunity cost theory is applied in the trade war between China and the USA. Due to the existing trade tensions between the countries, they have altered their export and import patterns. Instead, they have to seek alternative ways to acquire the import and the way to dispose off their exports to other markets and countries. In doing this, each of the nation’s incurs a significant economic cost (Marin, & Verdier, 2014). This is the cost evaluated and investigated. The focus of the analysis is to demonstrate the actual financial cost that each of the nation’s incurs for failing to trade with each other under a free and fair-trade system and policies. The analysis and application of the above findings form a basis for evaluating if the exiting trade war and tensions have a positive or a negative implication on each of the two markets.
Impacts of Trade war on China
This section develops a critical examination of an analysis of the effects of the USA-China trade war and tensions on China. This analysis investigates the actual impacts as of the date of analysis and the potential projected long-term implications.
One of the implications on the Chinese market has been on the decline in the exports the nation has on the USA market. This is a trend that was economically analysed and demonstrated in the UNCTAD 2019 trading report. The report noted that the country lost an estimated 25% of its expected value to the USA due to the trade tensions and the resulting tariffs. In this case, the estimated loss amount and reduction in the sale were at US$35 billion. This is a loss value on Chinese exports. The decline in the market exports implies that the Chinse manufactures have lost a significant proportion of their earnings.
Nevertheless, the findings indicate that to a small extent, Chinese firms have retained a high competitiveness index. Overall, the exporters have maintained 75% of their exports into the USA despite the tough and strict tariffs enacted by the government. Some of the 25% casualties of firms in China declining and lowering their exports into the USA have been among those listed as not feasible and viable for trading with the USA as a government and its agencies and other private entities. One such an organisation that has borne the brunt for the trade tension is Huawei. Although a leading global internet infrastructure provider, the entity, due to its alleged links with the Chinese government, has been barred from trading with any entity in the USA. The government in August 2019, listed Huawei and 70 of its affiliate companies on the Entity List. This was an effective legal blacks list of the entity. As such, with its listing, the government effectively barred any entity or supplier form contracting any business with Huawei without direct government approval. Before the Entity listing, Huawei, a Chinese based export and manufacturer, had a 9.2% market share as of 2019 prior to the ban. However, since the ban and the effective barring of its trading with USA companies, its market share, and brand popularity have significantly declined. This is a demonstration of the impacts of the trade tensions on typical Chinese companies. Overall, an evaluation of the had hit industries in China demonstrates that the office machinery and communication equipment sectors. These factors lost over 55% of the export market share that translated to an estimated $ 15 Billion as of 2019. This is a demonstration that the exiting trade war has had an impact on the Chinese export industry.
By extension, the reduced exports value by the Chinese companies have replicated on the economy. First, as already mentioned, the nation has lost a direct US$35 billion earnings in USA dollars. This is the foregone revenue. Using and adopting the opportunity cost theory, it would be argued that the direct costs incurred by China due to the existing trade tension are US$35 billion. Additionally, besides the immediate opportunity costs, there are other indirect costs incurred. This is as a result of the trade tariffs and taxes. With the raising of trade taxes and duties, it meant that the Chinese products in the USA market prices increased significantly. This is a basis for improving the rates and thus lowering their attractiveness. In overcoming this economic challenge, Liu and Woo (2018) noted that Chinese firms have shared on the additional costs. This means that rather than passing the cost and taxes burden on the consumers, the entities share in the responsibility. This is a basis and an economic factor that has reduced the profitability margins and profits by the Chinese firms exporting into the USA market. This is a trajectory that the Lukin (2019) analysis argued that has had an almost equal indirect cost and implications as the direct cost of the value of goods exports share lost. In addressing the risks and associated loss of revenues, the Chinses government has been critical in adjusting its fiscal systems. One of the adjustments has been the Yuan devaluation. In 2018, with the increased trade tensions and taxes, the government allowed the Yuan to sink below the traditional seven to one Yuan rate. The lowest since 2008. The sinking of the Yuan against the dollar was a strategic economic measure and basis through which the Chinese government sought to protect its exporters. In this regard, with a low-value Yuan, it meant that even if the resulting dollar products were low, once converted into Yuan’s, the loss was significantly mitigated, crated a basis and potential for economic feasibility and profits among the hard-hit Chinese firms.
Overall, the implications could be cited in the case of the Chinese GDP value. However, as Calì (2018) noted, in analysing, a nation’s GDP value, it is critical to note and understand that there are different predictor factors. For instance, the Chinese GDP value is predicted and impacted upon by various factors such as the population, government policies, among others. However, the exports of produced goods and the value of earnings and profits play a critical influencing role. This explains why the trade tensions between the USA and China are linked to the declining GDP growth rate that was at 6%, demonstrating a decline from the previous pre-trade war and tension period. This implies that the trade tensions have impacted specific Chinese entities, impacted negatively on industries, forced a devaluation of the nation currently, and by extension, impacted on a declining GDP growth rate index. It is evident from the above findings that the trade war has had no positive gains and implications on the Chinese market. Instead, all the impacts discussed in this section were negative and, as such, necessitates a shift in policy and an end to the existing trade war.
