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US/China trade war: Implications for world economy

By Isaac Matsilele

According to Chen (2021) a trade war commences if one country perceives that a competitor nation has unfair trading practises, and therefore retaliates against that nation by raising import tariffs, or other restrictions in order to protect itself from that unfair practice.

One such trade war is the ongoing one between the United States of America and China. This is a tit-for-tat battle between the two leading economic giants in the world. The trade war is a culmination of a long standing trade friction, dating back to the late 19th century, and more specifically, when China joined the World Trade Organisation in 2001.

Since then, bilateral trade between the two countries had been rising considerably, albeit, in favour of China. The US has been experiencing a huge trade deficit. It is for this reason that the US has, and continues to accuse China of unfair trade practises, which prejudice the US. According to ISDP (2020), specifically, the US accuses China of :

  • Intellectual property theft.
  • Forced technology transfer.
  • Lack of market access by US companies in China.
  • Unlevel playing field as a result of China subsidies on favoured companies.

China on the other hand,  disputes any wrongdoing, and instead blames US for ignoring WTO rules on Most Favoured Nations; and also ignoring the fact that the US and China are in different stages of development, and the US is trying to block the economic development of China. China also contends that the US protectionism is affecting the US, more than it does China.

Thus, the US/ China trade war began in ernst on the 6th of July 2018, with the US implementing the first round of China specific tariffs, and subsequently four more round of tit- for- tat tariffs. By end of 2019, the US had imposed tariffs on over USD 360 billion worth of Chinese goods, while China had imposed tariffs on USD100 billion worth of US goods.

Clearly, it is China’s exports that suffered, but the US consumers have been hard hit in terms of Choice of goods and services, and cost of doing business. US companies lost at least USD 1, 7 trillion in stock prices, costing the economy nearly 300 000 jobs, and an estimated 0,3% of real GDP, as at end of 2019 (ISDP 2020) .   

The Trade dispute between the two has been escalated to the WTO, for settlement, but with no reprieve in sight. However, the two world economic giants have opted for dialogue in order to reach a settlement. In October 2019, phase one agreement was announced, and signed in January 2020 (ISDP 2020).

Whilst the trade war between the US and China has primarily affected these two countries in terms of exports, and consumer choices, it has created implications for other multilateral trading partners, WTO, and the Bretton Woods Institutions.  As noted by Chen (2021) a trade war that begins with two countries, can affect other countries not initially involved in the war. Whilst for the US the trade war is meant to achieve the following:

  • Reduce trade deficit on bilateral trade.
  • Jobs creation and restoration
  • Limit access by Chinese companies to US technologies,

For the international community however, where two elephants fight, it is the grass that suffers most. The war has persisted throughout the Trump Administration era, and for the new Biden Administration, they will not make any “immediate moves to lift trade war tariffs ahead of  the review” (Southern China Morning Press, 2021).

What this means is that the world is sneezing at the cough of the US and China. At the local level, the US is battling increased cost of doing business, as goods have become very costly, limiting choice of goods by consumers. For China, the loss of revenue from potential exports is so huge and damaging.

Internationally, trade has been curtailed heavily especially those depending directly with trade between the US and China. Hongkong, which relies on tourism and the Chinese economy, was badly affected by the trade war. Its trade has been going down since 2018, and by end of 2019, it slid into a recession for the first time since 2020 (UNCTAD 2020).

There are however, some countries that have benefitted for the trade diversion by the two countries. The European Union, for example, experienced upward trade gains of around USD$2 billion, ever since the trade war began. Taiwan, also gained from trade war diversion of Chinese goods. It is the biggest winner from the trade war, with trade gains in excess of USD 4, 2 billion, followed by the European Union, Mexico, Vietnam, Japan, Canada and the rest of the world (US Census Bureau 2020).

Even with perceived easing of tensions between the 2 protagonists, there are no prospects for improving the world economy. The World Bank predicts very little improvement in the global economic activity, and with the trade war still persisting, another gloomy picture looms for international trade and investment.

If China, can confront the US, mighty as it is, on a tit for tat basis, one wonders what will happen as China could be looking to Africa, as trading partners for options. Africa needs to brace up for this new trajectory and up its trading terms if it is to trade on equal terms and conditions, especially, anti dumping and countervailing measures.

For the Bretton Woods Institutions, the US and China, are the main benefactors. The trade war means that the Institutions have to approach this with caution, lest they take sides to the detriment of their already compromised, confidence levels. The World Trade Organisation, has already treated the war with care, and allowed the parties to negotiate their way out. Can the prescription of the ‘Washington and Post Washington consensus’ work for the two world economic giants.  Only time will tell.

The future of ‘free trade’ as a prescription by the World Bank, and the International Monetary Fund, is slowly becoming elusive to elucidate. The situation is made even gloomier, with the persisting Global COVID-19 pandemic, making International Trade even more curtailed. The IMF further predicts that the trade war could cost the global economy in excess of USD 430 billion, which translates to 0, 5% reduction in global economic growth.

  • Isaac Matsilele is a student of International Trade and Diplomacy, with the University of Zimbabwe. He writes in his personal capacity.

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