US-China Trade Wars and Its Effects on Businesses on both Countries, and the World At Large

US-China Trade Wars and Its Effects on Businesses on both Countries, and the World At Large

Abstract

Having experienced a high growth rate in the past two decades to attain a trade surplus with the United States, China has become a target of US trade policies. Tariffs are the first tools used when there is bilateral tension. The US President Donald Trump has been using trade tariffs in attempts to solve imbalances between the two countries. This move received a detrimental impact on business in both countries and the global economy. The paper uses a type of multiregional general equilibrium model to study the effects of trade tariffs between China and the US. A model-based analysis on the macroeconomic impact of the trade tariff war shows that know country benefit entirely from the conflict. The trade rivalry between the two nations results from the existing competition for international economic dominance.  The trade war relates to the current trade imbalances and the completion of global economic dominance. The incidence of Trump raising tariffs on China’s imports has resulted in a fall on domestic consumption. The trade war hits China

Keywords: Tariffs, US-China Trade war; trade imbalance

US-China Trade Wars and Its Effects on Businesses on both Countries, and the World at Large

Introduction

In a period where the world’s economic growth is high, international trade has increased in the Asian market leading to conflict between the two major players in the market. Since the start of 2018, the global market has witnessed a series of disputes between China and the US government, which have engendered a full-fledged trade war. Over the past decades, the US has been leading on trade in the global market.

On the other hand, China has been gaining momentum to become one of the significant trade players in the global market, posing as a threat to the US at the top. As a result, US-China turnover has increased, and commercial ties between the two countries expanding significantly.  In August 2019, US President Donald Trump escalated the trade war between the two nations after he imposed fresh tariffs on consumer items (Dimitrieva, 2019). Such trade conflict does not benefit businesses in either of the economies and also affects other countries as well.

The paper will use analysis and synthesis to bring out the impact of the US to move to increase tariffs on chines imports. There will be a variety of sources utilized throughout the research to come up with various points of view to create a detailed analysis. The first part of this paper will use several economic models to analyze how the situation of China-US trade conflict and protectionist measures by US influent business in the two countries and the global economy. The second part will give a detailed analysis of the situation after US president hiked tariff on Chinese imports, with emphasis on international trade and the impact business in the two countries. The final section will conclude the whole research. This paper aims to analyze how the current trade conflict between China and the US government has affected carrying out business in both countries and other economies.

The Models Set up

The Euro Area and Global Economy (EAGLE) Model with Trade Tariffs

For an extended period, the US has gradual moving towards achieving free trade. However, President Donald Trump has recently jeopardized the foundation of the international trading system after he steepened tariff on China’s imports and other countries. According to Berthou et al. (2019), trade conflict between the two largest economies might continue, derailing recovery from the global crisis. This paper will use the EAGLE model to determine the macroeconomic effects of this trade war. This model is a model that covers the interdependence of macro at the euro area and the global economy and models bilateral trade flow together with the explicit prices of the regions (Gomes et al. 2012). In this model, putting trade tariffs affects the global output while causing trade diversion towards the euro area. According to this model, these new trade tariffs will reduce the US and China’s output as their bilateral exports drop.

The EAGLE model has four regions, which include: the home country, the rest of the euro region, the US, and the rest of the world. For this paper, China and other non-euro countries affected by the US trade tariffs will replace the rest of the world region in the model. From this model, imposing a trade tariff on imports would imply a distortionary levy on the marginal cost of exporters. In this case, when the US imposes a trade tariff on China’s intermediate goods imports, it consequently means imposing taxes on those exporting goods from china. Similarly, when China imposes tariffs imported intermediate goods, it essentially imposes taxes on the US exporters to China. Therefore the tax burden is shared between the domestic consumers and foreign producers. This model shows that imposing high tariffs would result in top imports and low exports.

