The Consequence of The Trade Barrier Between United States and China

1.0 Introduction

In March 22, 2018, US President Donald Trump’s administration took unilateral initiatives through presidential memorandum to impose substantial tariff on imported products from China, in what many consider as an escalation of trade war between the two global economic power. The aim of the tariff, according to Trump (2016) was to curb the persistent and widening trade deficit between the US and China, end the illicit intellectual property transfer to China, curb the alleged China’s currency manipulation, to weaken the competitiveness of the Chinese firms and weaken the Chinese economy, which the US believes could Compel China to implement policies that could foster a favorable environment for US firms selling or operating in China. However, the decision to impose tariffs on selected products from China met a retaliatory measure where China also imposed tariffs on the US imports, raising fears of a full blown trade war between the two leading economies. The literature analysis provides an overview of the trade ties between the US and China, Identifies the major areas of contention between the two nations, highlights Trump’s administration’s policy towards China including the tariffs set and the retaliatory measures from China and eventually reviews the actual impact of the trade dispute and possible future outcome in both the two countries and the world.

2.0 Literature review

2.1 Definition of international trade and trade tariff

OECD (1997) defines international trade as the exchange of goods, services, capital, information and knowledge across international territories and borders. The liberalization of economies ad globalization have been instrumental in facilitating the international trade while world trade organization(WTO) has developed rules and policies that have strived to ensure fair trade terms among nations, assisted in solving trade disputes. Ideally, international trade is supposed to be undertaken in fair manner to ensure that there is mutual benefit among the parties involved; however, protectionism and unfair trade terms have characterized international trade leading to trade disputes and trade wars. One of the issues that have led to trade disputes among nations is import tariff. Root (2000) defines import tariff as the fee charged by the importing country to allow specific products to enter its market. The author asserts that the country may import tariff to protect domestic industries against competition from foreign entity or may be imposed as a mean of collecting revenue. For nations that intend to use tariffs as revenue collecting measures, they usually set the rates of tariff at reasonable levels in order to maximize the revenue obtained from tariffs and hence, they cannot be considered as trade barriers. However, tariffs aimed at protecting the domestic industry from competition from foreign entities are usually high to make up for the difference in the marginal cost of production between the domestic producers and the foreign producers. In some cases, the tariffs may be used as a political tool to bar some nations from trading in their territories and these usually lead to retaliatory measures by other nations, resulting in trade wars and other forms of disputes.

2.2 The history of the trade dispute between the US and China

In the US presidential election that was undertaken in 2016, Donald J. Trump was elected as the country’s 45th president and was later sworn in office in January, 20, 2017. The main issue of concern in regards to global economy and trade was his trade protectionism plans that started during his campaigns and started to implement immediately after he was sworn in as president. Trump (2016) highlights Trumps plans that were delivered in his campaign speech in regards to the international trade. His plans entailed Withdrawing the US from Trans-Pacific partnership, Renegotiating NAFTA agreement so that it favors US labor force, compel the relevant agencies to curb abuses in foreign trade that harm the country’s labor force, accusing China as currency manipulator, initiating trade cases against China to the world trade organization in regards to unfair subsidy behavior, and developing plans to impose trade tariffs against the Chinese imports.

According to Hufbauer (2016), China rose fast to capture the largest share of the US Total trade value and by 2015, China had 16.2% in the US Total trade value, which was a tremendous increase from 2000 where the value was a mere 6.1%. Equally, the US was China’s top trading partner in 2015, making a total of 14.2% of the country’s total trade value. The nature of the two country’s exports and imports were complementary and compatible with each other. Basing on Michaley (1997) complementarity index, which is used to measure how one nations export structure complements the partnering import structure, the import structure of US effectively matched China’s export structure, making the nations natural trading partners. According to WTO (2012), the compatibility between the two nations also increased in terms of total trade volume. However, the increasing complementarity between the US and China was only one sided where the index indicates that whereas the China’s export structure was compatible with the US import structure, the contrary occurred for the US exports to China, impacting negatively on the US trade balance with China, providing a basis for trade disputes between the two nations.

