The China Ploy- 01

By Pratik Bajaj & Kunal Shah

Chapter-1: A brief history of “why”

Back in 2016, while campaigning for the presidential nomination, Trump said, “We can’t continue to allow China to rape our country. It’s the greatest theft in the history of the world.” Following such animosity, on March 22, 2018, Trump signs a memorandum to file a WTO case against China for their discriminatory licensing practices; to restrict investment in key technology sectors; and to impose tariffs on Chinese products.

POTUS began setting tariffs and other trade barriers on China with the goal of forcing it to make changes to what the U.S. says are “unfair trade practices”. He was worried about the theft of intellectual property, and the forced transfer of American Technology to China. There were a series of actions taken by Trump and the retaliation by the Chinese Government and the State Bank of China. The World witnessed rounds of Yuan Devaluation hinting to a Global Devaluation wars. By the end of September 2018, US had imposed on $550 billion of Chinese import. And China had responded with tariffs on $185 billion of U.S. goods.

This in-turn resulted, in a sharp decline in bilateral trade, higher prices for consumers and trade diversion effects, which in turn means increased imports from countries not directly involved in trade war.

Who was hardest hit by the trade war?

An analysis shows that US Tariffs caused 25% export loss, inflicting an absolute blow of USD 35 billion to the Chinese Exporters. The exports of Office Machinery and Communication Equipment, were hit the hardest followed by Chemicals, Furniture, and Electrical Machinery.

However, China’s retaliation resulted in higher Consumer Prices for Imported Products in the Chinese Markets, and losses for the US Exporters especially the Agriculture farm producers of the US after China putting a blanket ban on the purchase of US Agricultural Products.

Out of the total Export losses faced by the Chinese in the US Market, about 63% were diverted to other countries, significant gains were made by Taiwan, Vietnam, Mexico and collectively the European Union. Small, yet significant trade diversion were also made to India.

Large exporters, such as Brazil, the European Union, Malaysia, and Mexico have been the big aggregate beneficiaries, with Brazil exporting almost $6 billion in additional goods relative to the previous year in product categories where US goods face tariffs. The EU, with its large and diversified export basket, has benefited from both sides’ tariffs — increasing exports to the US and China as a result.

So why did US target China in the first place?

The first reason directs to growing concerns about Chinese economic practices. The largest set of tariffs from the Trump administration originate from a federal investigation into Chinese intellectual property misdeeds. The Trump administration designed the tariff to punish China for trading access to the Chinese market for foreign tech plans.

The second reason is about the U.S. trade deficit with China. As an outcome of growing Trade Deficit with China over the years, the US now owes the Chinese a total debt of $1.1 trillion (January 2020).

And what about the global economy?

Trade War between the two largest Economies of the World have brought in a lot of uncertainty to the Financial Markets across the Globe. So far, before the COVID-19 pandemic, the Trade War had negatively impacted the Global GDP growth by 0.7%, with the Chinese Economy slowing down by approximately 1%, and the US Economy by 0.9%.

(More in coming chapters…)