The American-Chinese tariff war decoded
The United States and China, in addition to being the world’s two largest economies, also have highly dependent bilateral trade relations. However, with the White House accusing the Chinese government of theft and unfair trade practices and Beijing responding with retaliation for those allegations, the two biggest players in international trade found themselves locked in a bitter tariff battle.
The US trade deficit hit a record high of $ 4 billion in 2018. This has created an alarming situation for the United States. It had already lost more than 35% of its manufacturing units due to stiff competition from Chinese imports over the past decade.
To prevent this situation from worsening any further, the United States responded to this development by replacing its traditional “open economy” approach with a protectionist policy following a series of tariffs and quotas that resulted in birth of the infamous “US-China Trade War”.
Right now, with the election of the Biden administration, the fate of this trade war hangs in the balance as the new US government has “revised” and kept existing tariffs. But was this trade deficit the only trigger for this accelerating trade war?
Calling China a “currency manipulator,” the United States denounced the country’s central bank – the People’s Bank of China (PBOC) for mischievously devaluing the yuan in order to keep the prices of Chinese exports cheap in world markets despite the increase in prices.
Interestingly, a similar tactic was used by the Chinese government in 2013 when President Xi Jinping was appointed. While the Chinese economy faced its lowest growth rate in decades, the yuan also appreciated steadily against the US dollar, representing a 33% appreciation between 2005-2015. In an attempt to boost Chinese exports, the PBOC devalued the yuan by more than 4% in 2015.
Classically, international trade involves two currencies which have a self-correction mechanism. In this system, when a country exports more, it receives several payments in foreign currency. As the supply of foreign currencies increases, the value of the national currency appreciates against foreign currencies. Consequently, exports become more expensive than foreign imports. Gradually, this translates into fewer exports and more imports and the initial system is reversed.
However, in the case of China, the PBOC intervenes to prevent the value of the yuan from appreciating despite the increase in exports, thus maintaining China’s competitive position in the international market. As a result, the dollar exchange rate is higher than the yuan and allows the PBOC to collect large FOREX reserves from the dollar which it uses to buy bonds and treasury bills in the United States.
Over the years, China has managed to buy significant shares of US debt, which has given it significant political clout as one of America’s biggest bankers. This dependence of the United States on China poses a threat to the United States.
The rush for intellectual property rights
Then, US President Donald Trump highlighted this issue with a statement on “China repeatedly attempting to steal US intellectual property.”
This is how the claim unfolds – Chinese foreign ownership restriction laws require foreign companies to form joint ventures with Chinese domestic companies to sell their products in China, often including some type of technology transfer. which exposes international companies to theft.
In fact, according to reports from the US Trade Representative, such alleged intellectual property (IP) theft has cost them considerable damage of approximately $ 600 billion annually.
Subsequently, this was a crucial issue addressed in the first phase of the US-China agreement signed last year, where China was urged to strengthen its legal framework to protect the intellectual property of foreign companies. operating in its territory against the forced transfer of technology and other embezzlement; to try to call a truce on this tariff war.
The current impact
The truth of this trade war comes down to damaging the economies of these two countries, with China losing its largest export market and several US companies facing major setbacks due to the disruption of their global value supply chains. that come from China.
In fact, this trade war caused economic hardship on both sides and led to a diversion of trade flows from China and the United States as growth slowed, business investment froze, and business levels froze. jobs have fallen.
While both sides have agreed to some respite from this clash, in an ornate White House signing, only time will tell if application innovations will succeed where others have failed in s. ‘ensuring that the two countries keep their part of the agreement.
Without a doubt, as this tariff battle now unfolds on a global scale, every action and its counter-action is expected and inevitably doomed to create ripples in the international trade market.
Keep up to date with all the ideas.
Browse the news, 1 day of email.
Subscribe to Qrius