Stephen (2018) asserts that the trade deficit between the US and China has been a point of contention to the US. There have been assertions that the increase in imports from China have resulted in Job losses and more importantly in the manufacturing sector. However, according to US-China Business Council(2017), there have been arguments that strong trade  ties between the US and China have culminated in several benefits to the US economy such as the ability of the US to penetrate China’s large and lucrative customer base and provide consumer goods at lower prices attained through low production cost. According to Congressional Research Service (2018),the 2017 China’s exports to the US were principally manufactured and consumer goods with the top being apparel, communication equipment, electronic that include semiconductors, computer equipment and assorted manufactured items such as games and toys. In the same year, the US export to China includes intermediate and capital goods with the main ones being motor vehicles,  electronic components and semiconductors, waste and scrap, oil seeds and grains such as Soya Beans, and aerospace products.

During the 2016 presidential campaign, Donald trump pledged to address the issue of trade deficit with China. US Department of commerce(2017) states that after his inauguration, both president Trump and China’s president Xi Jinping met in a high level summit in Florida, the US In April 2017.The two leaders announced the formation of a “100-day action plan on Trade” under the “us-China comprehensive economic dialogue),also referred to as the CED. Despite several dialogues and the initiative address the high trade deficit between US and China, the US Nevertheless set trade investigation basing on trade related provisions which was later followed by trade restrictions impacting on China and other trading partners that include European Union, Mexico and Canada.

According to United States International Trade Commission (nd), the US governments started trade investigations to find out whether certain imports had adverse effect on the US. The trade-related provisions that guided the investigations are section 232 of the investigation used to determine the impact of steel and aluminum imports on the national security, section 201 investigation used to determine the negative effects of large residential washing machines and crystalline silicon photovoltaic cells on the domestic industry, and section 301investigation used to find out if the China’s policies ,acts and practices related to innovation, intellectual property and technological transfer were discriminatory, burdensome, unreasonable and restrictive towards the advancement of US commerce.

 The United States International Trade Commission (nd) highlights the findings with recommendations to be adopted. The outcome of the section 201 investigation assert that increased imports of solar cells and washers are significant precursor of serious injury on domestic industry and hence, it was proposed that there was need of  tariff rate quotas on the products. The outcome of section 232 of the investigation indicates that the imports of aluminum and steel have high risk of impairing US national security ad hence, the report recommended increasing the tariffs  as a restrictive measures to imports of aluminum from Venezuela, Hong- Kong, Vietnam, Russia and China so as to facilitate the US domestic production of aluminum. As a result, Donald Trump imposed an additional tariff of 25% of steel while aluminum attracted a tariff of 10%. The outcomes of section 301 investigation revealed the China’s policies, actions and practices that facilitate the transfer of technology are restrictive and burdensome to the US commerce. As a result, the US undertook a number of actions against China on three arenas and these are tariffs, WTO dispute settlement and investment restrictions. According to the White House (2018), President Trump gave a memorandum announcing the USTR would list the proposed imports from China that would be subjected to tariffs. The proposed list had 1333 product lines that included electrical parts, machine parts, motor vehicles and color televisions. Furthermore, an addition tariff of 25% would be imposed on industrially significant technology worth more than US$50 billion including those under the category of “made in China 2015” programs. A full list, which was released on June 15, 2018 covered about 1102 product lines that entailed industries that dealt with Robotics, automobiles, new materials, industrial machinery, information and communication technology and aerospace. In terms of WTO dispute settlement, Donald Trump instructed USTR to set a dispute settlement with China in WTO so as to address the technology licensing practices that it considered as discriminatory ad to request consultation with China in line with the protection of the intellectual property rights. In terms of investment restrictions, in May 29, 2018, Donald trump stated that he would execute investment restriction and uphold export controls to Chinese organizations and people that are associated with the acquisition of technology that has industrial significance so as to protect the national security.

