Trade War

Trade war erupts between China and the US: What is going on?

Trade war erupts between China and the US: What is going on?

In an effort to win the political election, Donald Trump pledged to repair the established and unfair trade deals for the US and his drive to do just that has him battling with a few trading allies.

The US has tangled itself in an eye for an eye trade struggle with China, Canada, the EU and various other countries since 2017 when Trump became President.

It is the conflict between the US and China that is mustering the most attention, after all, they have the biggest economies in the world.

China has claimed that America has started the biggest trade war the world has ever seen.

President Trump has imposed tariffs on imported goods and services from the EU, China, Canada, Mexico, and Japan in an attempt to make consumers purchase American goods instead. Each country has taken measures to even the score.

Trump’s tough dealing with existing trade deals has also seen him depart from the Trans-Pacific Partnership on the 23rd of January 2017.

What is the TPP?

The Trans-Pacific Partnership (TPP) is a trade agreement now involving 11 nations skirting the Pacific Ocean. These countries include:
Vietnam, Singapore, Peru, New Zealand, Mexico, Malaysia, Japan, Chile, Canada, Brunei, and Australia.

The TPP deal aims at creating a unified single trade market free from hefty tariffs. President Trump decided to withdraw because he said it was a one-sided trade agreement which damaged the American economy.

Throwing fuel on a Trump trade fire

More than 200 billion dollars’ worth of goods from China have been taxed on by the US, with a total of 10% and possibly 25% should no agreement be made by the 1st of March.

In March 2018, during an announcement from the White House in Washington DC, President Trump said:

“We’ve lost over a fairly short period of time, 60 thousand factories in our country, 6 million jobs at least and now they’re starting to come back. You see what’s happening with Chrysler, with Foxconn with so many other companies wanting to come back into the United States. But we have one particular problem and that’s China. We have a trade deficit of $504 billion; it is the largest deficit of any country in the history of our world. Many countries are calling to negotiate better trade deals because they don’t want to have to pay the steel and aluminium tariff. We are just starting a negotiation with the European Union because they’ve really shut out our country to a large extent. They have barriers where they can trade with us, but we can’t trade with them.”

Watch the full announcement here.

President Trump has cautioned that this is just the beginning. He said that if China retaliates then a further set of tariffs on more than $250bn worth of Chinese goods would be put in place.

In the event that further levies are imposed it could essentially lead to the taxation of all imported Chinese goods to the US.

What is Trump trying to achieve by this and why?

The US’s trade deficit with China amounts to somewhere between 300 and 500 billion dollars. President Trump is trying the boost the US economy.

US trade deficits are as follows: Figures taken from thebalance.com.

  • China – $636 billion traded with a $375 billion deficit.
  • China – $636 billion traded with a $375 billion deficit.
  • Canada – $582 billion traded with an $18 billion deficit.
  • Mexico – $557 billion traded with a $71 billion deficit.
  • Japan – $204 billion traded with a $69 billion deficit.
  • Germany – $171 billion traded with a $65 billion deficit.

Additional figures taken from thebalance.com say:

  1. “The U.S. trade deficit with China was $375 billion in 2017. The trade deficit exists because U.S. exports to China were only $130 billion while imports from China were $506 billion.”
  2. “The United States imported from China $77 billion in computers and accessories, $70 billion in cell phones, and $54 billion in apparel and footwear. A lot of these imports are from U.S. manufacturers that send raw materials to China for low-cost assembly. Once shipped back to the United States, they are considered imports.”
  3. “In 2017, China imported from America $16 billion in commercial aircraft, $12 billion in soybeans, and $10 billion in autos. In 2018, China cancelled its soybean imports after President Trump started a trade war. He imposed tariffs on Chinese steel exports and other goods.”

In an interview with CNBC anchor Joe Kernen on the 20th of July 2018, Donald Trump said:

“I could have a much easier life if I wanted to do it incorrectly. I could just let all of these countries continue onward with these massive deficits. They are taking advantage of us. We are being taken advantage of and I don’t like it and I haven’t liked it for many years. China: 507 billion dollars a year in deficits, with the EU 151 billion dollars, with Mexico 120 billion dollars.”

Watch the full interview here

Now, an increase in tariffs theoretically could make consumers and manufacturers use national supply chains and goods as opposed to expensive imports from abroad. Why? Well, the answer is that increased taxes on imported products make it cheaper to buy from local manufacturers.

However, various American companies have said that the trade war is damaging to both profits and business sentiments.

So how are businesses being disturbed?

Three large car manufacturers: Ford, General Motors and Chrysler have cautioned that shifts in trade tariffs and practices are harming production rates and performance.

The revenue forecast reports for each company have been bleak as a result of the trade war, which in turn have seen a fall in shares.

Mary Barra, the CEO for General Motors, in an interview with CNBC’s Andrew Sorkin, said:

“Not only do we have a very significant business in China where last year we sold 4 million vehicles […] not only would it hurt from a sales perspective, but we also have a very strong joint partner there that we do work with from a development perspective.”

Watch the full interview with Barra here

There is growing anxiety that the US and China trade conflict may also damage the forex markets and raise costs for consumers.

Could a trade war cause a domino effect?

US automotive businesses, for example, are left to buy imported aluminium and steel with a 25 and 10 percent tax. The rise in tariffs consequently increases the cost of production which then raises the price it sells for.

What could the future hold?

Time will tell. Unless a US-China deal is finalized then the trade war could go on for a long time.

‘The IMF kept its global forecast unchanged Monday in the latest update to its Global Economic Outlook. The world economy will grow 3.9 percent this year and next said the Washington-based fund. The pace this year would be the fastest since 2011.But cracks are forming in the growth picture. The global expansion is becoming less balanced, with growth sputtering in the euro area and Japan. Growth appears to have peaked in some major economies, and the boost from U.S. tax cuts and spending increases is expected to fade, according to the IMF.’

Read the full article from Bloomberg.com here.

Unless China and the US negotiate a deal by March 1st taxes could escalate which in turn could have all sorts of economic side effects.

China’s economy is decelerating at a pace only seen in the 1990s with small-scale businesses facing the brunt of the blow as demands drop. There are indications that offshore corporations are branching out and seeking new supply sources outside China, increasing the possibility of jobs being lost in the long run.

Amidst the China-US trade war and the growing concerns regarding non-renewable resources and global warming, 2018 has proven to be a testing year for global trade. Multiple companies switched their sourcing in an effort to reduce the risks and avoid the uncertainties brought about by the trade war.

‘In a 2018 QIMA survey of 100+ businesses across the globe, up to 30% of respondents said they were diverting their sourcing from China to other regions, and as many as three-quarters noted they had already started sourcing suppliers in new countries, or were going to do so before the year was out: the sourcing geographical diversification is very much underway.’

Read the full QIMA 2019 Q1 Barometer report here.

The Huawei scandal

Huawei, the Chinese international telecommunications company, has been under close scrutiny and examination since July 2013, after accusations of espionage by the CIA (Central Intelligence Agency) surfaced. Countries such as New Zealand and the US have banned Huawei from their 5G networks.

Huawei has rejected all claims of any connection with the Chinese Government, insisting that it works independently.

The bottom line is that as this trade war continues, increased taxes make goods for consumers more expensive, driving down earnings reports which ultimately slow down global growth.

 

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