In 2017 the US launched a trade investigation on China to understand trade relationship between the two countries. Following the examination, the United States imposed billions of dollars’ worth of tariffs on China in a move to start trade negotiation. However, the US tariffs were met with retaliatory tariffs. While the United States imposed three rounds of tariffs tallying over $250 billion, and raising the duty rate to 25% on some key industrial products China responded by slapping tariffs on key products with rates varying from five to 25%
Both sides have continued to go back-and-forth in an attempt to get leverage in the trade negotiation process. A truce in the tariff war was temporarily reached last December, but was unceremoniously ended in May of 2019 as the US raised tariffs once again on $200 billion worth of goods and raised the tariffs by 10-25% on key imports. China countered by raising tariffs by $60 billion on US imports.
This most recent trade war was short lived as President Trump and Chinese President Xi met at the G20 Summit in Oska, Japan and reached a second trade tariff truce. To understand the economic implications that this ongoing back-and-forth has on Schaumburg’s economy the Schaumburg Business Association asked our partners at the International Trade Association of Greater Chicago to provide perspective and insight.
What is the true definition of a trade war and how does it affect the country’s overall economy?
A trade “spat” is when two countries threaten to raise tariffs. A trade war is when they actually do. The threat to a nation’s economy depends on how many products are included and the tariff percentage. As of now, here’s the scoreboard:
Total US tariffs applied exclusively to Chinese goods: US$250 billion
Total Chinese tariffs applied exclusively to US goods: US$110 billion
How was this most recent truce different than the truce that was reached in December 2018?
The “truce” reached in June involved an additional $300 billion of Chinese imports that the US threated with a 25% tariff rate. Presumably, this was initiated to reduce tensions and to provide a little breathing space for negotiations to resume. The December truce was undertaken for much the same reason: the U.S. withdrew its threat to increase tariffs from 10-25% on some $200 billion of Chinese goods. China, in turn, pledged to purchase more US products – especially agricultural and energy products – and to crack down on the production and distribution of Fentanyl, a synthetic opioid produced primarily in China.
How can President Trump and President Xi come to an agreement that not just settles the trade war for the time being, but prevents it from occurring again in the future?
President Trump started the trade war, apparently assuming that China was content with the status quo in their trade relationship with the U.S. In fact, it seems clear from media accounts and private conversations, that China wants to recalibrate their relationship with the U.S. – from inferior-superior to one of equals. This leaves very little common ground on which to negotiate.
Is there an ideal middle ground that can be reached where both nations are content with the results? If so, what does it look like and how does it get achieved?
Again, until there is a fundamental recalibration of the relationship, neither side is going to be pleased. If the U.S. was willing to concede to a more equal relationship, China would certainly have to be held accountable for improvements in IP protection, technology transfer and a host of other dodgy trade practices. How that outcome gets achieved is way above my pay grade.
If the trade war continues and conflict between the two countries gets worse, what could a potential worst outcome for both nations look like?
The worst scenario would be for the rest of the world to get dragged into the trade war (p.s., we’re also in a tariff war with the EU, though on a much smaller scale). The last time there was a global trade war (1929 – 1933), global trade shrank by a third, helping foment the Great Depression.
How does this trade war with China affect local economies like Schaumburg, Illinois?
From bridal gowns to steel bearings, virtually every product and manufacturer faces challenges. In the case of bridal gowns, I am told, the fine silk and embroidery is only sourced in China. Since orders are often placed six or more months in advance, owners of bridal shops are paying 25% more and unable to pass along the cost to consumers. Families are already paying more for washing machines (20% tariff) and dryers (no tariff!), and no doubt a host of products with imported parts that we cannot see (e.g., autos). Schaumburg exporters are no doubt feeling the pinch as well. And local economies across the country are noticing that Chinese investments in their communities have fallen 90% in the past two years.