Fighting Back: the US Declared a Trade War to the World. But the Chinese Won It

The year 2018 was spent under the smog of a trade war initiated by US President Donald Trump. The trade war struck almost all countries: from US neighbors and the European Union to Russia and China. As a result, dozens of countries were battered, billions of dollars were spent in vain, and existing trade agreements are now subject to revision. However, the US is the main loser to the war, which is expected to end by the spring of 2019.

Excerpted from the news series on the trade war from

Under the Banner of Righteousness

The trade war was long signaled during the election campaign of Mr. Donald Trump, when the then presidential candidate spoke more than once about the unreasonable share of Chinese goods sold in the American market. It is estimated that the US trade deficit with China had reached around US$500 billion a year, leading to the surge of unemployment rate and debt in the US.

However, in comparison to the trade deficit, it was the theft of intellectual property of American corporations that infuriated Trump more. Trump stated that according to the Chinese law, foreign companies could only enter the Chinese market by establishing a joint venture with local counterparties. This requirement enables Chinese companies to easily access the technologies of their US partners. As a result, the US was losing US$300 billion a year.

By January 2018, Trump ran out of patience. He launched his first attack on solar panels and washing machines, imposing a 30% and 20% tariff respectively. A washing machine maker will now have a 20% tariff imposed on the first 1.2 million sets of machines exported to the US, and a 50% tariff imposed above that number. This affects not only China, but South Korea and Mexico, both of which are major washing machine exporters. 

The second attack was launched on the metallurgical industry. In March, the import tariffs on steel and aluminum rose to 25% and 10% respectively. Trump claimed "Our steel and aluminum industries have been destroyed for decades by bad policies and unfair trade with countries around the world."

Washington's key allies (EU countries, Australia, Canada, and Japan) were initially granted a deferment, but in June it expired, which provoked retaliatory measures. The European Commission introduced a 25% tariff on traditional American goods totaling 2.8 billion euros: jeans, bourbon, motorcycles, orange juice, peanut butter, etc.

Economists compared the current economic situation with the Great Depression of the 1930s. The main reason behind the Great Depression were the trade protectionist measures taken by US President Herbert Hoover. His tariff policy had affected more than 20,000 items imported into the US, and decreased the total amounts of exports by three-fold from US$2.3 billion per year to US$784 million. As a result, the US industrial sector suffered a severe recession which then spread to the stock market and banks.

Eating Its Own Fruits

There have long been concerns about the bad consequences of Trump's hastily erected trade barriers. By the summer of 2018, it turns out that those concerns were not groundless. The trade policies have invited trouble to the US. At first, Harley-Davidson, a leading US motorcycle maker, announced a plan to move its manufacturing base outside of the US, to avoid retaliatory tariffs that were going to be eventually paid for by its European buyers. This move was a heavy blow to Trump, who had promised to force big companies to move back to the US. Although Brown-Forman, owner of Jack Daniels, a famous US alcohol brand, did not transfer its production outside the US, it warned about a 10% increase in the price of whisky in Europeans markets. 

A number of other companies are also affected by the trade war. These include the agricultural company Monsanto, sports gear manufacturer Nike, Wal-Mart, Apple (most of its factories are located in China), Boeing, Tesla, General Motors, Ford as well as some other car makers. US residential photovoltaic system supplier Vivint Solar is operating at a loss, as earnings have become more difficult as a result of declining orders. Soy bean farmers in Illinois are complaining about the possibility of losing the Chinese market.

At the same time, Trump, who ran for the presidency as a Republican (he once joined the Democrats, and even the little-known Reform Party), actually went against his fellow party members, who traditionally advocate free trade throughout the world. Many of the party members have their own business and have transferred production abroad to save on labor and resources, and therefore are interested in the duty-free movement of goods across borders. Thus, Trumped aggravated the already serious contradictions toward domestic policy, which had previously manifested themselves during disputes in Congress over tax reform and the abolition of the existing health care act. Both times, not only Democratic opponents, but also some Republican colleagues opposed Trump's initiatives.

President Trump has repeatedly said that he wanted to change the entire existing system of world trade, but in response he received reproaches from financial experts for not understanding its fundamental principles. The trade balance does not depend on the physical volumes of exports and imports, but on the size and needs of the national economy. The larger it is, the more goods and services its citizens need each day. Due to tax cuts and increased budget spending, domestic demand in the US is increasing, and the US manufacturers, contrary to Trump's calculations, cannot satisfy it all.

