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The US-China Trade War

The trade war between China and the United States (US) is becoming more intense. The trade war since 2018 has not reached a consensus and the regulation of the Chinese government towards US companies has made the US come up with much more severe retaliatory regulations. Furthermore, President Donald Trump has recently issued an order to ban WeChat and TikTok in the US and even announced that the business site, Alibaba, should be restricted in the US. This trade war between the US and China is negatively impacting the world economy, as well as the Korean economy. Thus, the Sungkyun Times (SKT) is going to thoroughly look into this trade war and analyze the possibility of an agreement between the two countries.

The Background of the US-China Trade War

Why did the US-China trade war start?

1. The Position of the US

Since the early 2000s, the US has requested that China reduces its export surplus towards the US to correct the trade imbalance. China, however, did not accept this request, and the export surplus related to the US grew greater over time. The US argues that China is not implementing the promises that were made when China joined the World Trade Organization (WTO), which are market opening and economic revolution. Therefore, the US, along with the European Union (EU), is opposed to China earning the status of a market economy in the WTO.

2. The Position of China

China finds the core reason for the trade conflict in the difference between the developmental stage and economic systems of China and the US. As the two countries have totally different systems, it is inevitable for them to avoid the trade war. Despite these differences, however, both countries have consistently tried to resolve the trade war before the Trump administration. After the inauguration of the Trump administration, all of the agreements and efforts made were ignored, and Trump is currently only focusing on suppressing the Chinese government. China attributes the break down of the agreement to the Trump administration, in that it urges for the new demand whenever a new agreement is made.

A Dispute Regarding the Market Economy Status of China (lt.chineseembassy.org)

The Regulation Policies of the US and Chinese Governments

1. The Regulation Policies of the US

In April 2017, US President Donald Trump and Chinese President Xi-Jinping agreed on a 100-Day Action Plan to resolve the imbalance in trade between the two countries. The goal of this plan is to widen the range of US exports and reduce the trade deficit of the US. This plan, however, did not work out well and President Donald Trump ordered the United States Trade Representative (USTR) to investigate the trade with China based on the Trade Act of 1974. The Trade Act of 1974 was established to protect the trade surplus of the US and to strengthen the spirit of the protectionist in the field of the trade, at the same time, it is very coercive to the trading partner as it only argues about the benefit of the US itself. After the investigation of USTR, the US started to impose 10% to 25% of the trade tariffs toward some of the Chinese commodities. The regulation towards China is also enacted in various ways such as with the regulation of the business with Chinese companies or more rigorous standards of the mergers and acquisitions (M&A) of the Chinese companies.

2. The Regulation Policies of China

The fundamental position of China is, “I do not want to fight, but I will not be afraid of the fight.” As the scale of Chinese exports towards the US is much greater than that of imports from the US, China cannot enact the same degree of regulation that is held in the US. Instead, China is suppressing the US by reducing the import of US commodities such as soybean, corn, pork, and liquified natural gas (LNG). Besides the regulation in the field of trade, China is restricting travel to the US and began a campaign to boycott US goods. Furthermore, the Chinese government is warning that it can disrupt the entire US stock market by selling an enormous amount of the US government bonds that they have on hold.

The Key Contetnts of the 1st Agreement and the Current Situation

The agreement consists of 9 chapters: preface, intellectual property rights, technology transfer, food and agricultural products, financial services, exchange rate and transparency, trade expansion, bilateral evaluation and problem solving, and final provision. For the matter of tariffs, the US agreed upon canceling the $160 billion of tariffs that were scheduled to be imposed on 2019 December 15th, while the 25% tariffs that are about $250 billion will continue to be imposed. Also, China agreed to expand imports from the US to $200 billion in the next two years. In the field of food and agricultural products, China also agreed to expand the purchasing of food and agricultural products from the US and lift the regulation of the ban of importing poultry from the US. Regarding intellectual property rights, China and the US agreed upon the degree of business protection policies and intellectual property rights between the two countries. Yet, there is still a lot of content that remains blank in the agreement and there is no clear future direction for the trade between the US and China. After the 1st agreement, the two countries have been having difficulties reaching a consensus for the 2nd agreement and President Trump even warned that he will terminate the 1st agreement if it is not suitably implemented.