2.3 China Strikes Back and Trade war starts

According to the ministry of commerce, the people republic of China (MOFCOM) (2018), the Chinese government was highly critical of the action to impose tariff on imports from China stating that the US had ignored dialogue and consensus reached by the two countries and had intentionally declared a trade war. As a result, the tariffs had impacted negatively on the interest of both nations and had wrecked havoc on the world trade order. As a result, China stated that it would retaliate by imposing tariffs with the same force and sixe and that the economic and trade achievements attained by the two nations would be invalid. As such, China took several retaliatory measures against its US imports. As a response to safeguard measures and findings of the section 201 investigations, where the US imposed tariffs on crystalline silicon photovoltaic cells and washing machines, China Requested for a WTO dispute settlement framework to address the issues involving the two major products. In reaction o section 232 investigation where the US SLAPPED tariffs on aluminium and steel, the Customs Tariff Commission of the State Council (CTCSC) declared that to offset the losses caused by the US import tariffs, I would increase the tariff on various imports from the US including Aluminum waste and scrap, pork products and selected nuts and fruits. As a response to the outcome and restrictive measures imposed on the basis of section 301 investigations, China took several retaliatory measures. In response to section, the retaliatory measures included imposing a tariff of 25% on airplanes, automobiles, agricultural products, and chemical products. The products were valued at $50 billion. The imposition, according to (MOFCOM) was to protect the legitimate interest and rights of Chinese. However, China initiated the trade dispute with WTO in regards to us measures based on section 301 investigations and restrictive measures. As a response to final list OF Chinese products that were subjected to 25% tariff, China imposed 25% tariff on US tariff. The products were including automobiles, agricultural products, chemical and aquatic products.

 2.4 The consequences of the trade war

There are several consequences of the trade war to both the US and China. According to The State Council of the People’s Republic of China (2008), when the US imposed tariffs of 818 lines of import from China and China’s retaliation against the 545 products of the equivalent amount, Premier Li Keqiang stated that no one could win the trade war. This was a clear indication that the trade war had serious negative impacts on both nations. Although the US could benefit on the short term basis in line with increased sales of is domestically produced products in the US, the long term impact on both nations is that the products from the two nation could be expensive, impacting on the bottom line of the companies from both the nations.

Given that China is the largest US trade partner with merchant export to the US totaling us$505.5 billion, thereby contributing heavily to the economy, tariffs and other trade barriers could impact negatively on the exports, which could in turn slow down the gross domestic production. Generally, the science and technology industry that imports substantial products in China including computer parts could slow down and this could affect innovations in the industry. Furthermore, manufactured products including apparel could be affected in that high tariffs could make them expensive in the US, thereby impacting negatively on their competitiveness and ultimate lowering of profits. The restriction on investment by the US could curtail the growth of some Chinese firms especially those with investment in the US or those that intend to invest in the country, which could in turn lower their competitiveness while the risks may increase, leading to high cost of doing business.

Wagner et al. (2017), state that stock market responded heavily to the subsequent events of trade disputes. The election of Donald Trump came as a shock to many and impacted negatively on many stock markets especially those with links to the US economy. When China rolled a retaliatory tariff on more than 128 US products, there was a 2.2% drop in the US stock market index while there was a drop of 0.6% drop in the Chinese market. When the US commerce department banned American organization from selling software, parts and component to Chinese firms and notably China’s ZTE corp. as a result of infringement of intellectual property and illicit technological transfer, there was a 1.6% drop in China’s stock market. After China had rolled retaliatory measures against the tariff imposed by Donald trump on Chinese products and his threat that he would impose more tariff if China retaliates, China’s stock market fell drastically by 3.5%.The market reactions depict the effect on trade war on stock markets and the general global economy. Basing on the analysis of the Bond market, Acemoglu et al.(2016) states that the US firms that depend more on the exports and imports from China had low bond and stock returns but the default risk was higher during the short period of the announcements that set a platform for trade war between the US and China. Organizations at the immediate downstream of industries with a large share of imports from China experiences significant downturn in the stock market returns, a fact that was attributed to the perceived price increase on the products from the upstream organizations after the announcement of the trade war. This is an indication that the perceived high prices as a result of the announcement of the tariffs affected and could further affect the value of companies whose businesses are highly dependent on the exports and imports from China.