Global Trade Analysis Project Model (GTAP) on the US-China Trade War

This model is widely used to estimate the economy-wide effect of trade policies like results from multilateral trade around. GTAP model is a standard analytical tool to determine the economic impact of free trade agreement as well as assessing the effects of trade wars (Gomes et al. 2012). For this model to be several useful assumptions should be made. These assumptions include the choice of exogenous and endogenous variable and model closure, assume there are numerous substitution and income elasticity. Since both the US and China are large economies, their trade policy sessions could have effects on other economies as well (Rosyadi & Widodo, 2018). The computable equilibrium model developed by GTAP was used in this research to determine the possible impact of the US-China tariff conflict.

This model consists of an equation based on macroeconomic fundamentals, which shows how businesses from each region in the model behave. One of the benefits of the equilibrium model, such as GTAP, is that it gives detailed data on the economic linkages. Besides, it is possible to simulate the impact on welfare. Figure 2 shows a model of the GTAP model, which assumes that every country has a regional household account which collects all income resources in the region.

The GTAP model is a reliable tool to analyze the US-China trade conflict. The model has a detailed trade and investment database, and it is flexible in regional disintegration, which enables focusing on the geographical setting.  This model assumes that all imports are different from domestic products, and they are imperfect substitutes. Similarly, the model assumes that goods are an imperfect substitute for the local goods. They all satisfy the Armingot assumption (Allen & Arkolakis, 2019). The approach used by this model follows MONASH-style in computable general equilibrium modeling (Fukui & McDaniel, 2010). For the model to work, it assumes firms to be goods by combining value-added and intermediate inputs. The model was selected for this research because it can capture how different economies are affected by the change in trade policies through the price mechanism.

Figure 1. Structural representation of the GTAP model. (Hertel, Tyner, and Birur, 2010)

Analysis of the planned 10 percent Tariff on Chinese imports by the US Government

US President Donald Trump, in August 2019, announced a plan to new 10 to 15 percent tariffs on additional Chinese imports worth 300 billion US dollars. These tariffs affected most consumer goods like clothing, household electronics, toys, and sporting equipment (Bown, 2019). The announcement came on a time of ongoing conflict between the two countries. The US new tariffs came in effect on a previous plan by the Trump administration to raise taxes virtually on all imports from China.

For a long time, bilateral economic relations between the US and China has been beneficial to both countries, but this relation has become increasingly tense overtime. Just like in any competition, the one on the top will have the position while the closest rival becomes the favorite to add the championship. Over the past years, the US has lead in international trade, and China has steadily grown and created rivalry in the US and causing many inconveniences. The US government views China as a dangerous rival posing a threat to the current state of affairs. The US is at a stage of maturity, which means that development has slowed down and can only hold on to the accumulated power. On the other hand, China views the US as a stumbling block to progress. The Chinese economy remains at a state of rapid growth with enormous resources to reach global proportions.

China is escalating the current trade war between the two countries. These tariffs on Chinese imports are among others imposed since President Trump came to power, showing the frustration because there is progress in trade talks with the Chinese partner (Tanaka, 2019).  This move was a massive blow to the global economy while causing fear that the US might go into recession. According to Dimitrieva (2019), this move saw merchandised imports from the Asian countries drop by 4.9 percent from the previous year, which is the lowest record in the past three years. This tariff, together with those imposed in the past year, would mean that virtually all imports from China would be taxed. In the meantime, China is determining whether to allow agricultural imports from the US. Concern has been growing among traders in both counties over the potential effect of the spiraling tariff war.

Since Donald Trump became the president of the United States, there have been strict trade policies that have resulted in a US-China trade war. In 2017, Trump ordered China to investigated for being involved in illegal trade practices and theft of intellectual property. Additional tariffs targeting Chinese imports followed this investigation. Since then, the conflict between the two has increased in scale and frequency. The US adopted the tariff policy, hoping to change trade arrangements can have a significant impact on the local economies, labor market, and overall social well-being of the people.