Impacts of trade war on the USA
This section develops a critical analysis and evaluation of the implications of the trade war and tensions on the USA economy. One of the overriding impact has been on the USA consumers. As Robinson and Thierfelder (2019) analysis illustrated, the USA government enacted taxes on a wide range of Chines products. For instance, as of 2019, the UA had imported a 15% tax range on Chinese goods estimated at $112 Billion. This is a proportion that meant that over two-thirds of Chinese imports into the USA had a tax and tariffs rise. This is a move that had its initial intention and goal and reducing the Chinese imports as well as earnings to the government. However, this has an indirect impact on the consumer economy. Qiu, Zhan and Wei (2019) argued that the assessed of trade and expansion, thus they focus on profit maximisation. In this regard, once taxation has been affected, there is a general tendency by organizations to pass on the tax burden onto the consumers. This is the case scenario in the USA consumer market. A significant proportion of the products charged tariffs are consumer goods. This is a cost burden that has been passed onto USA consumers. Thus, UNCTAD (2019) demonstrated that the prices and costs of the products have increased by an emerging range of close to 15%. For instance, as of October 2019, it was estimated that the CPI index was at 1.8% increase from the September 1.7%. This is an index CPI value that is higher than the earlier economic projections. For instance, forecasts by agencies such as Reuters had predicted the CIP index rise of 0.3% over the same period. This is an index that was surpassed in the actual figures that were close to 2%. This is an attribute, that although with other predictor factors were widely and profoundly linked to the changing Chinese product prices in the market. Although the entities in China have born some of the burden, they have not adequately covered the additional taxation burden. This is a cost burden that has been passed onto the consumers. Thus, in the long-run period, this has increased the costs of products.
Additionally, in the future, it is projected that this is bound to increase the cost of living among the USA consumers. The high price of Chinese products indicates that the consumers will spend an additional amount and proportion of their earnings. This high proportion of earnings spending will have an impact on the cost of living and disposal incomes. It means that the cost of living rise will negatively impact on savings and investment amounts in the long-run period. Hence, this analysis indicates that the exiting trade tensions have an impact of a higher cost of living and products prices among USA consumers.
A second impact of the trade war on USA relations is the impact on the export trends and rates in the market. Overall, as of 2019, it was established that the USA exports declined by 18.2% for the first seven months of the 2019 year. This is a decline in exports to China that has primarily been attributed to the exiting trade war and tensions. Upon its enactment of taxes and tariffs on Chinese imports into the USA, the Chinese government reiterated by increasing and equally imposing tariffs on USA products. For instance, the nation by August 2019 reported that it was imposing a tax of 5% and 10% on a total of 5078 USA goods. In this case, this is a tariff rate that is estimated at $75 Billion worth of goods. The importing of these tariffs indicates that there is a rise in the cost of doing business between the USA firms and the Chinese market. The effect of this has been a decline in export as the nation exports cut on its exports to China in a bid to lower the high operating costs.
The explanation of the impacts on USA firms could further be explained through an understanding of the working and business environment in China for USA firms. As of 2019, there was an enormous number of companies operating in China, including General Motors and Apple, among others. An economic analysis indicates challenges faced by these corporations operating within an ever-increasing hostile working environment in China (Guo, Lu, Sheng & Yu, 2018). This is a trend that has negatively impacted on the entities supply chain in the market. The implications of the supply chain has had a direct impact on the USA market entities’ profitability. The declining competitiveness by extension and variable explains this by the ventures. For instance, the Apple company has, over the years, used the Chinese market base as a production center. This is due to the comparative advantage theory merits of the Chinse market in the electronics industry. This is a basis that had allowed the company to gain and acquire quality and low-cost production in the market. This is a market advantage and merit that has enabled high quality at low costs production., The current trade wars and tensions have strained the supply chain systems in the market. As such, this implies that the entities such as Apple have their supply chain affected. This has significantly lowered their productivity rates and revenues in the market. Thus, this is an indirect cost that has impacted on the USA economy. Besides the direct loss of income from declining exports and imports from China, the economy continues to acquire a rising loss of income through strained production systems. This is an aspect explained through the opportunity cost theory. The organizations forced to adjust their supply and distribution systems incur a considerable cost in the process. This is a cost that, although not directly recorded by the government, lowers the firms and production entities revenues and market competitiveness.
Summary
In summary, this analysis develops a critical evaluation of the impacts of trade war and tensions among nations. This is ana analysis aimed at demonstrating the need for trade resolutions, trade agreements, and the de-escalation of emerging trade tensions among nations. In achieving this aim, the analysis adopts one of the current trade tensions and war between the USA and China. The analysis applies the economic and international training theories, namely the comparative advantage and the opportunity cost theories. Overall, it notes that the exiting trade tensions have negatively impacted both nations. On its part, the Chinese economy has mostly been affected by the decline in exports into the USA market, decline in the firm’s profitability margins, and the resulting need and impact on the Yuan devaluation.
On the other hand, the USA market has been impacted upon by decline in exports into China, a rise in the CIP Index and the burden of the tariffs is passed onto the consumers, an increase in cost of living, and the risks of declining and low productivity efficiency due to the USA firms supply chain systems disruption. Overall, the analysis demonstrates that there is a potential for economic GDP growth rates decline for both nations. Thus, it indicates that there is a need for both countries to re-evaluate their trade stands and re-work a new trade agreement. This is a trade and a de-escalation of the tensions that would help address the existing negative implications. Additionally, it will serve as a strategic basis for promoting economic growth and expansion for each nation and jointly.
References
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