US-China Trade War: Causes, Outcomes and Future Implications.

Author - Anubhav Maheshwari

“In a trade war there is no winner as proven by global economic history.”

Introduction -

A trade war always ends with three losers which are both the trading partners and a decline in trade leading to slowdown in global economy.

This trade war was officially started on March 23 2018, when US President imposes tariff on steel and Aluminum import from China. The tensions between US and China started back in 2017 when WTO granted China the status of market economy and US refused to recognize China as a market economy. During period of 2017 to 2019 both countries imposed various tariff and anti-tariff on goods from each other most significant step was the banning of Huawei and ZTE in US as a reply to which China stops importing agricultural products from US.

Four causes are as follows -

1- To reduce the deficit of bilateral trade between US and China which is accounted for 376 billion US dollars that is almost half of US bilateral trade deficit.

2- It is supposed to reduce Hi-Tech capacity of China, us argued that Chinese public spending is creating a unfair competition and global markets.

3- Over past few years China is developing military strength which is is unacceptable to let china achieve superiority and military sector.

4- Trade war is supposed to cut the federal budget deficit which is currently at 4% of GDP in US.

Was it necessary-

As expected, tariff imposed by US government decreased Chinese imports. Two reasons as are argued by President Trump for imposing tariff on Chinese goods are US GDP and Employment. But the chances of rising any of them is very low, even if us China trade deficit decreases. Hence, it can be concluded that the benefits of such tariffs are more political in nature for US than economic ones.

The government data of both countries provides different values for trade deficit (with the difference of more than $100 billion), according to US authorities, this is due to use of different ports of neighboring country by China to export their products to US.

Alternatives of trade war -

1- Rerouting existing exports to other countries to China.

2- To produce new goods and export to China using current resources.

Due to huge population of China and increase in economic condition of people in last 40 years (more than 600 million people rise above poverty), China has grown as consumption market with high demands of agriculture products, energy, tourism and education s and US can play important role by exporting products and such services to China..

Providing services and goods in three sectors as above mentioned, it can help US in reducing and even leveling the trade deficit with China.

The Theory of Reasonable or Voluntary Trade can held in finding solution, according to this theory ‘If a country is having comparative weakness or disadvantage and producing a product they can buy it from other and produce that product and which they have advantage or upper hand’. Therefore, US can produce goods and services which they have advantage by current economic resources and can easily export them to huge consumer market developing in China.

Another point of reasonable and voluntary trading is that all countries should be treated and equal manner with equal tariff but this is largely absent in US behaviour against China.

China is currently world's second largest economy and it has tremendously benefited from becoming member of WTO, opening its markets and reforming its economic policies. The liberalization and market economics of China is expected to grow further, also argued by

Francis Fukuyama, in his article ‘The End of History’ that economic liberalism always grow faster than political liberalism which is true as seen from example of China.

Some more reasons for clash between US and China -

1- Chinese restriction on foreign investment and it education sector.

2- They are allied by us for theft of intellectual property by Chinese firms; counter argument for this was for act of few firms whole country cannot be held liable for example is India cannot be held responsible for act of Reliance industries.

3- State controls maximum economic activities in China, whereas individuals are at Liberty in US due to capitalism and less state interference (Clash of ideology i.e. between Capitalism and Communism).

Possible scenarios of trade war -

1- Trade war can accelerate into cold war 2 you between US and China as both countries will not give up their political and economic systems under pressure of opposite side. As China as improving its relation with Asian Pacific countries which constitutes of 30% of global GDP and 50% of global population us is gradually becoming isolated and international community and its role and global supply chains and international trade will decrease.

2- The trade war will end only with a compromise between both the superpowers as already shown by China regarding their readiness to liberalize their economic sector and to reach out a compromise under the situation us also needs to understand major concerns of opposite side.

3- This trade war is expected to decline global growth rate by 0.5% in 2020, China is expected to witness a decrease of 1.12% in GDP 1.1 % reduction in employment.

4- After putting restriction on imports from China US imports from others Southeast Asian countries have increased, making us dependent on these countries.

5- There is also a possibility that this trade war may convert into World war 3. The conflict between both countries is for becoming global economic dominator and it is very fundamental nature therefore it cannot be resolved easily.

Towards a Geo-economic Order

Due to recent development in international economic, it is transitioning into Geo-economic order from Neoliberal order which is prevalent in post-cold war era.

There are two main international economic and security order after W.W. II, i.e. between 1940 to 1970 Liberalism and after that Neo-liberalism or the Washington Consensus. During this period, order becomes increasingly internationalized and legalized.

Geo economic order is described as a, ‘Macro level change in relationship between security and economics in trade and investment law’.

In Neoliberal order security was not that much important, although it was not absent. Mind set of states was concerned to create economic gains through international trade and investment. For them, as like classical economic theory free trade is best as it allows state to produce whatever they can produce best and trade for the rest.

The new Geo-economic order is based upon relative gains (concerning disproportionate gain by one party, or one party gains and other loses) than the absolute gains, which are prevalent in neoliberal order. This new order also differs in approach towards the relationship between trade and peace.

The need for this new order arises due to weaponized interdependence and increase in military power of states. States are now increasingly relying on the claims of national security to avoid restrictions under international trade and investment, as in this case US used the argument of national security to justify imposing high tariff on Chinese goods and banning companies like ZTE and Huawei from their markets.

US played most important role in establishing international economic order after W.W. II and currently it is also playing most important role and driving force this towards setting up Geo-economic order.

After the end of cold war, United States established it as economic and strategic dominance, world became uni polar with capitalism ruling economic ideology and threat of communism gone away. China emerged as a threat to US domination, and the differences in their economic and political system contributed to their rivalry. Wherein US promote free market i.e. neoliberalism and China adopted state led capitalistic model.

A major contrast between situation during cold war and present times is that, during cold war the economic interaction between Soviet Union and United States was negligible as compared to present economic interaction and interdependence between China and United States. Author provides economic security triangle in which how economic security can lead to national security and in-turn to economic nationalization is described.

The trade war is more of a technological war between these countries as once United States was leader in technological innovation but now China possesses a threat to this position of US. As per Andrew Kennedy, China has sought to close this gap in technological innovation by the process of making, transacting and taking.

The rivalry between countries on economic and technological issues is going to increase as data is becoming Central battleground, because it possesses both over sized economic benefits and security threats.

United States is putting pressure on other countries to choose between China and it.

Both these countries are major actors in new emerging Geo-economic order and the balance between economic and security, will depend not only on these States but also on international institutes like World Trade organization, third state actors and private individuals.

Conclusion -

Every nation is blaming China, for spread of coronavirus and US openly threatened it to face consequences if they have done it deliberately, this has led to put them at worst footing and currently possibilities of Cold War II or World War III are much higher than ever before.

About Author

Anubhav Maheshwari is a IV semester student from Institute of Law Nirma University, Ahmedabad. His Linkedin profile https://www.linkedin.com/in/anubhav-maheshwari-34917b197/.