Bilateral trade relation is always beneficial to the economies of involved parties, but this has changed in the case of the US and China. China has been using it is on monetary policies to increase export. The high population growth rate in China and a fast-growing economy has made the country an important market for exports from the US. According to Amadeo (2019), China has become one of the fastest-growing markets for exports from the US in recent years. On the other hand, the US imports cheap products from the Chinese market. Although the positioning of the Chinese market as a significant player in international trade, leading to increased imports and exports by the US, the United States trade deficit with China has risen rapidly. The US government has continued to raise the accusing figure to China for the increase in the trade deficit between the two countries.

The United States government started to act after sensing China as a potential treatment in attempts to contain and isolate China. Trump has also blamed China for being involved in controversial trade practices. The idea by the US government to impose high tariffs on Chinese imports aimed to make them more expensive for the American market. As a result, US traders to source the same products from other cheaper markets. This idea would, in turn, be a loss to the Chinese. The US president aims to make consumers prefer local products over those imported from china through tariff policy.

Most American companies, such as Apple, use the Chinese market for the manufacture and final assembly of their products. These companies chose to go to the Chinese market because it offers a reduction in the production cost and hence offering a completive price for them in the international market. However, most of these companies have been complaining of unfair competition in the Chinese market, where the Chinese products sell at low prices. As a result, most American firms have planned to close their operations in the Asian market resulting in loss of job to the American citizen. Besides, China has not fully become a free trade market, and there is government control in most of the sectors. This fact has fueled the friction between the two countries.

Since the start of 2018, the two countries have engaged in rounds of tariffs against each other, as seen in Figure 1. The US targets high-tech products from the Chinese market intending to put pressure on China’s “Made in China 2025” program – an initiative by the Chinese government to transform the county into an advanced manufacture powerhouse (Xia, 2017). On the other hand, China’s tariff has targeted on the exported US agricultural products like soybeans. The US has successfully imposed tariffs on Chinese goods worth more than 360 US dollars.  China has retaliated, putting tax on US products of value worth more than 110 US dollars. The latest move included a 5 percent tariff on US crude oil, which the first time crude oil has been affected by the tangle between the two countries. The two countries have threated to add more tariffs and also raise the existing ones.

Figure 2. The existing Trade War between the US and China

International trade is important because it increases economic productivity, help reallocate jobs to efficient industries. The trade relationship between the US and China has created jobs in a sector like agriculture and the service industry. On the other hand, free trade has contributed to the loss of employment in some sectors, such as low wage manufacturing. The Chinese presents a massive market for agricultural products from the US,

Company that was hit by Trump’s Latest Tariff on Chinese Imports

Since President Donald Trump came to power, one of the prominent policy he has taken is to raise tariffs of import. This policy has significantly affected the countries’ economies. According to…..trade, barriers like tariffs increase the cost of consumer and producer goods and depress the economic benefits brought about by competition, which hampers economic growth. Previous research has shown that trade tariffs directly cause inflation, depression in aggregate demand, and lower productivity levels.

One of the prominent companies concerned about the announcement about tariffs on imports is Apple Company. The company is known to have a tread of announcing new product in every September. The company is worried that the new tariff would affect its competitiveness in the international market. The company warned that imposing such tariffs would reduce its contribution to the US economy (Rappeport, Smialek & Schwartz, 2019). The new duty affects most of the company’s products like Apple phone, Apple TV, watches, MacBook, iPad, keyboards, and batteries.

Supplier of computer-chips, Intel reported that the announcement brought in more revenue to the company as people increased their orders (Layne, 2019). This move was because of the concern that there might be more tariffs, making prices to go higher. Industrial suppliers like Cummins, Rockwell Automation, United Technologies, and Johnson control have all experienced the effects of the tariff resulting in raising the price of their supplies. For example, Cummins has headquarters outside America, and therefore importing the industrial supplies to the US market is subject to trade tariffs (Layne, 2019).