Therefore it is impossible to manage the economy without imports anyway. Now the question becomes what goods to import and from which countries. Theoretically, the trade deficit between China and the US can be narrowed down to zero. And in this case, the US has to import from somewhere else, presumably still Chinese goods. Only this time with additional costs and tariffs from a third country added into them. Therefore, the obsession with US and China deficit is senseless. And the trade deficit itself is not as scary as it seems. The US has an extremely reliable bond. This will continue to attract capitals to flow into the country.

Not Tasting the Sweetness

What depresses Trump most is that his policies failed to stop China from economic expansion. China's One Road and One Belt, and Made in China 2025 are two major national strategies. The first strategy is intended to create transport corridors for the export of goods to Europe. The second strategy aims to develop advanced technologies within its national borders. As mentioned in Made in China 2025, China aims to raise domestic production of core components and materials by 70% by 2025. The Chinese government has allocated tens of billions of dollars in the two strategies in addition to hundreds of billions of dollars from private funds.

The US feels that its economic dominance is threatened as a result of Made in China 2025. It is estimated that China's GDP will surpass that of US in several years, as China will no longer need American products and Chinese products sell better than their US counterparts in the western market. Whatever measures the US takes, China is determined to follow its established policy. At the same time, even before the trade war, the Chinese government had gradually prohibited Chinese businesspersons from making risky investment overseas.

To find alternative markets to American imports and avoid shortages of goods, China relaxed or even lifted restrictions on products from many other countries, especially Asian countries.

The tension between China and the US has lasted for a long time, which is good for other countries than the US. The EU has attracted many new Chinese suppliers and buyers. Russia has been able to sell natural gas to the countries which failed to buy energy products from the US. The US media reported that Trump has fixated on China and considered the country his biggest enemy. This was confirmed by the new agreement signed between the US and its neighboring countries. In early Autumn, the US, Mexico, and Canada reached a new deal known as the United States-Mexico-Canada Agreement. Compared with the old agreement, the new one provides beneficial policies for American farmers and automobile makers. The US may sign a similar agreement with the EU to reduce most of the tariffs imposed on the region.

Reaching An Agreement

The conflict between the US and China kept intensifying until a G20 summit was held in Argentina. The US had previously considered raising tariffs from 10% to 25% on US$200 billion worth of Chinese imports. After a meeting of two and a half hours, the Chinese and the US leaders reached a consensus. China would increase its imports of US agricultural, energy and industrial products, and tariffs on vehicles imported from the US would fall from 40% to 15%. In addition, China will continuously improve laws and regulations to strengthen the protection of intellectual property rights. In response, US President Trump agreed to postpone the effective time for new tariffs from January to March, 2019.

Trump said on Twitter that America is going to have a "real deal" or "no deal at all" with China. It is said that China is considering to postpone the deadline from 2025 to 2035 for some strategic objectives prescribed in Made in China 2025, and to reduce state-level strategic investment. But the Chinese government did not officially announce that decision.

Potential Threats

However, concessions made by China will not leave the White House feel any assured. Economists have pointed out that the concessions actually benefit China itself. After the implementation of the trade barrier policy, the price of beans went down, which enables China to purchase beans at lower prices. During the confrontation between China and the US; German and Japan have replaced the US to hold a dominant position in the Chinese automobile market. Higher metal prices led to a significant increase in production costs, which have also put pressure on US companies.

What's more, the claim that China will reduce investments in "Made in China 2025" is incorrect. As China's economy slows down, the plan itself needs improvement and adaptations. The current priority for China is to redistribute budget to needed areas and cancel investments in non-profitable projects.

If the US and China can keep their promises, the bilateral trade war may end in the spring. However, it will not bring any positive changes to international trade. Although new development opportunities will emerge for international trade, the pain is still felt by many countries. On December 1, 2018, the Canadian government arrested Huawei's CFO Meng Wanzhou (Huawei is one of the largest smartphone and telecom equipment manufacturers in the world) at the request of the US government, on suspicions that Meng had violated the US trade sanctions against Iran. Ever since its withdrawal from the nuclear agreement, the US has begun another round of Iran sanctions, and asked companies in business relations with the US not to cooperate with Iran.

Huawei has been under fire from the US over the past few months.The US government and military agencies are prohibited from purchasing Huawei products, on the grounds that the company could potentially leak user data. Huawei's 5G technology is leading the world. Even the White House admitted that the US would not be able to catch up with China without Huawei's help. Although Meng Wanzhou was granted bail, she still faces potential extraction to the US in the next few months, while China and the US negotiate a deal. She could be used as a bargaining chip in future trade talks.

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