There are several impacts that the trade war could have on the US and these have both positive and negative effects. According to Congressional Research Service (2018) the issue of trade deficit has been a major point of concern to the US where in 2017, the trade deficit between the two nations was US$375.6%.Given that the impact of the trade war has heavily affected Chinese business interests, China has been compelled to address the issue of unfair trade practices and is currently developing policies that could favor US organizations in its market. This indicates that there are high chances of the trade deficit reducing in future. Further to this, high tariffs could make it expensive for some products to be sold in China, which will indicate that the volume of imports from China will be relatively low, thereby opening domestic market to domestic products such as aluminum. Further to this, China could be forced to respect intellectual property rights, which is one of the areas that the US has accused China of unfair business practices and failure to respect innovations from other nations.

According to US Chamber of Commerce (2018), the trade war between the US and China has had detrimental impacts on the US agricultural sector. One of US major exports to China is grain and oil seed such as soya beans that was subject to retaliatory tariff by the Chinese government. As a result of the tariff, organizations in China found it expensive to purchase soya beans and other products from the country and sought for alternatives, which indicated that the US soya beans lacked a substantial, market, causing unexpected losses to farmers, who ultimately decided to cultivate other products such as corn. Although China can seek the supply of soya beans from other nations such as Canada, the aggregate global supply of the product will be low to fulfill it demand and may make the products more expensive.

3.0 Summary

The trade war between the US and China is considered as one of the most destructive in the trade history and is projected to cause global economic upheaval if it continues. From the analysis, the tariff imposed by the US can be considered as protectionism, which could be beneficial to the US economy in short term but in long term, it could have negative impacts as it could isolate the us from other nations while its organizations ,which make large part of multinational organizations could be affected negatively. In addition, the trade war could affect the agricultural sector in the US while making the consumer products such as computers and apparels more expensive, given that some of the Chinese imports comprise a large proportion of consumer goods. As such, trade war will not offer any lasting solution to the issue that affect the two nation and it is only through dialogue ad diplomacy that the two  economies could resolve their disputes amicably.

4.0 References

Acemoglu, D., U. Akcigit & Kerr, W., 2016. Networks and the Macroeconomy: An Empirical Exploration” NBER Macroeconomics Annual, ed. Martin Eichenbaum and Jonathan Parker. Journal of Financial Economics, vol. 30, no.1: pp.276-335.

Congressional Research Service., 2018 China-US Trade Issues

Hufbauer, G., 2016. “Could a President Trump Shackle Imports?” In Assessing Trade Agendas in the US Presidential Campaign, 5–16. Washington DC: Peterson Institute of International Economics.

Ministry of Commerce, People’s Republic of China., 2018. MOFCOM Spokesman Comments on the US Trade Measures against China

OECD., 1997. Globalization and Small and Medium Enterprises (SMEs), Paris: Organization for Economic Co-operation and Development.

Office of the United States Trade Representative., 2018 USTR Issues Tariffs on Chinese Products in Response to Unfair Trade Practices

Root, F., 2000. International Trade and Investment. Seventh edition. The Wharton School University of Pennsylvania. South-Western Publishing Co.

Stephen, J. R., 2018. Is Foreign Trade the Cause of Manufacturing Job Losses? Urban Institute

The State Council of the People’s Republic of China., 2018. Premier says trade war has no winner

The White House., 2018 Statements & Releases – Statement on Steps to Protect Domestic Technology and Intellectual Property from China’s Discriminatory and Burdensome Trade Practices

Trump, D., 2016. “Declaring American Economic Independence.” Donald J. Trump For President

United States International Trade Commission., nd. Understanding Safeguard Investigations

US Chamber of Commerce., 2018. A state-by-state breakdown of products targeted for retaliation by China, the EU, Mexico, and Canada, as well as how much those retaliatory tariffs could cost each state

US Department of Commerce., 2017. Statement from Secretary Ross and Secretary Mnuchin Following the U.S.-China Comprehensive Economic Dialogue

US-China Business Council. 2017 Understanding the US-China Trade Relationship

Wagner, A., Zeckhauser, R. J., & Ziegler, A., 2018. Company Stock Reactions to the 2016 Election shock: Trump, Taxes and Trade” forthcoming.

WTO. 2012. A Practical Guide to Trade Policy Analysis. Geneva: World Trade Organization.

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