Monday, May 25, 2020

U.S. vs China: A trade war that the world cannot afford to lose

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Kay Ajibade

As discussions deepen from the U.S. and China’s ongoing trade war, the reality for the rest of the world is fate akin to cannon fodder. Should this cold war continue?

In July last year President Trump followed through on months of threats to impose extensive tariffs on China, for its alleged unfair trade practices. So far, the US have placed tariffs on $250 billion worth of Chinese products and has threatened tariffs on $267 billion more. China, for its part, has set tariffs on $110 billion worth of US goods, and is considering qualitative measures that would significantly affect US business in China.

Last March, when Trump initially finalised his tariffs, world markets went into a slump. Most importantly tech industries, as they were amongst the worst affected in the immediate aftermath of the “Facebook data scandal”. Market’s appeared to recover later in the month as evidence of behind the scenes negotiations emerged. However, the ongoing uncertainty as to a potential resolution places the global economy in a precarious position.

Together, both countries account for 39.8% of global GDP and with neither Trump nor Chinese President Xi Jinping willing to back down, tensions could erupt into a full-blown cold war. An escalation in the trade war could take a heavy toll on global growth by 2021, creating price pressures that could force interventionist measures to prevent a potential recession.

If you’re wondering why China’s sanctions don’t match Trump’s, there’s an easy explanation; Beijing is running out of American products to target. The U.S. imported $375 billion more products from China than the Chinese bought from the U.S. last year – because of this, Trump has a lot more to punish. 

However, while this may mean that China’s leverage on trade is limited, it doesn’t mean that Trump can easily win this confrontation. This is because China has many other ways to retaliate, such as dumping its considerable holdings of U.S. debt or obstructing U.S. efforts in negotiating a nuclear deal with North Korea.

Another option for China is to escalate the confrontation by using its substantial economic leverage outside of trade. China could retaliate by reducing its purchases of American Treasuries or by selling some of the $1.18 trillion in its possession. Overall, China owns almost a fifth of the U.S. national debt currently held by foreign countries.

Though it would probably be less apocalyptic than is sometimes assumed, a Chinese policy of reducing its holdings would substantially drive up the cost of many of the goods that Americans buy every day. The problem with this approach for China is that it would also strengthen the yuan, making products more expensive to import from China. 

The reality is that if the trade war between the U.S. and China intensifies, it can lead to a recession. It will cause consumers in the U.S. to cut back on purchases of the now more expensive domestically produced goods. The U.S. producers of those goods will expand their workforces and purchases of raw materials, but other U.S. producers will find less demand for their products from foreign buyers as well as U.S. consumers who are now poorer due to the imposition of tariffs. Those producers will lay off workers and buy fewer raw materials. The adjustment to this new pattern of demand will not be instantaneous and will be painful and costly to the workers thrown out of work, the cannon fodder of the trade.

Kay Ajibade is a graduate of the University of Leicester with a honours degree in Law. He is a chartered accountant, with a keen interest in sports, economics and politics. As an unseasoned journalist, Kay is keen to cover modern day developments at the forefront of global business.

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