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US-China Trade War And Its Aftermath

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“Protectionism becomes destructionism; it costs jobs” -President Ronald Reagan (June 28, 1986)

Overview

Throughout Reagan’s presidency, free trade policies were promulgated and his government pledged to lower down the government barriers and promote the idea of free flow of trade. But the raison d’etre of quoting Reagan as the bastion of free trade is his dichotomous stand on the same. During that time the threat was Japan, and it was regarded as a danger to American auto industry. That threat further extended to the semiconductor industries when President Reagan unlike to his ‘free trade’ slogan went on to impose a 100 percent tariff on selected Japanese electronics products. Reagan continued to embrace protectionism and tread ahead to further impose a 45 percent tariff on Japanese heavy motorbikes import over the period of five years. So, does it seems the history is repeating itself? The answer may be most likely so.

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Current US President Donald Trump asserted, “The deals we have with other countries are unbelievably bad. We don’t have any good deals… In fact, I’m trying to find a country where we actually have a surplus of trade as opposed to a deficit. Everything’s a deficit.” Contrary to his affirmation the US has a trade surplus with other countries. Albeit the trade deficit with China amounts to a large sum of $337 billion to which the US president responded by imposing tariff to dampen the deficit. A tariff of $50 billion on Chinese goods was imposed on China after announcing of sanctions on steel and aluminium imports. So as to promulgate the imposition Trump invoked a rarely used 1974 trade law.

President Reagan who was an ardent supporter of free trade used the law 49 times but with the advent of the World Trade Organization in 1995 the law commenced losing its relevance. Trade has not been of much political relevance in the US and did not occupy much space in the political campaigns in the US presidential elections. However, Trump made trade issue and especially trade with China as a crucial adjunct during his presidential election campaigns. Trump has incessantly attacked China for slower growth rate of the US, declining jobs and manipulation of US Dollar.

What is Free Trade?

“Free-trade policy means much more than a particular way of dealing with questions of foreign trade. . . . It is easy to see . . . that free-trade policy is related to other economic policies in such a manner that, for political as well as economic reasons, these other policies are difficult to pursue without free-trade policy, and vice versa. In other words, free trade is but an element of a comprehensive system of economic policy and should never be discussed in isolation. Nor is this all. The really important point to make is that this system of economic policy conditions, and is conditioned by, something that is more comprehensive still, namely, a general political and moral attitude or vision that asserts itself in all departments of national and international life”

The Politics of Free Trade

The average American predominantly supports the trade embargo on China which formed a primary agenda of Donald Trump in last year Presidential elections. It formed a crucial adjunct of his ‘America First’ campaign whereby he asserted to impose tariffs to equalize competition and reduce trade deficits. From the viewpoint of foreign policy Trump seems to use economic sanctions as a tool for the countries which tend to digress from viewpoints of the US (for instance Iran, North Korea and many others in the past). China’s euphoric rise geopolitically and economically has been alarming for the hegemony of the United States, and it now sees China as a strategic opponent. China sees US trade embargo to deter its ambitious ‘Made in China 2025’ plan that focus to reconfigure the Chinese economy from being labour intensive to more technologically innovative pertaining to robotics, aerospace, pharmaceuticals and the like.

The ‘Made in China 2015’ draws its inspiration from Germany’s ‘Industry 4.0’ that focuses on sophisticated and technologically intensive production. As Chinese President Xi Jinping professed that China is treading towards the path for ‘high quality development’ therefore focus on intelligent manufacturing becomes pertinent to evade the ‘middle income trap’ from which many countries are suffering. For instance, China for the first time has developed a first completely home-grown passenger jetliner Comac C919 which pose a great challenge to the monopoly of Boeing and Airbus in the international market. It is pertinent to note that the US has imposed a tariff on the industries of China which are a part of the Chinese vision 2025. The ‘big fine’ ostensibly called as a tariff to ensure protectionism have yielded some unwanted repercussions. In response to this imposition, Beijing planned to impose a counter tariff of about $3 billion worth of US products. However, both the sides have repeatedly pledged to resolve the issue and maintain the interest of both the parties involved.

