Another front has exploded in the US-China trade war. Unfolding immediately before our eyes, the economic war between the US and China is heating up. The trade war began in the Trump administration’s first year in early 2018. Since that time, both countries have released additional rounds of retaliatory measures which have changed the landscape of international trade drastically. As President Trump seems set to announce even larger punitive tariff actions against China, financial markets watchers are expecting more economic cataclysm ahead.
The trade war really kicked off when President Trump started his campaign of new trade barriers against China. He cited unfair commercial practices and rampant intellectual property theft as justifying his actions. These first-round tariffs set the stage for an adversarial dynamic that has deepened further still in the years since. These barriers have caused an economic catastrophe. For China, which has staked much of its growth potential on exports to the United States, this leaves a much bleaker economic prospect.
Background of the Trade Conflict
The US-China trade war started when President Trump slapped tariffs on thousands of Chinese products. His purpose, of course, was to use the threat of tariffs to force China to stop its trade cheating. He railed against China’s predatory practices which he asserted were destroying American enterprise and killing innovation. The tariffs resulted in millions of additional dollars in import duties on products made in China. Analysts say poisonous soot has deepened a slump in China’s economy.
In January 2020, the two countries put ink to paper on the US-China Phase One trade agreement. This promise was meant to lower hostility and re-establish confidence between them. Part of this agreement required far-reaching structural reforms in China’s economic and trade practices. It aimed to simultaneously hold China accountable for its unfair trade practices and offer tariff relief for certain parties. The deal’s ability to function as intended has been cast under a cloud of doubt during the continuing period of tension.
Initially, the signing of this agreement was taken with cautious optimism as only a temporary cease fire in the ongoing trade war. Then, as President Joe Biden entered the White House, the political circumstances turned upside down. That left many questioning how his administration would chart its course in relationship with China. Biden maintained many of the tariffs imposed by his predecessor and even introduced additional levies, signaling that the trade war was far from over.
Escalation of Tariff Measures
Recent news suggests that President Trump is preparing to soon slap massive new tariffs on imports from China. Unlike past tariffs, these could go much higher than ever before. Analysts expect these new measures to be supplemental, possibly involving even bigger tariffs on top of already announced 20% tariffs. Investors, for their part, are preparing for an escalation that would hit the American consumer hard and send shockwaves through the global economy. The impact of this speculation has already rattled the budgetary markets.
To call China an innocent bystander in this unfolding conflict would be supremely naïve. In retaliation to US tariffs, the Chinese government began throwing its own tariffs back at the Americans. This decision was especially damaging to cars and agricultural products like soybeans. This tit-for-tat, Trump-era strategy has created an even more tense and volatile environment and catalyzed an unsustainable economic landscape for both nations.
Market participants are acutely attuned to the fact that a return to disruptive tariff war escalation will have far-reaching and detrimental impacts. When prolonged trade disputes are escalated by measures such as tariffs, global supply chains are severely affected, causing rippling effects across multiple industries. At the same time, businesses are growing more and more leery of the overall economic direction. Because of this, the prospect of additional tariffs will be chilling spending and investment downwards.
Economic Impact and Future Outlook
The impacts of the US-China trade war go further than just the trade relationship between these two countries. The current war is predicted to cause continued and lasting damage to supply chains worldwide. Business on both sides of the globe will have to deal with passing the cost of tariffs onto consumers and risks associated with product unavailability through increased lead time. This type of disruption could eventually result in even greater consumer spending as inflation impacts higher-order goods down to basic consumer products.
Experts are cautioning that this war will affect US inflation levels. Fourth, upward pressure on the Consumer Price Index (CPI) as tariffs increase the price of imported goods. This inflationary environment could complicate monetary policy decisions for the Federal Reserve and add further unpredictability to the economic recovery from the pandemic.
Both countries seem to be preparing for a return to large scale fighting. It remains to be seen how this new history of trade war will develop. Analysts predict that the trajectory of US-China relations will continue to shape the global economic landscape for years to come. Hospitals, farmers, businesses and consumers all find themselves navigating the confusion sowed by this bitter war.