World Economy

Anxiety Spreads Over US-China Trade War

Anxiety Spreads Over US-China Trade WarAnxiety Spreads Over US-China Trade War

Beijing will be watching closely amid fears a trade war could break out between the world's top two economies, USA and China, after Donald Trump took office as the 45th president of the United States on Friday.

Trump has repeatedly blasted China's trade policies and threatened to slap huge tariffs of up to 45% on its goods, while Chinese media have countered that imports of American aircraft, smart phones, and agricultural products could suffer retaliation in any conflict, news outlets reported.

China’s President, Xi Jinping, at the World Economic Forum on January 17 mounted a robust defense of globalization.

While acknowledging that a new path for the global economy remained elusive since the financial crisis, Xi warned against calls for increased protectionism, a message aimed at Donald Trump, who had vowed to confront China on trade.

“No one will emerge as a winner in a trade war,” he told delighted elites from the world of business and finance.

Will there be a trade war between the world's two largest trading powers? Anxiety is spreading among business people around the world, with many saying a showdown with China is unavoidable and imminent.

In his inauguration speech on Friday, Donald Trump signaled no retreat from his populist agenda on trade, immigration, and on scaling back commitments overseas.

"Every decision on trade, on taxes, on immigration, on foreign affairs will be made to benefit American workers and American families. We must protect our borders from the ravages of other countries making our products, stealing our companies, and destroying our jobs," he said.

If he means what he says, then how many regular business ties will be affected? No one can tell.   

What will they lose? If there is a hike in tariffs across the board, then Chinese companies will lose a lot of orders for the same goods they have been shipping to the US market for the last decade.

What will they gain? Some of these goods are made from imported materials, like iron ore, and actually don’t sell for much of a profit. And environmentally, they may even produce a negative value. Officials with China’s National Development and Reform Commission may thank the Trump administration if it can help China offload obsolete, unsustainable industrial capacity quicker.

Chinese business executives, at the same time, may use the opportunity to apply for more tax breaks and preferential policies and turn to producing more competitive products. With the right policy incentives, China’s ample savings can be used for a new round of industrial investment, Xinhua reported.


What will be the reaction? No war can be one-sided. The Chinese government will adopt counter-measures, and local companies will find more import substitution opportunities in the selected industries.  

Every war comes with a cost. And trade wars backfire easily, especially for a more advanced economy. If heavy protection is required for US manufacturers to make the same goods as can be made equally well in China or in Mexico, then it will hurt, rather than benefit, the competitiveness of the US economy.

A temporary protection may be needed, admittedly, for workers to swop jobs and companies to turn out new products. But long term, it is a dose of poison for entrepreneurship.

In the future world market, US companies cannot compete by making the things that can be made in many developing countries. 

The war-maker will inevitable make a loss. A trade war will also backfire because it will turn away potential customers in a country with a population of 1.3 billion. Many international brands have benefited from their sales to China. It would be foolish to deny US brands the opportunity to do the same.

The immediate concern is that in a trade war, both countries will hit each other with tariffs, CNNMoney reported.

The US exported $125.3 billion in goods to China in the 12 months ending in November, according to Panjiva, a firm that tracks global trade data. Top of the export list: airplanes, soybeans and cars. 

China exports far more to the US, shipping $484 billion of goods in 2015, the most recent year for which data is available from the Commerce Department.

American trade experts have repeatedly cautioned that China will almost certainly retaliate if Trump uses tariffs. 

The big questions are: What’s at stake for the two countries, and the global economy as a whole? And who stands to lose more? Nobody knows.


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