CHAPTER 1. THE US-CHINA TRADE WAR OVERVIEW
1.3. The impacts of the trade war on the US and China’s economy
This part will point out the impacts of the trade tensions on the US and China investment, production and import-export activities. As Chinese President Xi Jinping said,
“No one will emerge as a winner in a trade war”, both China and the US had to suffer many negative effects from the trade war.
1.3.1. Impacts on the US
From May to September, Chinese exports to the US increased by more than 10%.
In contrast, the amount of products China imported from the US dropped dramatically.
Three biggest areas affected by trade tensions are: Automobiles, Tech and Telecommunications, Agriculture.
The tariffs on China made some US companies consider moving their factories abroad, while others may be forced to cut jobs due to rising costs or to sacrifice a part of revenue to retain customers. Ford's CEO, Jim Hackett, announced that the iron and steel tariffs cost the company about $1 billion in 2018 and 2019, and this firm was forced to cut jobs to reduce costs. Another brand, BMW, is also facing business problems in the Chinese market. BMW X3 and X5 models produced in South Carolina (USA) are very marketable in China, but because of the high tax rate, the amount of imports has dropped by 30% just two months after the trade began officially. It is said that 90% of the steel that Honda uses to produce cars in the US is bought domestically. The rise in steel prices in the US due to tariffs caused Honda to suffer hundreds of millions of USD in reluctant expenses.
Owing to cyber security and other concerns related to technology theft, the US and many allies are planning to ban Chinese technology companies. The consequence is the slow Chinese investment flow into US technology firms. In 2018, it was over two billion USD. According to Forbes, however, this number has decreased by more than 80%
compared to 2017. If bilateral trade negotiations between the US and China continue to bring deadlock results, the decreasing investment flow to the US will be prolonged.
Admittedly, the soybean industry suffered the most damage in agricultural sectors due to high taxes. As a result, Brazil became China's soybean supplier to replace the US.
The world's second-largest economy bought 5.07 million tons of soybeans from Brazil in November, up more than 80% from 2.76 million tons in the previous year. Meanwhile, Chinese soybean imports from the US fell 38% from 4.7 million tons in the same period last year. Farmers in Illinois, Iowa, Minnesota, North Carolina… are the most affected ones.
Since the outbreak of the US-China trade war, US soy and corn prices have fallen about 12% and many farmers have fallen into debt.
1.3.2. Impacts on China
Under The US's strike, Chinese labor costs were increasing and environmental regulations are tightened. Therefore, China is no longer an attractive investment environment. Advantech, one of the leading desktop manufacturers, said it would pull down production lines in China and build a new factory as well as open more sales offices in the US. GoerTek Group, Gigabyte… also announced plans to move production from China to avoid trade tensions. In other words, they are more likely to switch their factories to other Southeast Asia countries such as Vietnam, Indonesia or Thailand.
According to Global Trade Alert (2018), more than one-third of China's export value has been affected by the trade war. In the short term, Chinese production and exports have not changed significantly. Even according to the US Customs’ figures, China’s export value to the US reached 42.7 billion USD on October, increasing of 13% from the previous month.
This is due to the fact that Chinese exporters were seeking to speed up export orders to the US to avoid the increasing tax rate. In the long term, however, not only tax-imposed products, but the related industries are also affected clearly. EconPol Europe's study indicated that a 25% increase in tariffs raised US consumer prices on all affected Chinese products by only 4.5% on average, while the producer price of Chinese firms declined by 20.5%.
Considering only the soybean industry, China is the US’s largest soybean importer.
When imposing taxes on this product, the livestock industry and the bean pressing industry are heavily affected. They struggled with supply difficulties to survive. There are now more than 20 bean pressing factories that have to reduce production or even go bankrupt, resulting in a reduction in large-scale production which was rarely seen in the past. China has sought alternative sources of soybeans, mainly Brazil. However, these new partners
were unable to completely replace the US because they did not have enough volume to meet China’s demand. In addition, the price is more expensive. Many Chinese localities have encouraged farmers to increase soybean acreage, but it will take years for the country to meet its own agricultural needs.
1.3.3. Bilateral trade balance
Although the US started a trade war with the aim of improving the trade balance, it is difficult to achieve. China's bilateral trade surplus with the US in September 2018 amounted to 34 billion USD. The reason is that Chinese exporters hastily hoarded and exported goods to the US before the US’s threat of raising the tax from the current 10% to 25% into reality. In addition, although China pledged to try to improve the US trade deficit by buying more goods, but in fact, this process was dripping because some Chinese importers found alternative suppliers. At the end of 2018, for example, a ship was scheduled to unload about 70,000 tons of US soybean cargo in the Chinese port but finally, it had to switch destination to Vietnamese port. So far, the bilateral trade balance between the two countries has yet to improve the gap as the US has expected.
* Summary
In chapter 1, “trade war” concept was exploited both in theory and practice through a specific event, the US-China trade war. The contents included: Definition, causes and impacts. Although countries expected to gain the benefits of trade protection, but in the context of progressive globalization and interdependence between nations, a trade war will certainly have negative impacts on many countries. Commercial and Non-commercial measures were taken by the US and China to attack each other. The US struck off to improve the trade balance, establish fair trade, restrain China uprising and bring on political impacts. On the other side, China tried to ease the situation and retaliated meanwhile. The effects of the trade war on the US and China’s investment, production and import-export activities were presented as an unavoidable consequence of protectionism. The deterioration of trade balance, investment diversion, the increase in production costs… It can be said that the two countries are pushing their interests to other countries on their own.