The China-United States Trade War is an ongoing trade war between the People's Republic of China and the United States of America characterized by increasing tariffs and other measures since 2018.Uncertainty arising out of the US-China trade conflict could lower world gross domestic product (GDP) by 0.6 per cent in 2021, relative to a no-trade-war scenario, according to Bloomberg Economics. That is double the direct impact of the tariffs and the equivalent of $585 billion off the International Monetary Fund’s estimated 2021 world GDP of $97 trillion.
A survey released last week by the Federal Reserve Bank of New York found a growing conviction among businesses that tariffs were hitting their bottom line. The Fed responded to economic headwinds with a rate cut of 0.25 per cent last month.
The Bloomberg Economics report said that while monetary policy can be used to mitigate uncertainty shocks, it cannot prevent the damage entirely. If central banks respond to demand weakness, world GDP will be 0.3 per cent lower in 2021 than it would be in a no-trade-war scenario.
The trade war between the United States and China has entered a new and dangerous phase. Both countries have moved from using tariffs and other trade sanctions in a reasonably strategic fashion in order to try and strengthen their negotiating position into a series of punitive measures designed to inflict significant economic harm on the other. As markets signaled last week, with stocks taking a roller coaster ride and bond yields plunging, the risks of an unconstrained economic conflict have risen substantially.
Like all wars, trade wars are easier to begin than they are to end. They can start with limited, rational objectives, but if these fail to be achieved, leaders almost invariably see escalation as preferable to humiliating retreat. The result is a costly and damaging conflict that no country intended nor wanted.
This was a lesson the world’s leaders learned during the “beggar thy neighbor” economic conflicts of the 1930s, which is why they set up institutions after World War II to prevent trade wars. That vision culminated in the creation of the World Trade Organization in 1995 and the commitment by all its member countries to resolve their differences through binding dispute settlements.
It is not a vision that U.S. President Donald Trump agrees with. Previous American administrations had been frustrated by what they saw as predatory Chinese trade practices that were not curtailed by WTO rules, but Trump, fixated as well on chronic trade deficits, chose to throw off those shackles. After first targeting allies by restricting steel and aluminum imports, the Trump administration last year imposed tariffs on Chinese imports—against the rules of the WTO—to try to force changes in Chinese behavior. The sanctions succeeded in bringing China to the negotiating table, but the talks broke off in May after Beijing balked at some of the more sweeping U.S. demands. Instead of remaining at the table to see if the differences could be narrowed, Trump broke off the talks and imposed new tariffs that will soon cover most of China’s more than $500 billion in exports to the U.S.
Now, both sides are digging in for a prolonged conflict. On the day last week after U.S. stocks had their worst performance of 2019, Trump boasted that “the longer the trade war goes on, the weaker China gets and the stronger we get.” Beijing responded by announcing that it would impose new countermeasures against the U.S. next month. Chinese President Xi Jinping, facing protests in Hong Kong and other challenges to his authority, can’t afford a show of weakness. Hu Xijin, editor of the Chinese state-run Global Times, tweeted last week that “Chinese society has full confidence to fight a prolonged battle with the U.S.” Trump in turn warned that new Chinese sanctions would be met with a still harsher American response. “Just so you understand,” he told reporters, “I’ve been very mild about it—very, very mild. There’s a long way I can go.”
Unfortunately, there is a long way both sides can go. The tariffs imposed so far are relatively modest, from 10 to 25 percent. With WTO rules now thrown aside, there is nothing preventing each side from levying much steeper tariffs.
“I think it would be a disaster if we end up in that direction,” Box’s Aaron Levie said . ”
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