US-CHINA TRADE WAR

The US and China have fired the opening salvos of what could become a full-sized trade war among the two largest economies of the globe. It all started in 2018, when the US imposed unilateral tariffs on washing machine, aluminum, steel, and other varying items that US imports from its trading partners, in particular, China. The strategy behind the increase in Chinese product imports duty was to reduce the large trade deficit that the US has with China and overcome the large debt that the US owes to China. Moreover, there are certain concerns that the US holds against the Chinese economy, such as competition, money, market, geo-politics, and economy. China’s rapidly growing economy is a major concern for the US, as China is strengthening at the fastest rate with the implementation of certain national economic policies, such as Made in China 2025 and OBOR (one belt one road). Along with, the high export and low import of products in the US from China is another issue that possesses a concern for the economic growth of the US. 

The US national debt is rising at an alarming rate with Japan and China being the prominent debt holders across the globe. According to US Treasury, the US national debt on April 30, 2019, was estimated to be $22 trillion, in which, the country needs to sway around $1.1 trillion of debt to China. Therefore, Chinese investors are regarded as the largest foreign holders of the US debt, indicating 17% of all foreign-held US debt. 

Top Foreign Holders of the US Debt: China and Japan (in $billion) 

Source: US Department of the Treasury 

The major concern for the US regarding the debt from China is the possibility of China selling off large swaths of $1.1 trillion of debt of the US Treasury securities, which would reduce the price of the treasury, raise the interest rate and decrease the bond prices in the country. Higher consumer rate would percolate the US economy, affecting business and consumer spending, in turn, depressing the economic growth of the US. Therefore, the selling off the debt would escalate the economic conflict among the two economic superpowers of the globe. Therefore, in order to overcome the large debt, the US has taken up certain measures for the economic growth of the country. 

Currently, China is the largest goods trading partner of the US; however, the goods imported to the US are more as compared to goods exported to China from the US. The biggest category of products imported to the US from China includes cell phones, computers, apparel, and footwear. Among which, the majority of these imports comes from the US manufacturers for the low-cost assembly of raw materials in China, and hence, once these products are shipped back to the US, they are considered as imports. Moreover, for the US, China is the biggest buyer of US agricultural exports, including soybeans. According to United States Trade Administrative (USTR), the US goods and services trade with China estimated to around $737.1 billion in 2018, in which, the exports totaled to around $179.3 billion, whereas the imports were $557.9 billion. The US goods and services trade deficit with China was calculated to around $378.6 billion in 2018. However, the trade deficit was $762 billion in 2006. The decrease in the value of trade deficit indicates that the US exports grew faster than its imports. Therefore, the US has increased the tariff for US imports, so as to strengthen its global position, and doesn’t let China overcome its position. However, this has negatively impacted the US agricultural exports in China, as in 2018, the Chinese government canceled the soybean imports from the US, which has substantially decreased the export growth rate in the US. 

US Agricultural Exports 

Source: US Department of Agriculture 

MADE IN CHINA 2025: A THREAT TO THE US ECONOMY 

It is a strategic plan of China that aims to move away from global manufacturing and move towards producing higher value product and services. The plan would substantially benefit China more than any other country across the globe. There are certain norms been marked under the plan, which is required to be followed by every individual in the country, stating- 

• Chinese government pressured private companies to adjust their vision to China’s 2025 vision by improving manufacturing, technology, and ultimately the industry. 
• Fostering Chinese brands. 
• Promoting breakthroughs in 10 key sectors, namely next-generation information technology, high-end numerical control machinery and robotics, aerospace and aviation equipment, maritime engineering equipment and high-tech maritime vessel manufacturing, advanced rail equipment, energy-saving and new energy vehicles, electrical equipment, agricultural machinery and equipment, new materials, and biopharmaceuticals and high-performance medical devices. 
• Providing subsidies - $300 billion investment in private companies. 
• Foreign investment and acquisition – Chinese acquisition in the US peaked $45 billion in 2016. 
• Government is encouraging companies into semiconductor firms to gain access to technology. 
• Mobilizing state-backed companies. 
• Forced transfer agreements. 

Made in China 2025 (MIC 2025) appears to signal an expanded role by the government in the economy by reducing the country’s dependence foreign technology, which many fears could distort global markets and negatively affect the US firms. Another major aspect of the MIC 2025 plan that raises considerable concern among foreign businesses has been the listing of date-specific percentage targets for the domestic content value of certain products that are sold in China. The 2015 State Council’s document outlining MIC 2025 specified that by 2020, around 40% of essential spare parts and key materials will “have domestic sources,” and will rise to 70% by 2025. A 2017 study by the U.S. Chamber of Commerce concluded that MIC 2025 aims to leverage the power of the state to alter competitive dynamics in global markets in industries core to economic competitiveness. 

