The Impact of Trade War with China on the US Economy

The Impact of Trade War with China on the US Economy

The US and China have been caught in an escalating trade battle for the past two years. After an investigation of the Chinese trade policies, the US government had imposed tariffs on a number of Chinese products.

China had retaliated by imposing its own tariffs mostly on agricultural produce, coal, chemicals, and medical equipment from the US.

In this blog post, we will focus on how the US economy has been affected by the tit-for-tat spat between the US and China.

Investigating the Impact of Sino-US Trade War on the US Economy

In a response to the US tariffs on Chinese goods, China had imposed tariffs ranging from 5% to 25%. The tariffs were strategically imposed on goods that are produced in states with a Republican majority.

The IMF had warned at a weakened global economy due to the trade war. Fears of the trade spat had hit stock markets resulting in record losses in the global financial markets. The politically motivated tariffs had rattled the economy of the US.

Automotive sector suffered the most due to the tariffs. Both General Motors and Ford reported lower profit in 2018 due to 40 percent tariffs on American made cars. Other factors cited for the reduced profits were higher aluminum and steel prices instigated due to the US tariffs on Chinese products.

Food and drinks companies had also suffered due to the US-China trade war. Tyson foods had cut profit forecast due to tariffs on US meat exports. Coca-Cola had decided to rise prices of its drinks in North America due to higher metal and freight rates.

No Winners in the US-China Trade War

Protectionist environment benefit no one. The overall trade suffers as countries turn inwards to protect local companies.

While the imposition of tariffs had resulted in a decline in the US imports, exports had also decreased hurting local companies. Studies have pointed out the tariffs have reduced US GDP, investment, and employment levels. Ironically, these were the same factors for which the tariffs were put in the first place.

China has been the largest trading partner of the US since 2015. Trade with China amounts to 15 percent of the total US trade volume. The trade relationship supports nearly 2.6 million jobs in a range of businesses and industries.

The increase in tariffs have hurt American companies particularly those selling high value products like medical devices, aircraft, automobiles, and agricultural products. The tariffs have resulted in increased input prices and reduced profit of local US business.

The timing of the tariffs is also worse in the US. They have occurred as the effects of the monetary stimuli are wearing off and the oil prices are rising. Global economic growth is also on the decline. All of these factors have a negative impact on the overall economy.

While the tariffs had been successful in narrowing the import deficit by about $2.8 billion, when seen in the backdrop of the impact on the broader economy it does not seems to be worth the it. The US economy has worsened due to the bitter trade war that has been instigated with a myopic view of the problem.

When compared a year earlier, the trade deficits have in fact increased by 7.1 percent. The decrease has been consistent with an earlier rise due to the expectations of an increase in the tariffs.

Apart from the US economy, the world economy has also been impacted by the ongoing trade war between the two largest economies.

The implications of the trade war will have massive impact on the east Asian economies. US companies will shift away from the supply chains in east Asia hurting the economies. An estimated $160 billion in exports of local producers will likely be hurt due to the ongoing trade war.

The effects of the trade war would also be felt in the form of job losses, devaluation, and stagflation.

Hope on the Horizon: US-China Trade Deal?

The ongoing trade negotiations between China and the US will decide the fate of the US economy. The trade negotiations are ongoing, and a final agreement will likely happen in the coming months.

The negotiations focus on reducing deficit with China and also elevating obstacles for US firms from succession in China.

China would want all tariffs to be lifted while the US will look for less government control and an end to transfer of technology.

The end to the trade war would likely result in more investment by American companies in China. In return to an end – or at least reduction – of tariffs, China will likely commit to buying more agricultural produce, natural gas, and raw materials from the US.

However, experts are stating that this will have little effect on the trade balance. The trade deficit with China will likely remain unless the US consumers and companies decide to turn towards US made goods.

The pro market reforms expected of China will in fact boost its imports. The removal of subsidies will encourage investment by US firms in China. The increased production will further reduce prices of Chinese products due to increased competition. The price effect due to strengthening of the renminbi will be offset to a large extent by the reduction in prices of Chinese goods.

Final Remarks

The trade war with china has a devastating impact on American business. A lot of US companies had to cut profit forecasts, investment, and jobs due to the ongoing trade war.The economic impact of the tariffs on the US economy is not surprising.

Economist Adam Smith had advocated the policy of minimum governmental interference to boost local economies. The latest trade war drama between the US and China shows how true were the words of the 17^th century economist.

Government intervention to support local companies leads to reduced competitive pressure. As a result, companies don’t take the initiative to improve their competitive position. This leads to increased inflation levels hurting the end consumers.

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