People in the agriculture business have been much interested in the announcement that US president on tariffs. In a previous tariff conflict, China cut off the import of agricultural products like soybeans and corn. Famers in the US are retaliation by China that would hurt them. Agribusiness related company Deere and Co. announce its plan to reduce its production by 20 percent in the second half of 2019. Previous retaliatory tariff touched agricultural products like wine, nuts, and lobster. In a recent statement, Del Monte Foods stated that it was planning to close its plant in the US, which employs hundreds of workers.

The local businesses have also been by the recent announcement of a rising in tariffs. Since the US-China tough talks started, its stock dropped by almost 20 percent (Layne, 2019). The company cared much about the news because among the affect consumer good by the new tariff includes mobile phones and gaming consul. Most of the best vendors are making plans to move their manufacturing out. However, it is not clear how the consumer will respond to a rise in the price of the products.

Who Wins in the Trade War

From 2018, the US and China have been slinging tariffs at each other. The two nations desperately tried to out-tariff each other even as fears of a global recession intensify. It is normal to wonder who among them will win the epic battle. According to Melatos, Raimondos-Møller, and Gibson, (2007), in a trade war, a country whose preference shows a significant degree of substitution as compared to those of the rival country may win the trade war. Therefore, even if a country has a smaller economy than its rival, it can win the trade war provided its preference to exhibit sufficient substitutability.

During the previous tariffs announcements, China has mostly played a defensive stand intending to minimize associated damage on supply chain and production in the country. Based on the observed results so far, Trump is winning. There has been an announcement by companies in china to relocate and hence to damage the supply chain (Conklin, 2019). Although this tariff does not reduce the US trade deficit, the tariffs are attaining the intended goal, which was to force production from China to the US or other countries. However these trade tariffs have worsen the US trade deficit situation,

Impact of raise Trade Tariffs

Impact on the US Economy

There are no benefits to a country in engaging in a trade war. Unlike the previous tariff that only affected manufactured goods, this particular tariff was imposed on products like shoes, clothes, food, nappies, among others. Therefore, it is the American consumers who will bear the effects of these fresh tariffs as the cost of these products will go up. The retailers have no choice but to pass the burden of the increased import cost to the consumers. The tariffs imposed by the US government could backfire if other countries retaliate, making it harder for American companies to sell goods overseas. Agricultural firms in the US have warned that China and Mexico, which are the largest market for US agricultural products, retaliate, they would be adversely affected.

China provides an important market for the US in its future to global competitiveness. In return, the US benefits from low-cost products from China. Furthermore, some of America’s companies like Apple have set their final assembly point for their production Chine. In some cases, America’s companies use inputs from China for production in the US. Therefore, when the US government imposes tariffs on imports, it puts trade parries to America’s company n china and those who depend on imported inputs for their production.

One of the areas of the US economy that is most likely to be affected by the retaliation of China on tariff is the labor market. The US enjoys the benefit of cheap Chinese imports, but they are the first to feel the effects of trade tariffs. United States farmers have much suffered from retaliatory tariffs imposed by China on their export. Bankruptcy levels have been reports to have risen to the highest in the farm belts of Illinois, Indiana, and Wisconsin (Amadeo, 2019). According to Amadeo (2017), farmers’ income dropped by 11.8 billion US dollars nationally between January and March 2019, which was the highest since 2016.

When the US government raised trade tariffs in 2018, not only did China retaliate, but many foreign countries as well by applying tariffs of their own. China used levy tariffs on the US exports worth more than 3.3 billion dollars. The product that was affected by this tariff included steel, aluminum, and agricultural products. Later on, the European Union, Mexico, Russia, and Turkey also imposed retaliatory tariffs on exports from the US market. These retaliatory tariffs affected export worth approximately 121 billion dollars.