In August 2017, the US Trade Representative (USTR) launched a Section 301 investigation to determine if China’s policies on IP, innovation, and technology were unfair and harmed US stakeholders. In March 2018, the USTR announced action against four broad Chinese policies, including forced technology transfer, unfair licensing requirements, government-backed cyber-theft of US trade secrets, and efforts by China to acquire US technology through acquisitions to support its industrial plans. 

The Diplomatic Ties Hitting A New Low 

It all started when the US and China began sparring over trade. In February 2018, the US slammed 30% tariffs on washing machines and solar panels. Lately, in March 2018, the US announced that it would impose additional tariffs on import tariffs on aluminum (10%) and steel (25%), based on national security justifications under the 1962 Trade Act. The measures for tariffs were further targeted to other goods including clothing, shoes, and electronics, and restricted Chinese investment in the US. The Chinese government responded to the US tariff hikes by imposing tariffs on several products such as wine, pork, and fruits. 

In 2018, there were tit-for-tat tariffs between the US and China. The trade battle began in July 2018 with the US levying punitive tariffs of the first round, which is triggered by a Section 301 investigation. The US imposed 25% tariffs on $34 billion worth Chinese goods, covering over eight hundred Chinese products in the transport and industrial sectors, and goods such as televisions and medical devices. China retaliates by levying tariffs on over 500 products exported from the US. Again, in September 2018, the US reconsider its tariffs and decrease its percentage to 10% tariffs on $200 billion worth Chinese goods. To which, China imposed a range of tariffs on $60 billion of American goods. In October 2018, the US stated that the country is planning to prioritize competition over cooperation by using tariffs to combat. 

In May 2019, the US raises tariffs from 10% to 25% on $300 billion worth of Chinese goods. China retaliates by raising tariffs ranging 5% to 25% on $60 billion worth of American goods. The US believes that the high costs imposed by tariffs will shove China to make a favorable deal to the US. Moreover, the US puts a ban on local companies from using foreign-made telecommunications equipment that could threaten national security. China has planned to increase the imports duty by as high as 25% on over 5,000 American products from June 2019. 

Here, a commencement of a new phase of trade war begun among the two largest economies of the globe. By now, the US has targeted a range of Chinese products ranging from industrial items such as rare-earth metals to consumer items such as handbags. China accounts for over 95% of global output and the US relies majorly on the Asian countries, accounting for 80% for rare-earths requirement. These rare-earth elements are also found in electric vehicles, iPhones, and wind turbines. According to the US Geological Survey, the US imported $160 million worth of rare-earth metals and compounds in 2018, an increase of 17% from 2017; however, a down from $519 million of refined rare-earth metals in 2012. On China’s list, the tariffs were put on medical equipment, coal, and US agricultural exports such as soybeans. However, China and the US are set to discuss the escalating trade war at the G-20 Summit in Japan that is expected to be held in June 2019. 

Key points for tariffs hike as exclaimed by the US 

· Keep manufacturing jobs in the US 

· Reduce US/China trade deficit 

· Maintain the dominant economic superpower position 

· Get the US out of debt 

With the hike in tariffs, the US government have started focusing on local goods manufacturing solutions, or say, planning to move to countries having lower tariffs, rather than China, as China is planning to be a powerful country by imposing Made in China 2025. Moreover, the services contribute to the majority of the net income of the US economy, in contrast, China deals majorly in exporting manufactured goods. Therefore, the US is moving towards protectionism, entailing the restrictions that are imposed on the trade, such as tariffs, in order to boost the country’s manufacturing industry and economy. 

Source: OMR Analysis 

There are certain factors that propels the manufacturing industry of China. The availability of cheap labor is one among the major factor that augments the manufacturing industry of China. Moreover, China manufactures the counterfeit product which resembles original or branded product at relatively low cost. Therefore, Chinese products are in great demand all across the globe. These factors certainly disregard the growth of the US economy, and hence, the US has increased the import tariffs rate and started focusing on manufacturing goods from its domestic market. 

OVERVIEW OF TRADE BETWEEN THE US AND CHINA 

Source: OMR Analysis 

IMPACT ON THE US 

Negative Impact 

· Tariffs have cost the US economy some $5 billion loss in GDP last year, estimating $11 per consumer, for each month. 

