The United States and China are sliding into a full-blown trade war. Donald Trump recently pledged to use sweeping tariffs on China should he win the presidency again in 2024. This new development brings back some familiar concerns. This economic war started in early 2018 when Trump slapped trade tariffs on China, alleging bad economic behavior and IP theft on the part of the Chinese. These rising tensions have been felt already by significant global supply chain and investment/spending behavior shocks around the globe.
Trump’s initial tariffs led China to retaliate with its own tariffs on U.S. products, including automobiles and soybeans, resulting in a tit-for-tat exchange that has defined the trade relationship since. Despite signing the US-China Phase One trade deal in January 2020, which aimed to restore some level of stability, the underlying issues remain unresolved. The deal’s primary concession was China’s commitment to structural reforms to its economic practices. It failed to address the underlying grievances between the two countries.
Background of the Trade War
The trade war is just the latest front in a new kind of economic conflict based on harsh protectionism and anti-globalist, nationalistic economic ideology. Beginning in early 2018, the United States has sought to rectify what it views as unfairnesses in trade relations with China. First, let’s quickly recap the Trump administration’s trade war with China. The Trump administration blamed China for predatory practices that hurt US businesses and violate IP rights. In retaliation, China implemented tariffs on a wide range of U.S. products, taking the dispute to the next level.
Yet as set in motion by both countries with each tit-for-tat tariff announcement, economic analysts cautioned that those consequences may cascade through the global economy. At least on the surface, the Phase One deal looked to provide such short-term relief. It failed to address the fundamental causes of the trade war.
“The US government has unilaterally and repeatedly provoked new economic and trade frictions, exacerbating uncertainty and instability in bilateral economic and trade relations.” – Chinese Commerce Ministry
The Current Landscape
We all still remember when Trump’s announcement last summer of a proposed 60% tariff on Chinese imports sounded the alarm for a long-term economic war. The threat of increased tariffs could be equally damaging. Global markets would be hard hit should this prospect turn into reality. Analysts worry that escalating tensions could further strain supply chains, forcing businesses to pull back even more on spending and investment.
Geopolitical uncertainty from the war in Ukraine and now Israel has increased risk aversion in markets. These uncertainties are starting to exert significant strain on global stocks. Violence and hate are on the rise. Consequently, the U.S. dollar has weakened relative to all the major currencies such as the euro, reflecting the broader economic effects of the trade war.
The implications of this new battleground are not limited to the United States and China. Even before the pandemic, the trade war was driving global trade volumes and investment flows down. That rapid decline has created second order inflationary pressures. Exhibit A being the Consumer Price Index. As disruptions to our supply chains have added to these challenges, it has become obvious that the impacts are being felt by economies around the globe.
Future Implications
It’s still unclear what the future holds for U.S.-China trade relations as both countries continue to define their own economic policies against the backdrop of increasing tensions. The return of Donald Trump to political prominence introduces a wholly unpredictable variable to this already complicated equation. If he wins his way back into the presidency, look for a good chance of more tariffs to come. This development, if it goes forward, could fundamentally change the nature of global trade.
Beyond these possible tariffs, the biggest thing to watch will be how each country reacts to the other in the future. America’s trade war is therefore likely to continue rattling global supply chains and market practices. Companies are having a hard time forecasting expenses and the availability of products due to these unpredictable factors.
Firms and investors are strategically positioning themselves for an eventual longer-term consensus period. Others are already asking how far into the future or how many steps it will take for either country to reach a more lasting accord. Timing is everything. Lessons learned from previous significant escalations can serve as guardrails in future negotiations. Whether those lessons will be applied in the most effective ways remains to be seen.