The 1st Agreement upon the Trade War (hankyung.com)

The Impact of the Trade War on the Global Economy

The Impact on the Global Economy

The impact of the US-China trade war now reaches all over the world, including the volume of trade, stock markets, and consumption. The volume of trade has shrunk, stock markets have become turbulent, and consumption has reduced. Bloomberg expects that global gross domestic product (GDP) will decline to 0.5%p, including 0.8%p in China, and 0.5%p in the US, due to the heavy tariffs imposed on each other. Heavy tariffs on big conglomerates such as Apple and Huawei will cause a downtrend in the stock price for both companies and severely disrupt the global stock market. Also, due to the heavy tariffs set by the US, countries like Taiwan, Korea, Malaysia, Singapore, and Thailand, who are highly dependent on the Chinese market, are suffering huge damages in the field of exports as the overall volume of Chinese exports has decreased. In the same way, as US exports have decreased due to China imposing heavy tariffs on US commodities, Canada, Mexico, Ireland, and Saudi Arabia are also experiencing severe damages in their national exports. As China and the US are the two big countries that make up the big proportion of the global value chain (GVC), the US-China trade war is affecting the whole globe in both the trading field and the financial market.

Shrinking Volume of International Trading

The Impact on the US Economy

According to the Global Integrated Monetary and Fiscal Model (GIMF) of the International Monetary Fund (IMF), the GDP of the US will decrease by 0.3%p to 0.6%p. The increased tariffs will become a burden on consumers in the US, because of the increased price of the commodities. In the US, the extra tax cost due to the retaliatory tariffs was about $12.3 billion and the cost to adjust to the new global value chain due to the trade war was about $165 billion. Furthermore, the tariffs imposed in 2018 and the additional tariffs that were imposed in 2019 will cause a family of four to pay an additional $2,398 in taxes.

The Impact on the Chinese Economy

According to the GIMF, due to the trade war, the GDP of China will decrease by 0.5%p to 1.5%p. The Chinese government is putting its utmost effort to offset the damage from the trade war by using the quantitative easing (QE) method and devaluating the exchange rate of the Chinese Yuan. If the trade war between the US and China continues, however, the risk of the loss of GDP in China will be much greater. The unemployment rate will also severely rise if the trade war is prolonged.

The Impact on the Korean Economy

Korea highly depends on China and the US in the field of exports. In 2018, the proportion of the exports to China was up to 26.8% and if the exports towards Hong Kong (7.6%) is added, the export towards China covered more than a third of the total national export of Korea. According to the Korea International Trade Association (KITA), however, most of the goods exported are consumed in the domestic market of China. Therefore, the damage from the US-China trade war will not be as severe as expected. On the other hand, many experts expect that the US-China trade war will not be limited to trade regulations but be expanded into the financial market and affect exchange rates. In this case, the expected level of damages to the Korean economy from the trade war will triple. In 2018, the foreign investment of Korea was highly dependent on the US (23%) and China (14%). If the trade war is prolonged, the Korean stock market and exchange rate market will suffer from huge chaos.

The Future Prospect of the Trade War

The Short-term Prospect

The trade war has already become a hegemonic war between China and the US. It is difficult for both countries to yield or give up their benefit as this trade war is not only about trade but about their respective supremacy in the global economy. In the short-term, even though the war may stop for a while, problems will still persist. As there are tons of matters tangled up between the two countries, it will be difficult to rebuild their relationship in good faith. There is a high possibility of the second Cold War to happen after the short-term agreement.

The Long-term Prospect

According to the IMF, the relationship between China and the US will be decided upon the difference in the economic power and industrial structures of the two countries. The economic power of the two countries has been shrinking for the past few decades, and experts expect the economic power of the two countries to be pretty much the same in the 2030s. Currently, China is going through a dynamic change in the field of the economy and the industrial structure. Their key industries are changing from manufacturing to the service sector, and their economic system is changing from state-led to privateled. Furthermore, the Chinese government is putting in effort to diversify its exporting countries and to reinforce the supply within the domestic market to reduce their dependence on foreign countries. Also, in 2012, the rate of manufacturing and production in China surpassed that of the US and has been number one since. If China’s economic power and industrial structure surpass the US economy, a China-centered world trade system will occur. The trade war is considered a transitional phase in the world trade system, moving from a US-centered to a China-centered system. If the two countries reach a point of compromise (POC) before the damage gets more severe, they can both prevent the loss of GDP and protect their economies. However, if both countries do not yield, the prolonged trade war will continue to cause catastrophic damage to the international economy.

Prolonged Conflict Between the US and China (donga.com/news)

함여민  12345hym@naver.com

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