· US soybeans biggest buyer, China, is now out of the market, and it has substantially affected the US agricultural sector. 

· Apple, the US-based major electronics company, has blamed trade war for its revenue decline over the first three months of 2019, owing to which, Apple may have to raise the prices of its iPhone XS by $160 to cover the higher cost of components coming out of China. 

· US steel makers could get a boost, increase in demand will drive new hires and bigger profits for the economy. However, the US companies, such as car and airplane makers, that needs raw materials will see experience hike in its costs. 

· American companies whose supply chains are built around Chinese machinery and equipment would face issues with the hike in tariffs. Moreover, eliminating Chinese vendors from the supply chain will take time and could be costly for the US economy. 

· Firms would likely cut back employment in order to pay the tariffs imposed on these Chinese goods.  

Positive Impact 

· On the US side, a loss in business sector is expected to happen; however, the US is sure to win in relative terms by putting the Chinese at obstruction. The US has less to lose, as it exports $120 billion worth goods per year, in contrast with China been exporting $550 billion worth goods to the US. Therefore, the goods exported to the US from China contributes to much larger slice of the Chinese economy as compared to goods exported to China from the US. 

· Tariffs levied by China are lower, typically ranging between 5% to 25%, compared to the US tariffs of 25%, so the impact on importers will be easier to bear. 

IMPACT ON CHINA 

Negative Impact 

· One year on, the face-off between the US and China has witnessed China’s GDP growth fall from 6.8% in 2017 to 6.6% in 2018, lowest since 2009. Moreover, according to the International Monetary Fund (IMF), an all-out trade war could shave nearly 2% of China’s GDP growth over the next two years. 

· Small- and medium-sized manufacturing companies, traditionally the backbone of China’s economy, are already feeling the negative impact of US tariffs. 

· The trade war will accelerate the process of business moving out of China, as trading partners are shifting their production from Chinese facilities to Indian, Vietnamese or Cambodian or Southeast Asian facilities. 

· China’s disproportionate dependence on US agricultural products has hampered the food industry of the country. 

· A deal may mean different things for the short-term market: as it would likely expose China and global equities to more social-economic and geopolitical uncertainties 

Positive Impact 

· China is so well connected and integrated with other economies across the globe, that isolating China is virtually impossible. OBOR initiative is a flagship project by Chinese governments that has 126 countries already leveraging the economic benefits. This was already a foreseen threat the Chinese economists predicted and hence launched OBOR. Amongst these, the US economy will have a long-term blow and not the Chinese economy. 

· China imported soybeans, aircrafts, grains and cotton from the US, in doing so the positive impact that China can benefit from is to become self-sufficient in the production of the aforementioned commodities. The aviation sector in China would also catapult in bringing the third front in the Boeing-Airbus duopoly dominance in the form of state owned Comac (Commercial Aircraft Corporation of China. Ltd. The is China’s one of the pet projects that would further gain traction. 

IMPACT ON THE REST OF THE WORLD 

Negative Impact 

· The trade war will disrupt the global supply chain, impacting major players of the supply chain market, including Asian exporters, such as Malaysia, Singapore, South Korea, and Taiwan. 

· Already, Singapore has seen slower growth in the second half of 2018, backed by slower global demand for semiconductors and technology gadgets. This has pulled down growth in key manufacturing sectors of Singapore’s open economy. 

· Sub-Saharan African countries are facing economic distress from the trade war among the US and China. The US tariffs have precipitated drops in local currencies, commodity prices, and major stock exchanges. 

· The recent escalation in tariffs, the financial markets from Europe, Asia, and the US have seen a steep decline. 

Positive Impact 

· Rerouting of the supply chain may benefit southeast Asia, simply due to the region’s geographical location, strong supply chain, well-established distribution network, and sizeable labor with low labor cost. 

· India has a great opportunity and Chinese vendors are looking to invest more in India, thus, India has a tailwind that could benefit India’s economy leaps and bounds. India is one such country that has the potential to fill the void by China and US war. India needs to focus on becoming a new powerhouse as a global hub for exports, with a major positive impact on competitiveness and job creation. India exports steel and aluminum to the US and increased tariffs on Chinese products have helped India to raise its exports to the global market, driving up prices locally. According to the independent Congressional Research Service (CRS), India’s aluminum exports to the US in 2018 increased by 58% to $221 million. 

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