Impact on Chinese Economy

The effect of tariffs on imported goods to the US is that it makes them unattractive in the US market by making them more expensive. Taiwan exports computers and electronics to the US market tied up in China’s exports to the US. Besides, many Americans companies like Apple, Dell, and Nintendo have considered relocating their production facilities from china because of the tariffs imposed by the US government on Chinese imports. If this happens, a large number of people will lose their jobs as a result (Conklin, 2019).

With every new trade-war headline, the financial market starts wobbling. An escalated trade conflict between China and the US would affect foreign exchange markets through a shift in trade flows and expectations on growth and monetary policies. Most of the currency valuations are made based on a useful exchange rate index model of the International Monetary Fund, which adjusts for inflation. The Chinese Yuan has already b overvalued since China being the potential loser in this trade war.

The China-US trade war will have a profound impact on employment. Previous custom data have indicated that China’s to the US are, in many cases, labor-intensive and are mostly electronics furniture and textiles.  A significant role of China in the global value chain has been to provide labor services. After the announcement of the tariff on Chinese imports in the US, American companies that had set up production and assembly plants are planning to move out. This move would mean a lot of Chinese citizens losing employment.

Impact on the International Market

Three is no doubt that the trade war between the US and China, which are the largest economies in the world, will harm the global economies and cause destruction in trade relations. More so, this conflict is a massive threat to globalization.  The trade conflict between China and the US has also brought economic struggles to other countries.  According to Holland & Sam (2019), a drop in China’s export volumes would also affect other countries like Taiwan, South Korea, and Malaysia, which have embedded in Asia’s export chain.

Since the start of 2018, the US and China have been involved in a tit-for-tat trade conflict. With the US imposing a 10 percent tariff on imports from China, China may retaliate and with a similar tax on US imports. Figure 3 shows that a 10 percent tariff, global output, eventually starts to decline. Similarly, when China retaliates, global production even drops further, as demonstrated in Figur 3.

Figure 3. Effects of US-China Imports Tariffs Conflict on the World Output (Bolt, Mavromatis & van Wijnbergen, 2019)

The impose import tax on Chines imports makes them expensive, making them uncompetitive. In the short run –run, this might benefit the euro area. Since export from china to the US are experiencing barriers, the exports will divert to the euro area. Consequently, as China diverts much of its exports to the euro market, euro area imports to the US will increase in the short-run (Bolt, Mavromatis & van Wijnbergen, 2019).

The international trade is likely to suffer in a more protectionist environment because they make multinational firms to move out their operations to stay competitive. Both China and the US will experience losses in economic welfare, while other economies would experience subject to the tariffs would suffer collateral damage. The US has experienced a decline in the volume of exports after the introduction of these trade tariffs. If these trade tariffs persist, losses in economic output could be long-lasting as distorted price signals could hinder specialization, which causes maximization in global productivity. The two countries have the most significant stake, and it would be the best interest to solve the real problem.

Monetary policy and financial market response has a more significant impact on the outcome of the trade war. The US federal funds rate has gone up faster than in the baseline predicted because of high domestic inflation. Additionally, international equity prices are also expected to decline in a protectionist environment.

Internationally, foreign direct investment has reduced. This trade war has affected the European economy, like Germany, although trade relations with China and the U.S. remain good. The Canadian economy has as well experienced some negative impact, just like how the US and other countries exhibited “a weak manufacturing performance” as of 2019. Asian governments have put in place stimulus measures to curb the consequences of the trade war, though economists forecast that they may not be valid.

Conclusion

The China-US trade war has received a lot of attention because of its complexity and vastness of the economies involved. Understanding the forces behind the trade conflict is vital to determine the possible impact it may have. Research shows that the trade war will have a significant effect on China, the US, and the world economy as well. The paper highlights the impact of the trade war led by the US against Chinese imports and its impact on both the US and Chinese economies and to other countries as well. It is fair to conclude that tariff policies are not the right instruments to address the issues existing between the US and China. Considering the impact of tariffs. The trade tariffs result in many unnecessary difficulties for the consumer since they bear the burden of tariffs.

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