Comprehending ‘Trade ‘Imbalance

America has been a bastion of globalisation and has compelled (and encouraged) other countries to follow suit by opening up their economies. In this context of the globalised world, the bilateral trade imbalances do not offer such convincing grounds to deter trade. For instance, if nation A has a trade deficit with nation B but has a trade surplus with nation C; the ideal scenario for trade should be that all the three countries should strive for or should achieve zero trade deficit vis-à-vis each other which is not possible in real world. Therefore, the primary goal of a country in such a scenario should be to control its current account deficit rather narrow down once focus on bilateral trade deficits. It would be a utopia where each pair of the country would have a ‘balanced’ trade with each other in an international economic system.

For the past couple of years, the gap between exports and imports have increased and decreasing intermittently. However, over the last few months of 2018, there has been a steady rise in the trade deficit. Albeit, during the month of March a substantial decrease was noticed in the trade deficit from the US $57.7 billion to the US $49 billion in March 2018. The total exports have swelled up to 2 percent month over month to a value of US $208 billion approximately, which has been a record high value. It is pertinent to note that the United States has been running into trade deficits since 1976 and it peaked in 2017 (recorded highest in China) primarily due to the import of oil and consumer products.

Problems on both the sides

The American industrial giants have long complained about intellectual property theft and conditionality imposed by the Chinese government to rope in local manufacturers prior establishing industrial bases in China. They have also alleged that China’s lose handedness with cases pertaining to intellectual property theft and technology transfers are making American industry lose the competitive edge in terms of innovation and expertise. However, China refutes such allegations and asserts that it’s a futile attempt by the United States to retain its hegemony in the international system.

According to the US, the Chinese Vision of 2025 keep the American industries at the disadvantaged position. However, it should be noted that many developing countries in the past have devised the same kind of policies so as to give an impetus to their engine of growth. So what China is doing is nothing off the track. Developing countries and especially countries suffering from ‘middle income trap’ often adopted protectionist policies that are more favourable to local manufactures. However, this is not to state that the increasing trade deficit of the US vis-a-vis China should not draw any attention.

On the other hand imposing tariffs on bilateral does not serve as a solution to ongoing deficit. It is aptly being made vocal on the bother the sides by economists, academicians and policy makers that this war would yield no winners.

Unwarranted Global Consequences?

The US-China ‘trade war’ is not something that will affect only the two countries but will have global repercussions.

First, this event may possibly lead to changes in global production chains. As with the advent of globalisation the world economy is highly integrated as the multinational companies have production units spread across the globe in terms of a nation’s comparative advantage to manufacture vis-à-vis others. The factors for comparative advantage are determined by the availability of raw materials, technological expertise, cost of land and labour. Locating this issue with respect to China which is weak in manufacturing in chips and rely heavily on the advanced economics like US to import (China imported huge volume of electronic chips worth US $160 billion in 2016 alone). Such kind of barriers and imposition of tariff may lead to disruption in global supply chains as companies today do not concentrate their production bases only in one country. And this trend may further compel American and European multinational to revisit their investments, merger and acquisitions and foreign direct investments which may ignite reverse trend of globalisation as governments tend to use sanctions, tariffs and the like for their own leverage.

The germination of global institutions like the World Trade Organisation in 1995 was to ensure free and fair trade. The rationale was to deter countries to impose trade barriers, customs and protectionists policies by the government. The imposition of the ostensible tariff of $ 50 billion initially by the US is a short-sighted and knee-jerk reaction to contain its swelling trade deficit vis-à-vis China. The conditionality put forth by the US on China, like ensuring of intellectual property rights will not yield any substantive effect unless and until China sees these policies or conditions to favour their economic development and not to serve as an impediment to the growth. Furthermore, such imposition of barriers in a bilateral arrangement undermine the rationale and relevance of global institutions like the WTO where countries pledged to follow the charter and resolve mutual disputes under the Dispute Settlement Mechanism (DSM) of the WTO.

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