It’s back in the news – a seemingly never ending trade war with China. Last Monday, the issue escalated after China announced increased tariffs on $60 billion of exports from the US and caused a plunge in the stock market. Meanwhile in America, President Donald Trump is yet to decide on implementing tariffs on $352 of Chinese imports. But what is this trade war and what’s the reason behind it?
What’s been going on recently?
Trump has declared a national emergency over foreign IT threats undermining US security. Without naming a specific company, it is likely that the threat is largely directed at Huawei, the Chinese telecommunications company, and concerns that the company is using their products for spying (a claim firmly denied by Huawei). Last Wednesday, Trump signed an executive order that effectively bans US companies from using foreign telecoms that have been blacklisted as a security threat. This makes it difficult, likely impossible, for a US company to do business with Huawei, with this strategy perhaps an attempt to starve the company of money and foreign investment – which questionable as Huawei remains the world’s largest telecommunications company. The order also means that Huawei and its affiliates must be granted a US government license to but American technology – and if you’ve ever had to get a visa or an ESTA, based on the questions it is unlikely the company will be granted the license at least in the short term.
The issue surrounding Huawei is a big deal in the trade war, as well as America’s relations with its allies, namely the United Kingdom. Huawei is developing a 5G system, with Prime Minister Theresa May giving the company provisional approval for future 5G telecoms in the UK last month (despite 5 Members of Parliament raising concerns over the company’s espionage and connections to the Chinese state). The United States has been urging its allies to deny Huawei access to their telecommunications – May having not denied the company access to UK telecoms could put the ‘special relationship’ on the rocks. Huawei has been banned in Australia and New Zealand, and the Netherlands is investigating the company for evidence of espionage.
What Started the Trade War?
The traded war with China has been ongoing since January 2018, although Trump was complaining about Chinese trading practice before he became president – a look back at his campaign, there are several instances where he mentions China as an economic threat. Trump has accused China of unfair trading practice, with the US claiming that the cause of the trade war is the Communist’s Party opposition to free-market capitalism and fair competition.
Many countries, not just the United States, have accused China of the theft of scientific and technological secrets through the planting of software bugs, gaining access to foreign industries and institutions, including universities. The United States has officially accused Chinese intelligence of stealing top secret and sensitive US technology, including stealth bombers, helicopters, artificial intelligence, and mobile communications. An investigation into the thefts were opened by the US in August 2017. In January 2019, the US announced 23 criminal charges against Huawei and the CFO Wanzhou Meng- charges include financial fraud, conspiracy to defraud the United States, and the theft of confidential information.
War of Tariffs
On January 22, 2018, Trump placed a 30% tariff on imported solar panels (to be reduced to 15% after four years) and is the trigger for the trade war. This tariff hit China hardest as the country manufactures most of the world’s solar panels. Tariffs of 20% were also imposed on the first 1.2 million units of the year imported from China on the same day.
China does not immediately respond – between January and April, Trump also applied tariffs to steel and aluminium (which affected South Korea and Canada more than China) and proposed tariffs on 1,300 Chinese import categories. China responds to the tariffs on April 2, 2018 by imposing tariffs on 128 US imports – including soybeans, cars, pork (with a 25% tariff), fruits, nuts, and steel piping (15% tariff).
The trade war gets mentioned in the news usually if one of the countries has put up new tariffs. The next move will come on June 1, 2019, when China has stated it will raise tariffs on $60 billion of US imports.
Impacts of the Trade War
The Winners
ASEAN (Association of Southeast Asian Nations)
As China’s economy is shaken in the trade war, investment and outsourcing that would otherwise go to China is going to other nations in Southeast Asia. Vietnam is a major winner, its economy growing at 7 per cent a year since the trade war (and growing as long as it continues) as companies like Nike that usually manufacture in China outsource to Vietnam instead due to its low cost.
Brazil
The trade war means that China is looking elsewhere for soybeans – before, most came from America’s midwest. They may have found the solution in Brazil. In 2018, Brazil exported 84 million tonnes with most of that produce going to China – and there were almost no soybeans left for export, and there was a premium high of $2 per bushel (1 Brazilian real = $0.25 USD, so quite a premium price!).
