USA-China Trade-Wars and Beyond

 This post I decided to have a global perspective. One of brewing topics of international relevance was that of the trade wars. USA and China have locked horns in an inevitable trade war for large period of time and both the economies have felt the immense turbulence emerging from it. This post tries to look at how Trump’s ideologies (good, bad or ugly?) have shaped into a massive trade war which can send ripples across global market.

Post World War II, United States of America established an open rule trade systems and reduced protectionist barriers to trade. The years following the war observed tremendous inflow of investments and a growing American economy. However, in current times, President Donald Trump has a diametrically opposite view. His firm belief in America First has given him the unspoken mandate to impose tariffs on steel and aluminium so as to create more employment opportunities in America. The tariffs did create 33,400 American jobs simultaneously destroying 1, 80,000 jobs across other economies. As on November 2^nd, 2018, steel prices have risen 33.14% YoY.  The corporate numbers have suffered with American companies using steel & aluminium as raw materials reporting weaker profit margins and lesser sales. Trump cited reasons of national security for imposing steel tariffs. However, US defence resorts to just 8.5 percent of total steel consumption and this reason looks far from being genuine. It has taken a toll on automobile companies (who are one of major buyers for steel) wherein there was a sharp 4% rise in automobile costs as predicted by the economists. Trump’s protectionist quagmire has slowly led to an outbreak of a trade war with China. In one of his speeches, Trump clearly reprimanded the leadership in earlier years who allowed US wealth to flow towards Chinese economy through massive reliance on imports. Former President George Bush had imposed 8-30% tariffs on steel to create more jobs; however as trade tensions were sighted, he quickly abandoned the tariffs. With alleged Chinese misuse of intellectual property rights, Trump along with his advisors used an arsenal of tariffs on China to discourage imports. China was closely looking at the Midterm elections wherein a Democrat win could have proven to be a helping hand.  However, even if the outcome was as expected and it challenged Trump on military spending and international business dealing. However, Trump still enjoys executive power on USA’s trade policy and can emphasize on his own terms.

China’s Made in China 2025 policy plans to replace imports with local products as the Government plans to build on existing infrastructure and technology so that Chinese champion companies can take on Western World in terms of domestic production. Trump may have sighted this policy’s adverse repercussions on the American economy as USA exports sizeable amount of goods to China (130.37 billion as on 31^st December 2017). The antagonistic attitude of Trump towards China appears to have stemmed from this foresight. Trade wars have led to a rise in the consumer price index to 2.7% with USA reporting good employment numbers without subsequent rise in productivity as stated by Former Chairman of Federal Reserve Alan Greenspan. This appears to be extremely unsustainable looking at the future growth.

Chinese economy will also suffer implications of growing trade war with China’s fixed asset investment slowing down to a record low in August 2018. China has tremendous debt/GDP ratio of about 250% as China has rising expenditures from debt (12.5% of the GDP) which are used to simulate the economy. These solutions are extremely unsustainable for long term as warned by the International Monetary Fund.