Mexico
With high tariffs on Chinese imports, US companies have looked elsewhere for cheap manufactured goods. Trade with Mexico has since been boosted, with roughly $850 million worth of imports from the country – essentially replacing that from China.
Nucor Corp Steel
America’s biggest steel producer has recently benefited from the trade war, having exported a record volume of steel in 2018. This is a bit of a Pyrrhic victory as although business is booming, the company has reported lower than average sales costs and shipment delays due to increased demand. The trade war has increased domestic steel production, but has also dropped the price of steel.
U.S Manufacturing
The demand for domestic manufactured goods have created more jobs in the sector – around 2.6 million new jobs have been created, with 204,000 of those jobs in manufacturing. The biggest winners here are jobs in machinery, electronic instruments, and and fabricated metals (which were largely Chinese imports).
Donald Trump (his 2020 chances, that is)
The trade war does suggest Trump to be tough on China, which was one of his campaign promises and answers the concerns of China’s growing economic influence. He has shown himself to be tough on threats, a trait that may carry well at the election polls in November 2020. However, as will be explained further down, the trade war may not be entirely a positive for the sitting president. The core supporter base may be pleased to see this campaign promise being carried out, but those outside that base may see it as reckless and harmful to the long term economy.
The Losers
American Industries
Tariffs were not just applied to China. The steel tariffs of 25% were applied to the European Union in June 2018 – so the E.U responded by applying tariffs on American imports worth $3.5 billion, including jeans, bourbon, and Florida orange juice. Especially hit were textiles. Textile industries reported losses due to decreased trade.
American Consumers
Consumer products have increased in price since the trade war. US companies that require raw goods that need to be imported from China (from plane manufacturing to aluminium cans) will have to raise prices on the finished product – yes, that includes a simple can of beer.
American Farmers
With far fewer soybeans being sent to China and the price of soybean bushels falling to a low of $1.65 a bushel (now at $2), farmers are feeling the pinch of the trade war. The U.S Department of Agriculture is expected to implement a trade aid plan via a buyback scheme that could top $15 billion. This relief is only short term. Farmers have built trade relations with China for decades. Even if the trade war ends tomorrow, it won’t be easy to rebuild those relations and start trading soybeans with China in vast quantities. Long term, it is possible that farmers will make losses due to excessive surpluses.
China
Although the American economy has had a stumble due to the trade war, China’s economy has taken a tumble. China had been in debt, with a debt-GDP ratio of about 50%, but China’s growth of about 6% a year as the result of borrowing. However, that ratio is suspected to be higher by unofficial outside sources – some estimates put the ratio at about 300%. Tariffs have meant an economic slowdown, with little opportunity to even out the debt. The trade war will have short term impacts in the US. In China, a fragile economy is likely beginning to crack.
Huawei
The Chinese tech company is a casualty of the trade war – it is currently wounded, but not out of the game yet. Since being blacklisted from the US via executive order and Google barring some updates on its phones, Huawei market stocks are in sharp decline. Although this instance is not a direct result of the trade war, it is an indirect one as the steps taken around Huawei will have negative impacts on the Chinese economy (despite China arguing otherwise) as overseas profits drop.
Apple
The US tech company both assembles and sells its products in China, and Greater China (Hong Kong and Taiwan) accounts for $51 billion in revenue for Apple. The trade war risks losing a sizable proportion of Apple’s third largest market, a blow worsened by already weak iPhone sales globally. Apple’s stocks are in decline, but the company appears to be at the mercy of the politics of the trade war.
Donald Trump (popularity)
He may be a trade war winner, but he’s also a trade war loser. Overall, the trade war has not sat well with a majority American voters. According to the Quinnipiac University national poll, about 39% of respondents approved of Trump’s handling of trade and the trade war with China – while 53% disapproved. Being tough on China may rally Trump’s support base, but the trade war has risked losing rural Republican strongholds in the Midwest as farmers lose profit on their crops. What may be a saving grace for Trump is that the economy is doing okay so far, and that might be enough to appease voters.
What's Going On, America? 